Crude oil started the week with gains following comments made by the Russian and Saudi Arabian Energy Ministers at their meeting in Oman, reinforcing an overwhelming feeling of volatility on the oil market—something that analysts had been warning about.
Khalid al Falih said that “There is a readiness to continue cooperation beyond 2018...The mechanism hasn’t been determined yet, but there is a consensus to continue,” which most traders apparently interpreted as a possibility that the production cuts that helped boost prices will be extended yet again.
In this context, Alexander Novak’s uncharacteristically extensive comment could have been a kind of a cold shower for the bulls. Here’s what he said: "As for joint coordination on the oil market, the past year has demonstrated that this was a successful and positive experience that can be used in future, if need be. All will depend on expediency and necessity. Any joint actions reach their goals. We have agreed earlier and agreed today that this format of cooperation between OPEC and non-OPEC countries can be used as a consultations format after the deal is over."
Novak demonstrated his usual guardedness against any specific statement ahead of time, and Falih is also his usual self, spreading optimism. It needs noting, however, that the remarks come at the end of a week during which oil prices started sliding as the latest production figures from the Energy Information Administrations rekindled fears about a flood of U.S. crude oil on global markets. Related: This U.S. Lab Could Help Saudis Boost Crude Demand
During the same week, media cited analysts from major banks, including Citi’s Ed Morse, as arguing that Saudi Arabia and especially Russia would rather prices weren’t so high, so it was possible that they would end their deal in June.
These new comments, particularly the Saudi minister’s, point in the opposite direction: why bother hinting at a longer cut if you want prices lower? The truth is that Saudi Arabia needs prices to stay higher: the Aramco IPO is coming in the second half of the year.
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com:
- Peak Oil Demand Is A Slow-Motion Train Wreck
- The No.1 Challenge To The Oil Rally
- Luxury Automakers Pivot To EVs
OPEC members particularly Saudi Arabia need an oil price higher than $100/barrel to balance their books and recoup the losses their economies have suffered since 2014 as a result of low oil prices.
As for Russia, it is less dependent on the oil revenues than the OPEC members as its economy can now live with an oil price of $40/barrel or even less. But Russia still wants the cooperation with Saudi Arabia to continue well beyond the production cut agreement for geopolitical reasons and also to ensure oil price stability in the future.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London