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Russia, Saudi Arabia Clash Ahead of OPEC Meeting

Saudis want production cuts extended through 2018, while Moscow wants flexibility.

Russia and Saudi Arabia are trying to hammer out differences over petroleum output ahead of OPEC’s meeting on Thursday, highlighting the fragility of an energy alliance involving the world’s two largest crude-oil producers.

Saudi Arabia, the most influential member of the Organization of the Petroleum Exporting Countries, is pushing for higher oil prices as it attempts an economic transformation funded by the initial public offering of its state oil company next year. Oil prices have risen to around $60 a barrel in 2017, up from lows of less than $30 a barrel in 2016.

The Saudis want OPEC, Russia and other big producers to keep withholding about 2% of global oil production for all of 2018, said people familiar with the matter. An agreement first struck a year ago and set to expire in March is aimed at reducing a global oversupply of oil caused in part by U.S. producers.

Russia isn’t a member of OPEC but has emerged as an oil-and-politics power broker in the past year.

Moscow is pushing for a shorter agreement that could be changed if oil prices continue to rise and allow American shale producers to ramp up output, the people said. Russian oil companies have chafed under production limitations in the past year and want to cash in on higher prices before a flood of oil from the U.S. crashes the market again.

However, a shorter agreement holds “significant risk” of sending oil prices lower because the Saudis have built up expectations by talking for months about an extension for all of 2018, said ING analysts in a note late Tuesday.

“There are differences over the amount of time we need,” Saudi energy minister Khalid al-Falih said to reporters in Dubai on Tuesday. He said it was “too early to talk about a disagreement” and said “a solution” will be reached during talks Wednesday and Thursday in Vienna, where OPEC is based.

The differences between Russia and Saudi Arabia are among the final hurdles for big oil producers to overcome as they gather. A committee led by Russia and Kuwait will deliver a recommendation on Wednesday, and oil ministers from OPEC’s 14 nations and about a dozen others will meet Thursday to make a final decision.

OPEC, which controls about 40% of global oil production, has sought to reassert its relevance following an oil-price crash it could do nothing to halt. The Saudi-Russian alliance has helped, though there is debate about how much the production cuts have contributed to rising prices compared with a strong global economy and healthy oil demand.

Once Cold War enemies, Russia and Saudi Arabia have used oil to underpin a new alliance.

Russian President Vladimir Putin needs to prop up energy revenues that make up a third of his government’s budget. Saudi Arabia doesn’t want to cut production without Moscow’s participation, for fear that Russia would swoop in on the kingdom’s markets.

But their national interests diverge on Syria, where Russia supports President Bashar al-Assad while the Saudis support rebels. Even on oil policy, the two countries have competing priorities.

Russia needs an oil price of $72 a barrel to cover its government spending, according to ratings firm Fitch, while Saudi Arabia requires almost $84 a barrel, according to the International Monetary Fund. Russia has old oil fields that could be damaged if production is reduced for too long, and its oil companies have longstanding plans to ramp up output.

“The benefits of the [OPEC] deal for Russia and thus Mr. Putin may be more fleeting,” U.S. consultancy ESAI Energy said.

Moscow has sent mixed signals about maintaining the production cuts through next year.

In October, Mr. Putin said he wouldn’t rule out an extension of output cuts through all of 2018 but only if it was necessary. Saudi officials took the statement as an endorsement of their stance, since it came during a state visit by Saudi King Salman. 

But last week, Russian Energy Minister Alexander Novak held talks with Russian oil companies about extending the limits through September 2018, shorter than the Saudis want. Even if Moscow agrees to Saudi demands, “Russian producers will increasingly resist compliance, leading to [the deal’s] eventual unraveling in 2018,” ESAI said.

A Russian Energy Ministry spokeswoman referred to comments by a local oil company that talks are ongoing. She declined to comment further.

A senior Saudi oil officials said the Russians are “facing huge internal pressure” from oil companies.

“It is very muddy and it looks like the promise made by Putin may not stand,” the official said.

 

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Russia, Saudi Arabia Clash Ahead of OPEC Meeting

Saudis want production cuts extended through 2018, while Moscow wants flexibility.
Parvin Faghfouri Azar
Russia and Saudi Arabia are trying to hammer out differences over petroleum output ahead of OPEC’s meeting on Thursday, highlighting the fragility of an energy alliance involving the world’s two largest crude-oil producers.Saudi Arabia, the most influential member of the Organization of the Petroleum Exporting Countries, is pushing for higher oil prices as it attempts an economic transformation funded by the initial public offering of its state oil company next year. Oil prices have risen to around $60 a barrel in 2017, up from lows of less than $30 a barrel in 2016.The Saudis want OPEC, Russia and other big producers to keep withholding about 2% of global oil production for all of 2018, said people familiar with the matter. An agreement first struck a year ago and set to expire in March is aimed at reducing a global oversupply of oil caused in part by U.S. producers.Russia isn’t a member of OPEC but has emerged as an oil-and-politics power broker in the past year.Moscow is pushing for a shorter agreement that could be changed if oil prices continue to rise and allow American shale producers to ramp up output, the people said. Russian oil companies have chafed under production limitations in the past year and want to cash in on higher prices before a flood of oil from the U.S. crashes the market again.However, a shorter agreement holds “significant risk” of sending oil prices lower because the Saudis have built up expectations by talking for months about an extension for all of 2018, said ING analysts in a note late Tuesday.“There are differences over the amount of time we need,” Saudi energy minister Khalid al-Falih said to reporters in Dubai on Tuesday. He said it was “too early to talk about a disagreement” and said “a solution” will be reached during talks Wednesday and Thursday in Vienna, where OPEC is based.The differences between Russia and Saudi Arabia are among the final hurdles for big oil producers to overcome as they gather. A committee led by Russia and Kuwait will deliver a recommendation on Wednesday, and oil ministers from OPEC’s 14 nations and about a dozen others will meet Thursday to make a final decision.OPEC, which controls about 40% of global oil production, has sought to reassert its relevance following an oil-price crash it could do nothing to halt. The Saudi-Russian alliance has helped, though there is debate about how much the production cuts have contributed to rising prices compared with a strong global economy and healthy oil demand.Once Cold War enemies, Russia and Saudi Arabia have used oil to underpin a new alliance.Russian President Vladimir Putin needs to prop up energy revenues that make up a third of his government’s budget. Saudi Arabia doesn’t want to cut production without Moscow’s participation, for fear that Russia would swoop in on the kingdom’s markets.But their national interests diverge on Syria, where Russia supports President Bashar al-Assad while the Saudis support rebels. Even on oil policy, the two countries have competing priorities.Russia needs an oil price of $72 a barrel to cover its government spending, according to ratings firm Fitch, while Saudi Arabia requires almost $84 a barrel, according to the International Monetary Fund. Russia has old oil fields that could be damaged if production is reduced for too long, and its oil companies have longstanding plans to ramp up output.“The benefits of the [OPEC] deal for Russia and thus Mr. Putin may be more fleeting,” U.S. consultancy ESAI Energy said.Moscow has sent mixed signals about maintaining the production cuts through next year.In October, Mr. Putin said he wouldn’t rule out an extension of output cuts through all of 2018 but only if it was necessary. Saudi officials took the statement as an endorsement of their stance, since it came during a state visit by Saudi King Salman. But last week, Russian Energy Minister Alexander Novak held talks with Russian oil companies about extending the limits through September 2018, shorter than the Saudis want. Even if Moscow agrees to Saudi demands, “Russian producers will increasingly resist compliance, leading to [the deal’s] eventual unraveling in 2018,” ESAI said.A Russian Energy Ministry spokeswoman referred to comments by a local oil company that talks are ongoing. She declined to comment further.A senior Saudi oil officials said the Russians are “facing huge internal pressure” from oil companies.“It is very muddy and it looks like the promise made by Putin may not stand,” the official said. 
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