Syed Rashid Husain
On the heels of a chatter about a possible OPEC- Russian entente, oil prices made a staggering rally late last week, rising as much as 8%.
Kicking things off last Monday, Abdallah Salem El Badri, the OPEC Secretary General, talked about the possibility of OPEC and non-OPEC producers working together to cut output.
El-Badri said OPEC was ready to embrace rivals and thrash out a compromise following the 72% crash in prices since mid-2014. "Tough times require tough choices. It is crucial that all major producers sit down and come up with a solution," he emphasized.
“It is vital the market addresses the issue of the stock overhang. As you can see from previous cycles, once this overhang starts falling then prices start to rise. Yes, OPEC provided some of the additional supply last year, but the majority of this has come from non-OPEC countries,” he told delegates at the Chatham House Middle East and North Africa Energy Conference 2016.
And in the meantime, Russian Energy Minister Alexander Novak went on record, underlining his government was willing to engage in "coordination" with OPEC, emphasizing the Saudis were ready to talk about limiting supply. He also hinted that Russia could cut output by up to 500,000 barrels a day. Novak said the two sides - who make up 20% of the world's oil supply - would discuss cuts of around 5% from the world's markets, or 2m barrels a day.
The chatter was further fueled by the statement of Iraq’s Oil Minister Adel Abdul Mahdi, who last Tuesday said that Saudi Arabia and Russia might be ready to become “more flexible.”
And then Russian TASS news agency quoting Transneft President Nikolai Tokarev reported that Saudi and Russian officials had met to discuss production cuts. And almost at the same time Interfax, another Russian news agency, suggested a February OPEC summit was on cards and the Russians had been invited to it; something which has also happened in the past. It also cited Alexander Korsik, chief executive of Russian state-owned integrated oil company Bashneft, as having said that a meeting discussing coordinated production cuts had indeed taken place.
Some other reports also contributed to the growing chatter in the global media.
And in the meantime, media reported of meetings between the Russian Energy Ministry officials and Russian oil companies. Reportedly OPEC was discussed during the meeting. As per a Reuters report quoting Nikolai Tokarev, head of oil pipeline monopoly Transneft, Russian officials have decided they should talk to Saudi Arabia and other OPEC countries about possible, coordinated output cuts to bolster oil prices.
Tokarev said oil executives and government officials meeting in Moscow on Tuesday had reached the conclusion that talks with OPEC were needed to shore up the oil price. "At the meeting there was discussion in particular about the oil price and what steps we should take collectively to change the situation for the better, including negotiations within the framework of OPEC as a whole, and bilaterally," Russian news agencies quoted Tokarev as saying.
A Russian energy ministry representative confirmed to Reuters that possible coordination with OPEC had been discussed at the meeting, which the ministry hosted. "The meeting participants discussed the possibility of coordination of actions with OPEC members amid unfavorable market conditions on the global oil market," the Energy Ministry official was reported as saying.
According to media reports, Minister Novak also floated the idea (of output cuts) at a meeting with energy company executives on Wednesday evening. A source briefed on the meeting said those present did not oppose it. The "meeting has shown that the oilmen share the same views," the source was quoted as saying.
In the meantime, a Gulf source told CNN on Thursday that regional players were "willing to do anything to stabilize the market" and "all options are open." And that includes a potential emergency meeting in February between OPEC and non-OPEC producers like Russia.
And all this provided impetus to the chatter about a possible, coordinated output cuts. But to be fair, things are far from certain.
On Friday, Russian Deputy Prime Minister Arkady Dvorkovich played down expectations, saying the state would not intervene to balance the market.
Speaking at a news briefing in Moscow, Dvorkovich said, Russia will not purposefully slash oil production; decisions are made by private companies. "We assume our oil sector is private and commercially focused. It is not under control of the state. We have a certain participation interest but the market on the whole is regulated by decisions of individual companies. So it will continue," he added.
If the period of low oil prices lasts longer, the Russian oil market is capable of adjusting production and investments level on its own, Dvorkovich said. "Correction of investments is inevitable under the excessively low level (of oil prices) and the too lengthy time period, and this will result in definite decline of production. This will not be a focused action of the government. The market is essentially self-regulating and self-adjusting and this will lead to stabilization of prices at higher level than now," Dvorkovich said.
Companies will consider the situation on the basis of interests of stable functioning, he added.
And indeed not everyone got excited with the chatter. "There's nothing new. It's another part of a stream of news that comes out of Russia and there's no indication that the Saudis have any desire to do anything," said Edward Morse, global head of commodities research at Citigroup.
"I really don't think that has any legs. I don't expect we will see any talks coming from these, and the other reason I think the Saudis would not really pursue this is because the real target of the Saudis is the US shale producers," said Chris Weafer, senior partner at Macro-Advisory in Moscow. "Unless they are also part of an agreement, I can't see Russia or Saudi cutting their own production to help the shale industry."
IHS Vice Chairman Daniel Yergin also points out that Iran would have to be on board in order for OPEC to be willing to strike any deal. "It's very hard to see how this works with Iran ramping up production," said Yergin.
Dow Jones later quoted a senior Gulf OPEC official as saying that the Saudis did not ask Russia to cut output by 5 percent. The official also said the proposal was an old suggestion from Algeria and Venezuela.
"We cannot confirm the rumor," an OPEC spokesperson was also quoted as saying about a possible urgent OPEC meeting or on any discussion with non-OPEC stake holders. News services quoted unnamed sources as saying Saudi Arabia has no such plan to cut output by 5 percent.
All the chatter – all around - at best seems premature!
