Saudis and Russians threaten to step up oil deal battle

Jon Oronero
Jul 25, 2017 · 3 min read

Saudi Arabia and Russia have threatened to escalate a brewing oil dispute to the highest levels of government, as frustration with countries who have failed to cut production in line with an OPEC-led supply deal starts to spill over.

Khalid al Falih, Saudi Arabia’s energy minister, said on Monday in St Petersburg there could be no more “free rides” after reviewing the progress of the supply deal, which was hailed as a new period of co-operation between OPEC and big oil producers outside the group, but has so far failed to hold prices above $50 a barrel. “We are going to forcefully demand participation of all,” Mr Falih said in a joint press conference, adding they planned to raise the matter to “leadership beyond oil ministers if we do not see a response.”

Alexander Novak, Russia’s energy minister, who has made a close alliance with Mr Falih, backed his comments saying: “We insist and demand that all of the countries have 100% conformity.” This would mean taking 200,000 b/d out of the market. Their comments amount to a warning shot to producers that have failed to uphold their side of a grand supply bargain that was forged late last year with the full backing of Russian president Vladimir Putin and Saudi Arabia’s powerful crown prince Mohammed Bin Salman, who is next in line to the throne. The deal aimed to end a three-year old oil glut that has hammered big producers’ budgets, targeting cuts that would remove 1.8m barrels a day from the market to drain inventories and raise prices. While Saudi Arabia, Kuwait and Angola are among countries that have reached close to full compliance with the deal since January, others such as Algeria, Ecuador and Iraq are among those producing above their allocations, data show. Saudi Arabia’s Gulf ally in OPEC, the UAE, was also slow to fully curb output. Russia reached its target in May. The supply deal, which started in January, initially raised Brent crude prices as high $58 a barrel. But they have since fallen to about $48, raising questions over the effectiveness of the plan.

Ahead of Monday’s meeting of the Joint Ministerial Monitoring Committee, which was set up to review the progress of the deal, analysts and traders had speculated that OPEC and Russia may seek to deepen production cuts to speed up the oil market rebalancing. Producers have so far shown little appetite for formally increasing the size of the curbs, especially as other members lag. They did not rule out calling an extraordinary meeting of OPEC ministers if the market does not show signs of tightening. Mr Falih said the kingdom would lead by example and cap its exports in August at 6.6m b/d, down from 6.9m b/d in May and 1m b/d lower than last year’s monthly high. Saudi Arabia’s actual production of just below 10m b/d is unlikely to fall further however, as oil consumption soars in the summer months, with power plants burning crude to meet peak air conditioner demand. “August is going to experience the maximum demand within the Kingdom of Saudi Arabia,” Mr Falih said. “As a result we are putting a very firm cap on our exports we are going to be exporting 6.6m b/d in the weeks to come in August.”

The committee also recommended producers may need to prolong the supply cuts beyond the first quarter of 2018. The deal was already extended for nine months in June at the last official meeting of OPEC ministers. The deal could also capture more members. Nigeria, which has been exempt from the deal, told the committee it would cap its output should its production reach a sustained 1.8m b/d.

Source: Anjli Raval and David Sheppard for the Financial Times

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