If Saudis Extend Oil Cuts, Will Russia Agree?

March 30, 2017

Saudi Arabia and some Gulf State oil producer-allies appear likely to extend the six-month oil production cut that expires in June, according to SGH Macro Advisors.

But will Russia agree?  SGH writes that Russia appears to be complying with agreed-to production cuts, which have kept prices closer to $50 per barrel, rather than the $60-plus hoped. But Russia is not a member of the Organization of Petroleum Exporting Countries and in February, oil-production cuts among non-OPEC producers including Russia stood at 64% compliance while OPEC members were at 106% compliance. Iraq has also lagged in compliance too, according to SGH. OPEC ministers will meet in Vienna on May 25 to decide what’s next.

CEO Sassan Ghahramani and senior analyst Kevin Muehring write:

“We understand Saudi oil policy officials have reaffirmed the Kingdom and its key Gulf oil producing allies are highly likely to extend the Vienna agreement on output cuts for another six months, and stand ready to cut output by more in the second half of this year.

But the Kingdom is putting the onus for extending the Vienna agreement entirely on Russia: the Saudi and Gulf Cooperation Council commitment is conditional on clear evidence Russia has reached at least 250,000 barrels per day of the promised 300,000 barrels per day in output cuts by the time of the next meeting of the five-nation joint technical committee on April 21 … Riyadh sees its alliance with Moscow on oil policy as a cornerstone to its efforts to stabilize oil prices at a $50 to $60 target range over the medium term. But Saudi officials are nevertheless becoming increasingly frustrated with how Russia seems to be dragging its feet on meeting their commitments …

Iran has affirmed it will adhere to a production cap of 3.8 million barrels per day, which the Saudis took as an important statement of intent. Saudi and Iranian cooperation on oil policy seems to be already spilling over into a thaw in diplomatic relations, such as the opening of the hajj to Iranian pilgrims this year …”

The United States Oil Fund (USO) jumped 2.2% Wednesday in regular trading. The iShares MSCI Saudi Arabia Capped exchange-traded fund (KSA) rose 1.6% Wednesday. The VanEck Vectors Russia ETF (RSX) was up fractionally. This week, the Saudi ETF is up nearly 2% while the Russia ETF is down 0.4%.

The international Brent price of oil for May deliver is hovering near $52.27 per barrel. Oil bulls were enthused Wednesday by a less-than-expected increase in U.S. oil inventories and signs that conflict in Libya means there will be trouble getting exports back online.

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