Despite blustering threats to ramp oil output up to 13 million bpd or reports of rebuffing overtures from Russia, there are in fact very high level lines of communication that are being kept open between Riyadh and Moscow, and across the OPEC+ oil producing capitals.
** Both Saudi Arabia and Russia will send their representatives to the OPEC+ Joint Ministerial Monitoring Committee meeting in Vienna on March 18. As a reminder, the JMMC is not a policy making body, but a technical committee that will be revising demand estimates, quota compliance, and will issue its recommendations on how OPEC+ could return the crude market to “a new supply and demand equilibrium.”
** The standoff between Riyadh and Moscow may well go on for a couple of months, to June, which will feel like a lifetime to traders, and the JMMC meeting will probably be too early for a complete rapprochement between the two producers after their very public throwing down of the gauntlet just last week. And indeed, a key barometer of how the overtures are going will be whether the JMMC meeting is held as planned: cancellation or a no-show by either the Kingdom or Russia would be a stark indication the talks have broken down.
** But we believe the JMMC will provide a first step to setting the stage for the two key players, Russia and Saudi Arabia, to sign off on a recommendation to go back to the original, more modest two-part agreement that was on the table going into last week’s disastrous meeting in Vienna: an extension of the current 1.7 million bpd in cuts allocated in the existing quotas to year-end 2020, and a likely recommendation for the original additional output cuts of at least 600,000 bpd from the end of February output levels.
** An emergency full OPEC+ ministerial meeting could then, in theory, be convened, essentially any time soon, to put a formal stamp on the JMMC recommendations to make it the new OPEC+ policy stance on the respective quotas with the additional lower quotas. To work, however – and Russia still disagrees strongly on the fundamental logic of committing to deep cuts until there is clarity on demand outlook – there would need to be a crucial linchpin clause that the additional cuts, as well as the existing cuts, would both be subject to review at the regularly scheduled OPEC and OPEC+ ministerial meetings on 9-10 June.
** Both the Saudis and Russians believe that the JMMC, in preparation for the June OPEC meeting, will by early June have a better sense of the global demand picture before issuing its recommendations for the full ministerial meeting. The pivotal meeting, in other words, to a new OPEC+ agreement being locked down, will be June. But again if the coronavirus crisis is truly worsening, the Saudis and Russians could be pressed by their OPEC+ peers into agreeing to an emergency meeting before June.
** A more modest agreement would entail Saudi Arabia again agreeing to absorb the lion’s share of output cuts, by as much as 400,000 bpd of the 600,000 bpd in additional cuts, and trimming output from the 9.8 million bpd output as of the end of February. The UAE and Kuwait would likewise add another 150,000 bpd, leaving only 50,000 bpd to be cut from the other 22 OPEC+ members, including Russia. That scale of a cut, however, may not be enough, but at least provide a platform to scale up the output cuts and move towards shared, lower quotas.
** There is considerable room, we understand, to ramp up the output cuts to at least one million bpd, with the Saudis again taking up the lion’s share of the cuts, perhaps by as much as 600,000 bpd, with another 250,000 from the UAE and Kuwait. But the higher the size of the additional output cuts, the more the other OPEC+ members – specifically Russia – will need to kick in on the cuts, and for them to be real not nominal cuts.
** That moment, though, is still some time away, and the near term scenario is for the Saudis and Russians to simply to get back to the table after the JMMC meeting, and to re-start with the original, smaller scaled output cuts and to take it from there. Russia had in fact essentially already agreed to that understanding before the Saudis had jacked up the demand for collective output cuts up to 1.5 million bpd.
**The pressure on Saudi Arabia and Russia is coming from multiple fronts, much of it in the frantic phone calls in recent days between energy ministers from OPEC+ member states, whose revenues are already being crushed by the sudden shift to an oil price war. While publicly demonstrating solidarity with Riyadh in announcing production hikes of their own, both the UAE and Kuwait, close allies of the Kingdom, as well as Algeria, are making noises that the threats and price declines are too severe and dangerous to the longer term stability of the crude markets.
** Those pleas from allies, if anything, provide some much needed cover for the besieged Crown Prince Mohammed bin Salman to give the go ahead to his half-brother, Prince Abdul Aziz bin Salman, the Saudi energy minister who is a seasoned OPEC veteran after serving as the deputy oil minister under former Energy Ministers Ali al-Naimi and Khaled al-Falih, to go back to the negotiating table. And there is, of course, the pressure now privately being exerted by Washington on Riyadh to stabilize prices.
** In addition, as we reported previous (SGH 3/9/20, “Saudi Arabia: Seeking Re-engagement with Russia”), we believe but have not yet confirmed that Chinese officials are pressing both Russian and Saudi leadership to come to terms. As the largest importer of crude in the world, Beijing’s interests do not lie in driving prices higher, but in averting price wars and sustained sub-$30 oil prices that they believe will fuel a recessionary feedback loop from the global economy and financial markets to its own as yet highly tenuous recovery.
** If, however, there is no move to an emergency ministerial meeting in the coming weeks on a new agreement and the higher output cuts, the Kingdom may opt to let prices settle wherever the market demand takes them until the June Ministerial meeting. That would mean the end of May posting of the Kingdom’s Official Selling Prices will be a critical signal to the Kingdom’s oil policy intentions.
** Saudi Arabia has already ramped up its output from 9.8 million bpd and is rapidly approaching 11 million bpd. It has threatened to go to 12.5 million bpd and even to 13 million bpd. But we believe this is mostly negotiating bluster, and that the Kingdom in fact lacks a near-term capacity to go much above 11.5 million. In time, though, it could within three or four months get up to the 12.5 million bpd capacity that was long its official capacity estimate, and so the Saudi threats are being taken seriously by the other OPEC+ member states.
** And finally, we would make one last point to note it may be important to distinguish between the Kingdom’s crude exports and its total output, as it does have considerable capacity to shift crude into storage, and it will soon be ramping up anyway to meet a traditionally higher domestic oil demand for the summer season.