The members of the OPEC and non-OPEC joint ministerial monitoring committee (JMMC) met in Oman on Sunday to review recent oil production numbers and assess the overall compliance with their production cut deal. Producing countries congratulated themselves on rising oil prices.
However, traders and analysts are wondering:
Khalid al Falih, the Saudi oil minister and co-chair of the JMMC, was very optimistic about the impact the deal has had on the global oil market. He stated that overall compliance rates have been greater than 100% and that the global oil surplus has been reduced by 220 million barrels. In addition, floating oil storage dropped by almost 50 million barrels between June and December 2017.
Despite this good news, al Falih singled out Iraq and Kazakhstan for overproduction and for failing to meet their allocated cuts. In December, Iraq produced 4.41 million bpd, according to S&P Global Platts, whereas its allocation is 4.35 million bpd. Kazakhstan admitted to overproducing its allocation by an average of 35,000-45,000 bpd in 2017, but its energy minister justified this overproduction as “within the margin of error.” It seems that falling production from Venezuela overshadowed and made up for overproduction from Iraq and Kazakhstan.
The real purpose of the meeting was for the key players—Saudi Arabia and Russia—to consider whether it will be necessary to continue the production cuts through 2018. Given the reduction in global inventory and rising prices, many market watchers wonder whether the OPEC and non-OPEC oil producers might abandon the production cut deal before the end of 2018. Al Falih said that the group remains committed to continuing the production cuts through the end of 2018, but that is not a guarantee. In June, the group is expected to discuss how it will end production cuts. The fear is that if the cuts are indiscriminately abandoned in 2019 or earlier, the result will shock the market and cause a sudden drop in oil prices.
All attention has been on al Falih and Alexander Novak, the Russian oil minister. Both appear committed to maintaining their communication and cooperation, a sign that the production cuts will continue at least through the end of 2018. The two men have even taken steps to ensure that they are seen together in public.
Al Falih and Novak’s association has even been referred to as a “bromance” by financial institutions like CitiGroup. The association, however, is most likely a calculated move by al Falih, designed to keep Russia from deviating from the production cut deal and to convince the market that the deal is strong.
From the start, al Falih knew Russian cooperation would be his biggest challenge. Russia has a history of agreeing to cut oil production and then failing to comply. After Russia agreed to cut production in conjunction with OPEC in November 2016, the major concern was that Russia would not deliver on its promise.
Al Falih is known to push his point until he gets what he wants. It seems his strategy is to keep talking, keep selling his points and keep making his argument. Al Falih thinks he will win if he keeps selling Novak on the deal.
Novak, on the other hand, likely sees al Falih’s strategy as an economic opportunity for Russia. As al Falih keeps trying to sell Novak on the production cuts, Novak can negotiate for contracts for Russia. Novak wants to sell nuclear power plants and natural gas to Saudi Arabia, which needs these for domestic power generation.
In global politics as in business there are no “friends” and there is no “bromance.” Both are now at the WEF conference in Davos, Switzerland and we can expect them to be seen side by side once again. Russia and Saudi Arabia will continue to appear friendly as long as it's useful and beneficial to each.
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