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Saudi-Russia Oil Policy Shift sets the stage for tense OPEC meetings



When Saudi Arabia and Russia announced a new policy to revive oil production last week, one thing was missing: most of the other partners in their Grand Coalition

Given the shortage of oil supplies and rising prices, the two countries agreed to restore one Part of the production that they have engaged under an agreement with 22 other producers from the Organization of Petroleum Exporting Countries and beyond. The problem is that most of these countries have not been consulted and some may have reason to oppose the proposal when they meet in Vienna next month.

"It could be a contentious meeting," said Ed Morse, head of commodity research at Citigroup Inc. in New York.

The matter is particularly delicate as Russia and the Saudis propose an increase in production to offset losses from other members, notably a deteriorating Venezuelan supply and a possible decline in Iran as renewed US sanctions have their beginnings. These countries have nothing to gain from loose production capacity and much to lose as oil prices expand the steep decline on Friday.

Who has the juice?

Saudi Arabia and Russia may possibly return the most oil

Source: IEA, OPEC


Suhail Al Mazrouei, United Arab Emirates Energy Minister and current holder of OPEC's rotating presidency, said the group as a whole will decide if production should be adjusted.

"No decisions are made by two or three countries," he said in an interview in St. Petersburg, Russia, following a meeting with his Saudi and Russian counterparts. "We respect all member countries."

Saudi Arabia and Russia could simply continue their plan without the blessing of their cohorts. Because they are the only countries that can significantly increase their production, the impact on the market would be almost as great if they decided on their own.

"If the rest is not on board, Saudi Arabia will do it alone. It's not a big choice," said Roger Diwan, an analyst with IHS Markit Ltd.'s advisor. in Washington.

But the success of the 24-nation alliance accepting supply cuts seems to be valuable to the kingdom. They may prefer a diplomatic path by seeking consensus. If that were so, that would be a tough sell.

Winners, losers

Although not always enforced, the OPEC rules require the policy changes to be approved by all members – many of them would lose in this case. Outside the Persian Gulf Arab countries, most countries are unable to increase supply and would face lower revenues if prices continue to decline.

U.S. Oil futures fell 4.6% from $ 1.44 to $ 16.00 to $ 67.49 a barrel. in New York on Friday. That's the biggest drop in nearly a year, killing most of May's gains.

In Venezuela, which has worked hard to establish the 2016 agreement, production has fallen to its lowest level since the 1950s, as a worsening economic crisis reaches its peak oil industry. The loss of additional revenue could accelerate its financial collapse.

Iran, a longtime political opponent of Saudi Arabia, faces the risk of losing customers to its rival as renewed US sanctions after President Donald Trump has ended an agreement on the country's nuclear program – forcing buyers to reduce purchases ,

Different Scenarios

Ending lower cuts by individual members would barely stimulate supply, while the group's return to 100% compliance would add more than 700,000 b / d. The termination of the agreement would increase production by about 1.3 million barrels per day

Source: IEA, OPEC


It may be that the increases in production are not substantial enough to require much consultation within the group Helima Croft. Chief Commodities Analyst at RBC Capital Markets LLC. The lower end of the range discussed by the producers – a return to the values ​​agreed at the beginning of the agreement – is only a few hundred thousand barrels a day above current production.

If history is a guideline, the other members of OPEC will eventually stand behind Saudi Energy Minister Khalid Al-Falih. In June 2011, countries such as Iran opposed the Kingdom's push to increase the organization's production quota. At the next meeting of the group six months later, the Saudi proposal was adopted.

"I firmly believe that we will find a compromise because all countries are interested in a stable market," said Russian Energy Minister Alexander Novak in a Bloomberg television interview in St. Petersburg on Friday

– With the support of Dina Chrennikova, Annmarie Hordern and Elena Mazneva


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