On October 10, speaking at the World Energy Congress in Istanbul, Russian President Vladimir Putin called Russia to participate with OPEC in oil production cuts:
We believe a freeze or a cutting of the production of oil is the only way to preserve the stability of the energy sector and accelerate a rebalancing of the market… Russia is ready to join joint measures limiting production and calls on other exporting countries to do the same.
The announcement set the stage for an oil price rally that continued what had begun after a tentative OPEC agreement was brokered a little more than a week before.
If a deal is struck among OPEC members, and between OPEC members and Russia (which is not a member of OPEC, but is the world’s largest oil producer), the stage could be set for modest production cuts (1–2% according to OPEC communications made a week before Russia’s announcement). That announcement would come at OPEC’s next meeting, scheduled for November 30 in Austria.
Of course, it’s not a done deal. Russia has a history of failing to follow through on tentative commitments to production cuts -- for example, in the wake of the 9/11 attacks, and during the 2008 financial crisis. There are also technical difficulties that can make production cuts problematic in many Russian fields.
Should a deal actually be made in November, the prediction of Saudi energy minister Khalid al-Falih that $60 oil is “not unthinkable” could come to pass.
We note, though, that besides the difficulty of getting the Russians on board, there are still major problems to be overcome: most notably that the two other critical players, Saudi Arabia and Iran, are currently involved in two intense and ugly proxy wars in Syria and Yemen. In Syria, Iran backs the government of Bashar al-Assad, whose family belongs to the heterodox Alawite sect of Shi’ite Islam; and in Yemen, Iran is supporting the rebel Houthis, also a dissident Shi’ite group.
The Saudis are launching air strikes against the Houthis in Yemen and sending arms and money to opposition fighters in Syria -- many of whom are not “moderate rebels” but rather fundamentalist Wahhabi jihadis. Saudi’s “existential fear” is the consolidation of a “Shi’ite crescent” from Iran to the coast of the Mediterranean -- and perhaps from there to the Shi’ites of Yemen and, more ominously, the suppressed Shi’ites within the Kingdom itself.
Russia has thus far provided indispensable military aid to Syria -- and indirectly to Iranian ambitions. We will have to wait for November to find out if financial realities are sufficient to overcome the old rivalries that have made it so difficult for these three major oil producers to make common cause in defending the price of oil.
Investment implications: Announcements ahead of November’s OPEC meeting suggest that a deal is close, which will see Russia, Saudi Arabia, and Iran agree to modest production cuts. This possibility was enough to send Brent to 12-month highs. Russia’s history in making good on such pledges is patchy, although the current fiscal stress -- with crude accounting for 40% of Russia’s budget revenues -- will encourage them to close the deal.
Still, with Saudi and Iran engaged in ugly proxy wars in Yemen and Syria, old Sunni/Shi’ite rivalries could yet scupper the agreement but we do not think they will. What happens in Vienna on November 30? If a deal does go through, $60 oil by year-end is probable.