Saudi Cuts, Iran Waivers & Russian Roulette

03/21/19 10:27AM EDT

Editor's Note: Below is a complimentary research note written by our Senior Energy Policy analyst Joe McMonigle. To access McMonigle's research email sales@hedgeye.com.

Saudi Cuts, Iran Waivers & Russian Roulette - zoo

The message to oil markets from Saudi Arabia Energy Minister Khalid al-Falih at the recent OPEC committee meeting in Baku was clear: Saudi Arabia will stay the course on OPEC cuts in 2019 despite Trump. Less clear is whether Russia will continue to follow the course set by OPEC’s biggest producer.

Minister al-Falih told reporters in Azerbaijan that OPEC’s cuts were required due to still rising oil inventory levels, and the cuts are locked in at least through June. There were some signals that the Saudis were trying to get an early extension of the cuts through the end of 2019 but encountered resistance from Russia. We think Russia will increasingly be a reluctant partner in future cuts but more on that later. 

As we projected in our March 1 client note “Saudis Unfollow Trump Tweets,” we are not surprised by Saudi Arabia’s resolve on oil market management in 2019.

Last year Saudi Arabia complied with Trump’s requests on oil supplies but it was viewed through the prism of reimposed Iran oil sanctions and a desire to help the President in an election year for mid-term congressional races.  But Saudi Arabia is now implementing a “Saudi-first” oil policy, and the market should take seriously OPEC’s pull-back on production to support prices after the declines late last year.

Indeed Minister al-Falih said in Baku that Saudi production in will average about 9.8 million barrels per day (b/d) and exports at 7 million b/d over the next two months – a production level considerably lower than its new quota of 10.3 million b/d in the new December agreement. 

OPEC also took steps in Baku to cancel a special April 17 meeting in Vienna and avoid a collision course with the May 4 US decision on renewals of Iran oil sanction waivers. If there was to be an early extension of cuts through the end of the year, OPEC would have wanted some certainty on the waiver decision. For the US, the waiver decision would have been likely influenced by an early extension of cuts at the April meeting and by any subsequent hike in oil prices.  

We think renewals for the existing five Iran oil sanction waivers are already priced into the market.

Certainly the Administration’s Iran hawks Pompeo and Bolton would like to see the waivers expire in May but Trump’s concern about oil prices likely means US officials have been noncommittal on the subject in recent talks with OPEC officials as well as the waiver recipients themselves. 

The Administration has about another 45 days to make the waiver decision and will be closely watching oil prices, especially with production declines in Venezuela from US sanctions. 

One important subplot from events in Baku was Russia‘s resistance to commit to extending the cuts through December 2019. The Russians were a reluctant supporter of the December cut agreement, and we believe requested the special April meeting to reassess whether the cuts were needed. Ironically, Russia is not in compliance with its agreed cut of 230,000 b/d that the Russian energy minister attributes to harsh winter conditions that make it difficult to cut. 

Russia’s oil companies have never been supportive of the OPEC deal that required them to cut production or delay new projects. This cross pressure will continue in 2019 especially as Russia sees now surging US production surpassing it. Certainly Putin enjoys being viewed as a major global player in oil market stage with the Saudis but we think this novelty begins to wear off as Russian cuts prompt even greater US production. 

So while Russia is reluctant to commit to extending cuts at this time, OPEC and Russia are in agreement to cancel the April meeting as they wait out the US decision on Iran waivers. 

The oil cut extension decision now will be the main topic at the regular-scheduled June OPEC meeting in Vienna. However, OPEC’s Joint Ministerial Monitoring Committee has set its next meeting for May in Saudi Arabia (likely after US announcement on Iran waivers) and could provide some front-running insight on the June decision.

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