Oil prices have surged in the wake of this weekend’s agreement by Russia and some 12 other non-OPEC oil producers to align with OPEC’s agreement in Vienna on quotas and output cuts.
*** First, a word of caution in that the OPEC/non OPEC efforts are not to drive oil prices ever higher, but to stabilize them, primarily by steering prices within a target range of $50 to $60 a barrel through the first half of next year that they expect should rebalance supply and demand by the middle of next year. The $60 upper band of the target range is not a hard cap, but if prices do climb too quickly or too high above that mark, the Saudis will lead efforts to put more supply into the market. ***
*** Although it is not a formal participant in the OPEC-non OPEC accord, China has indicated to Saudi Arabia and Russia its support for the $50 to $60 target range, affirming its three oil companies, CNPC, Sinopec and CNOOC, will not increase output unless global oil prices are exceeding the $60 per barrel upper band of the price target on a sustained basis. China is also committed to increasing its oil imports in 2017 by at least 6%. ***
*** Along those lines to shore up the target price range, Saudi Energy Minister Khaled al-Falih’s promise over the weekend that Saudi Arabia may cut its output by even more to below 10 million bpd was meant to keep price above the $50 floor. The Kingdom is not expecting full compliance among the OPEC oil producers, but it does want to see strong compliance, and if there is slippage in the January output figures, the Kingdom will unilaterally commit to further cuts. ***
*** Likewise, if prices are rising too high above the $60 upper band, Saudi oil officials are likely to react with “verbal interventions” much like a central bank defending a currency, to dampen the market pricing. It would then work towards an upward adjustment in the OPEC quotas, including its own, by the time of the June OPEC meeting to put more supply into the market. The secondary source review of the January OPEC output numbers in February will be a key milestone in enforcing the target price range. ***
Trump and the Riyadh-Moscow Axis
It is also interesting as a side note that Russia is now the co-chair, along with Algeria, of the monitoring group that will be assessing the compliance of both OPEC and non OPEC oil producers. In other words, while Russia is not formally a member of OPEC and is maintaining an independent stance, it is nevertheless being drawn deeper into the coordination on oil policy alongside Saudi Arabia.
Indeed, what is making this OPEC accord stand out is the new degree of cooperation between Saudi Arabia and Russia, which as we have written (SGH 2/19/16, “Oil: An Output Deal and the Riyadh-Moscow Axis”), has been underway throughout the year. Helping it along has been the Saudi commitments to invest up to $20 billion in the Russian energy sector, and in the last few days, by the announcement that Qatar and Glencore, the Swiss-based commodities trading company, will take a 19.5% stake in Rosneft.
And one last point worth mentioning is how much the election of Donald Trump is driving Riyadh and Moscow closer in their perceived shared strategic interests. Trump’s campaign promise to “unleash” US oil output — and the growing sense of antagonism on Capitol Hill towards the Kingdom — went a long way to boosting the Saudi and Russian cooperation, not only in cementing this current output agreement, but in further deepening the strategic alliance between the two countries, be it on the energy markets, arms sales, or new trade agreements.
The US is, of course, more or less an equally powerful swing producer with the marginal barrel of oil through its shale production. That is a key driver to the $60 upper price band, which the Saudis and the other oil producers are betting will limit the pace and scale of another US shale production surge. It is, however, a bet that is likely to be sorely tested by the middle of next year.
And the high stakes interplay of the three-way global energy politics between Saudi Arabia, Russia, and the United States will entail an additional new wrinkle if Exxon Mobil Chief Executive Rex Tillerson is named the Trump Administration’s choice for Secretary of State (see SGH 12/8/16, “US: President-elect Trump; “Personnel is Policy”). Tillerson has a deep “big oil” background, mostly on the international energy side, and he knows both Russia and Saudi Arabia and the Gulf countries extremely well. He may quickly find international oil politics will be demanding a priority of his time next year.