Extending Alliance, Oil’s Top Two Seek Smooth Exit From Cuts

Extending Alliance, Oil’s Top Two Seek Smooth Exit From CutsExtending Alliance, Oil’s Top Two Seek Smooth Exit From Cuts

The pledge made by Saudi Arabia and Russia to keep working together on managing the oil market beyond 2018 shows the two energy giants are now looking to engineer an orderly exit from the deal and avoid crashing the prices they have worked so hard to revive.

“Keeping some level of production cuts into 2019 is the kind of thing that makes sense,” said Robin Mills, chief executive officer of Dubai-based consultants Qamar Energy, Bloomberg reported.

“Just abandoning the deal at the end of 2018 would put a lot of oil back on the market.”

Russia is prepared to continue cooperating with the Organization of Petroleum Exporting Countries even after the cuts expire, Energy Minister Alexander Novak said in a joint interview with his Saudi counterpart in Oman on Sunday.

Saudi Oil Minister Khalid Al-Falih said continuing curbs at a different level was one possibility under consideration.

Mirroring the way central banks have looked to manage their exit from years of loose monetary policy, OPEC and its allies want to demonstrate they have a range of options open after the current deal expires at the end of the year.

There are also reasons to be cautious about the current runup in oil prices close to $70 a barrel, analysts said. Brent crude traded above $69 on Tuesday.

“We are at price levels where we can see an impact on demand and we have the risk of more shale coming” from rival producers in the US, said Olivier Jakob, managing director at Petromatrix GmbH in Zug, Switzerland. “That raises the likelihood the cuts would have to go on longer.”

Excess oil inventories have declined by 220 million barrels from a level of 340 million barrels in early 2017, according to Al-Falih who said he is uncertain the pace of drawdowns will continue in the coming months.

Both Saudi Arabia and Russia stand to gain if production cuts, albeit at a lower level, extend into 2019, Qamar’s Mills said, adding that they are able to boost output quickly once curbs end, while some producers like Venezuela or Algeria are more limited when it comes to reviving supply.

That is not to say the two biggest producers will not face resistance at home. Russian oil companies have already lobbied for restrictions to be eased, while Saudi Arabia needs economic growth as it readies a public listing for state oil giant Aramco.

“If they have buyers knocking on their door and asking for more oil, that is going to test the extent of that cooperation and that resolve, but certainly they are aiming to build the foundations for a much longer period of cooperation,” said Richard Mallinson, an analyst at Energy Aspects Ltd. in London.


Add new comment

Read our comment policy before posting your viewpoints