Despite its best efforts, Saudi Arabia has yet to convince Russia to commit at least not publicly to extending the OPEC /non-OPEC production cut agreement through the end of 2018, injecting some uncertainty ahead of Thursday’s closely watched meeting in Vienna. Traders have priced in the nine-month extension favored by the Saudis as a fait accompli, betting that its energy minister Khalid al-Falih’s oil diplomacy efforts will win the day.
But the mixed signals from Russia, whose energy minister Alexander Novak has said he would prefer to wait until closer to the deal’s March expiry to announce any decisions, has many analysts warning of oil market volatility in the week ahead, as headlines and rumors of handshake agreements and horse trading come hot and heavy.
Analysts with investment bank UBS said in a note that “Russian dithering on the timing of a decision of an extension or its duration is exactly what can make the oil market nervous. Should the outcome of the next OPEC meeting fall short of expectations, the large net?long speculative position on oil futures can unwind, sending prices lower and volatility higher.”
The cut agreement calls on OPEC and 10 non-OPEC partners, led by Russia, to cut a combined 1.8 million b/d through March in a bid to draw down inventories of oil in storage and hasten the market’s rebalancing.
While the market has tightened considerably in the past few months, OPEC kingpin Saudi Arabia is seeking to continue the cuts through the end of 2018 to keep prices stable as it embarks on significant economic reforms and the possible listing of its state-owned oil company Aramco.
But any such deal would need to have the backing of Russia, the world’s largest producer with some 12% of global output, to have any bite, given OPEC’s diminished market share.
Novak has said he supports continuing the cuts, but has repeatedly declined to say for how long exactly. Many Russian oil companies have made known their discomfit with the deal to begin with, and Russia is also wary of sending oil prices too high, which would strengthen the ruble and hit its export economy.
Novak said in an interview from Bolivia with Russia’s RBC TV network, which was posted on the Russian energy ministry?s website that “Nearly everybody speaks today about the necessity to extend the deal. In principle, Russia also supports those proposals. Different options are being considered.”
Mr Yasser Elguindi, an analyst with consultancy Energy Aspects, said the recent rise in prices, driven by robust demand and tighter supplies from the OPEC/non-OPEC cuts, has given some members of the 24-country coalition pause to consider how aggressive they should be, particularly if 2018 demand shapes up to be similarly strong.
Higher prices would also unleash more US shale production, as companies hedge output, a major concern of many OPEC members.
Mr Elguindi said that “The goal is not to overtighten the market. They’re worried about the upside more than the downside. They’re trying to give themselves maximum flexibility and optionality. That’s the only reason for this debate. It’s not that they want to abandon the agreement and produce as much as they want.” Source : PLATTS Pipe Industry Co., Limited (www.wilsonpipeline.com)
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