As if OPEC needed any more bearish sentiment signals, Russian energy officials, and President Putin himself, have now suggested in recent days that Russia does not support extending the OPEC+ production cuts for another six months when the current deal expires at the end of June.
The decision to extend the oil production cuts for another six months will be the key decision at OPEC’s upcoming June 26-27 meeting in Vienna.
In March, we wrote a note about Russian resistance to continuing the OPEC+ cuts and said “we think Russia will increasingly be a reluctant partner in future cuts.”
The oil market is now asking whether the Saudi-Russia oil bromance is over.
Saudi energy minister Khalid al-Falih will be in Russia on Friday through Monday to try to convince Russia to stay the course on cuts. We expect a full court press by al-Falih in his talks with President Putin and Russian Energy Minister Alexander Novak amid the current free-fall in oil prices prompted largely by sentiment and macro signals.
It was clear at the last OPEC meeting in December that Russia very reluctantly agreed to another round of cuts and conditioned it on a smaller Russian cut commitment and a special April OPEC meeting to reconsider the need for cuts. The April meeting was cancelled due to a lack of consensus on next steps.
Russian oil companies were never in favor of the cuts and are pushing the government big time to exit the deal as it has forced them to delay new production projects. The companies are publicly saying the new projects will start regardless and theywill seek compensation from the government if it agrees to another extension in June.
If it were up to the oil companies, and we think also for Novak, Russia would walk away from the cut deal.
The wildcard has been President Putin who will likely receive a phone call by King Salman or Crown Prince Mohammed Bin Salman in the days leading up to the OPEC meeting in late June.
Putin enjoys the international spotlight of being a key player in oil markets with the Saudis but Russia is also increasingly concerned about losing market share to surging US production that has surpassed Russia as the world’s biggest producer.
Complicating matters is the contamination in Russia’s 1 million barrels per day (b/d) Druzhba pipeline that has sent Russia’s production down to 10.87 million b/d, a new low not seen since 2016. Due to the pipeline shutdown, Russia has finally stared to comply with its December OPEC cut commitment for the first time.
When the pipeline issue is resolved, Russia will want to hike production amid fears of losing market share. Moreover, Minister Novak reiterated on Thursday that Russia supports prices in $60-65 per barrel range. This position is at odds with the Saudi, and likely most of OPEC, price preference for the $75 to $80 range.
Minister al-Falih said last week that the OPEC consensus is to extend the cuts at the upcoming late June meeting. We agree that it may be the OPEC consensus but Russia is part of the non-OPEC group and is at a minimum not committed to the extension.
Even though Russia had not even complied with the cuts until the recent pipeline issue and only contributes a small 300,000 b/d cut, the Saudis view Russian participation as critical for market sentiment.
A Russia exit from the OPEC cuts would be very bearish for prices even if OPEC itself continues the cuts. OPEC would need not just a cut extension but also an increase production cuts to offset a Russia exit.
We think its possible that Russia stays in the OPEC+ alliance for future oil market cooperation but just indicates that it cannot comply due to the pipeline issue. Another possible alternative scenario is that the Saudis tell Russia to support an extension with the full private acknowledgement that Russia will hike production.
A telling side story here is that Russia wants to move the meeting to the following week on July 3 and 4. The Saudis support the move but the rest of OPEC opposes it, most notably the Iran. The latest is that there is now talk of just an OPEC meeting on June 26 and the non-OPEC meeting later in July. We think would also provide a bearish signal to markets. OPEC is having trouble agreeing on a meeting date, and in our view, is a sign of more dissension at the meeting itself in Vienna.
