Saudi-Russia deal on oil disappoints market

Saudi Arabia and Russia signed a joint statement on Monday in China agreeing to talk and “cooperate” to stabilise the world oil market, but they did not indicate that any oil output limits or other concrete measures were on the table.

There had been a small drumbeat of expectation about the meeting of two oil ministers – and a separate brief meeting between the Russian president Vladimir Putin and Saudi deputy crown prince Mohammed bin Salman at the G20 summit in Hangzhou – but the bland, non-committal statement was followed by a decline in oil futures prices.

“Whatever this was it was a little disappointing,” said Edward Bell, commodities analyst at Emirates NBD in Dubai.

North Sea Brent crude oil futures prices fell nearly US$2 per barrel after the statement, from a high during the day of $49.31 to about $47.37 per barrel in afternoon trading.

Prices had climbed since the beginning of August from just below US$42 per barrel to about $51 mid-month, largely on improved fundamentals as the world oil market absorbed some of the glut and inventories were declining.

They were also supported by talk that oil producers would meet on the sidelines of a meeting in Algeria later this month, with the hopes there might be action on production, according to some traders.

In their joint statement, the oil ministers, Alexander Novak and Khalid Al Falih, pledged to meet again in Algiers in a few weeks.

They also said they would hold the first meeting of a working group in October to talk about shared technology and other such cooperation, as well as perhaps setting up a database.

The statement noted that the two countries together produce more than 20 per cent of the world’s oil, but it did not mention that they compete fiercely for market share, not least in China, where on Monday’s meeting took place.

Last month, Saudi Arabia pumped a record 10.65 million barrels per day and has been recapturing market share since it embarked on its aggressive laissez-faire policy two years ago. Russia’s August production was at a 13-month low at 10.7 million bpd as one of its major fields in Siberia went down for essential repairs.

The Russian oil minister has made calls for an output freeze ahead of the Algeria meeting, much as he did before a meeting in Doha earlier this year. Mr Novak’s efforts to broker an accord between Saudi Arabia and Iran came to nothing and there have been few signs that any deal could be reached this time either as Iran has remained steadfast in its position that it will not freeze until it reaches output levels of 4 million bpd, the level before nuclear sanctions were imposed.

“The Saudis have said ‘the market is coming to a balance, we’re not going to cut’,” said Edward Morse, head of commodities research at Citibank. “They’ve hedged on a freeze whatever that may be, but the signals are that they’re not going to do very much and why would they now in midstream, when they see the markets coming back into balance?”

Despite some of the public comments, it is a common view that Saudi Arabia is going to ride out its current policy, not only because it is the most likely course to bring lasting stability to the oil market, but also because it helps to enforce the domestic economic policy shifts the new regime has been pushing.

“It doesn’t make sense for either Saudi or Russia to voluntarily freeze production levels when the market share battle is showing signs of success,” said Mr Bell, noting that major non-Opec producers including the US, Canada, Brazil and China all have registered sharp declines in their high-cost output.

“Al Falih’s comments that they won’t balance the market on their own is consistent Saudi policy for the past two years and I don’t see them budging on that,” he added. “If Russia is expecting Saudi Arabia to be the first one to rationalise output then I think they will be waiting a long time.”

Russia may be looking at other aspects of energy cooperation.

Mr Putin’s aide Yury Ushakov also said on Monday in China that Russia stands ready to build up to 16 nuclear reactors in Saudi Arabia, saying the project could be worth $100 billion through 2030.

Russia competes directly with China for Saudi’s nuclear business and while it has signed various cooperation agreements and deals with the kingdom, Mr Al Falih last week met China National Nuclear Corp chairman Sun Qin, who told him that China also stands ready to meet Saudi’s nuclear energy needs.

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