RIYADH, SAUDI ARABIA: After OPEC decided at its last meeting on November 30 to extend the production cut deal to all of 2018, many press headlines and OPEC watchers wondered aloud if OPEC’s action might be too aggressive and cause a price spike. At the time, we said that Saudi Arabia is not concerned about overshooting the market on cuts as they make preparations for an IPO in 2018.
Today, Saudi Energy Minister Khalid al-Falih confirmed our assessment by saying that “we believe we have to err on the safe side… rather than exit cuts too early.” This message has to be welcome news for U.S. shale producers who are hoping for elevated oil prices in 2018.
Of course, the Saudi minister was using very bullish language about the production cut deal amid rising oil production and crude stocks in the U.S. which has also added over 50 oil rigs to date in 2018.
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Despite all the talk of cooperation, there remains a big question mark about Russian participation in cuts beyond the June 2018 OPEC meeting when the group meets to reassess market conditions. That question mark got underscored earlier this week by Russian Energy Minister Alexander Novak’s comments to Russian wire services about exploring or preparing for an “exit” from the production cut deal.
Many officials I spoke to here dismissed Novak’s comments as problems in translation and said the minister was only addressing the exit when the deal expires at the end of 2018. But the fact that Minister Novak is even using the word “exit” is very alarming and frustrating to the Saudis and OPEC officials. Indeed OPEC Secretary General Mohammed Barkindo told reporters in Cairo two days ago that “the lexicon of ‘exit’ is not in our vocabulary.”
Despite the dismissal of Novak’s comments, the Saudis are rattled by the Russian Minister’s “exit” talk. In a video recording I did Tuesday for the Hedgeye public website, I jokingly said the Saudis would pull out the Royal red carpet for Novak in Riyadh on Wednesday. The Saudis are more determined than ever to keep the production cut deal in place for all of 2018 and keeping Novak and the Russians by their side is critical.
So Novak did indeed get the red carpet treatment starting with an audience with King Salman in the morning followed by an announcement of a Saudi deal to buy Russian LNG and expected announcements on three other projects totaling a $2 billion Saudi investment in Russia. One easily gets the clear picture how important the Saudis view continued Russian cooperation on the production cut agreement in 2018.
But this red carpet treatment also conveys that even the Saudis recognize the tenuous nature of the Russian commitment. It was remarked to be by a source very close to the Saudis that Novak seems to always raise doubts about continued cooperation right before big meetings or events as we saw this week.
The Saudis believe Novak’s exit talk is due to external pressures from Russian oil companies who want to increase production and are losing money because of the tax structure in Russia. I don’t expect the Russian position to become clearer until at least after the Russian Presidential election in March when Putin and his government will have more flexibility.
The path forward on the Aramco IPO international listing is not much clearer after spending a few days here. All of the body language seems to point to the IPO being moved to 2019. If the IPO is to happen this year, they will have to make some major decisions in the next month or two or there will be no doubt about a delay. Oil Ministry officials I spoke to privately did not want to discuss the IPO which in my view means this is being decided at a much higher level with Crown Prince Mohammed Bin Salman (MBS). I also get the feeling that the oil ministry and Aramco prefer not to do an IPO but obviously realize it a signature proposal of the Crown Prince. Until they get the green light, no one wants to step out of their lane.
MBS is scheduled to make his first official visit as Crown Prince to the U.S. in early March when we also expect Saudi announcements regarding energy investment deals in the U.S. Trump will want to see them on a similar level to the Russian deals announced during King’s Salman’s trip to Russia last fall and during Novak’s trip to Riyadh this week.
