The writing is on the wall: Saudi Arabia and its oil-producing allies can’t keep up very much longer with production cuts the way they’ve been going.
Saudi Energy Minister Khalid al-Falih said on Monday it was premature to establish whether a consensus existed among a global oil-producers' alliance to extend supply cuts, adding that a meeting next month would be key for deciding.
That itself was the clearest sign that there were divisions on how much longer the 14 members in the Saudi-led OPEC and ten other oil producers led by Russia should grit their teeth and stick to highly disciplined production quotas when oil at $70 was proving too tempting not to cash in with extra barrels.
Manipulating Supply Not Russia’s Style
According to reports quoting insiders of the OPEC+ alliance, high on the list of the discontent members was Russia, which was stuck in a pact that cramped its regular style of working the energy markets.
Although oil is important to Russia’s coffers, the country has no national oil company, unlike Saudi Arabia and the rest of OPEC. While oil pipelines in Russia are owned and operated by state monopoly Transneft, the oil companies themselves, including Rosneft—its biggest—and others like Lukoil (MCX:LKOH), Surgutneftegaz (MCX:SNGS), Gazprom Neft (MCX:SIBN) and Tatneft (MCX:TATN), are used to free-market competition and winning on best prices and services. They don’t need to manipulate production in order to create artificial shortages that would boost prices, which instead is a Standard Operating Procedure within OPEC.
In the past three years, the Russians have entered production cut pacts with the Saudis twice to bring oil prices back from market collapses that took crude to as low as $26 per barrel at one point. In an overwhelmingly bullish market like now, they’d rather compete on an even keel with the best out there. They can afford to: in December, the Russian breakeven price for oil was $42 a barrel, just half of the $84 needed by the Saudis.
Until this week, bets were high that the 24-nation OPEC+ would extend its production cuts of 1.2 million barrels per day when it meets in June.
OPEC Might Decide By May Where It’s Going With Cuts
But the Saudi energy minister said a decision might be taken earlier, at a lower-key technical grouping in May, and it may not necessarily involve an extension. "I don't think we will need (to do more) ... the market is on its way toward balance," he said, referring to the possibility of Saudi Arabia cutting output further below its target under the deal.
Falih’s comments seemed designed to accommodate his Russian counterpart Alexander Novak who, according to those familiar with Moscow's energy policy, was "under too much pressure internally to end the cuts". Rosneft CEO Igor Sechin is among those dead-set against OPEC+, telling Russian President Vladimir Putin in a letter leaked in February the pact was a strategic threat to Moscow, which played into the United States’ hands.
And Russia isn’t the only one having difficulty continuing with cuts. For the third consecutive month in March, Nigeria failed to comply with the production quota It was given under the OPEC+ arrangement, pumping beyond what it pledged. The Nigerians were allowed a quota 1.685 million barrels per day but ended up producing 1.92 million in March.
Global pressure, led by U.S. President Donald Trump, is expected to grow on OPEC to abandon its production cuts as a civil war wages in Libya, threatening the North African country’s output of 1 million bpd. Coupled with U.S. sanctions on Iranian and Venezuelan crude, a Libyan outage might be a recipe for a global supply disaster that the Saudis simply cannot ignore—if indeed, as they claim, the objective of OPEC’s cuts was to achieve “market rebalancing”, not just super high oil prices.
Saudi Arabia Placating Trump Too
Olivier Jakob, who heads oil consultancy PetroMatrix in Zug, Switzerland, said the Saudis also seem to be placating Trump with their apparent openness in winding down some of their production cuts early. Jakob said:
"Saudi Arabia will continue to claim that it does not listen to Trump but we take (their) small change of tone as a first sign of appeasement."
He added that Riyadh last week increased most of its official selling price, or OSP, for crude particularly to Europe.
Hedge funds long on oil will count on OPEC to tell another intimidating tale of tightening supply in its monthly report slated for release on Wednesday that could further fuel the year-to-date rally of 40% in WTI and 31% in Brent.
One reason the Saudis may be willing to let their guard down a little on production is the roaring market reception to the bond issue linked to the first public sale of shares in their state oil company Aramco.
Will The Saudis Show Some Magnanimity After Aramco Bond Issue?
Aside from getting the oil price it wants for its national budget, the Aramco IPO has been top-most priority for the Kingdom. By Monday, the Saudi oil company had received bids for more than three times the $10 billion it was expected to raise in a debut international bond issue.
John Kilduff, founding partner at New York energy hedge fund Again Capital, said:
“The oversubscription for the bonds is a major endorsement for the Saudis and Aramco.”
“They should be able to relax a little this point and show a little magnanimity too.”