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Analysts doubt Russia’s appetite for additional production cuts

Rashid Husain Syed

Saudi Arabia and Russia diverging views on crude output policy have set the stage for an intriguing OPEC+ meeting on June 4.

Moscow needs to maximize its crude revenue to sustain its war efforts in Ukraine. The price cap levied on its crude exports under the Western sanctions policy is forcing Russia to export as much crude as possible. Its only way to achieve this is to expand its list of customers by offering deep price discounts. Pakistan is the latest addition to its list of customers.

These discounts are hurting Riyadh’s efforts to tighten oil markets and bolster crude market prices. Riyadh wants to optimize cash flow by controlling the output taps. Its top priority has been to strive to put a floor under prices. For months now, Riyadh has spearheaded a campaign to lower OPEC+ output levels and use the demand-supply balance to its benefit.

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As industry analyst Paul Sankey says, the real issue today is: “Can the Saudis corral Russia?” That is an interesting comment.

In sharp contrast to the Saudi position, Russian Deputy Prime Minister Alexander Novak last Thursday played down any prospect of further OPEC+ production cuts at its meeting next week.

“I don’t think that there will be any new steps because just a month ago certain decisions were made regarding the voluntary reduction of oil production by some countries …” Novak was quoted as saying by Izvestia newspaper.

Last Friday, sources with knowledge of the Russian position also told Reuters that Russia would prefer its partners of the OPEC+ group to leave oil production unchanged when it meets next week, as Moscow is okay with the current oil prices and production quotas.

However, only a few days earlier, Saudi Arabia’s Oil Minister, Prince Abdulaziz bin Salman, warned traders – again – against shorting oil futures. “I keep advising them that they will be ouching – (as) they did ouch in April,” bin Salman said on Tuesday.

Investors took the statement as a signal that OPEC+, the Organization of Petroleum Exporting Countries and allies including Russia, could consider further output cuts at their meeting on June 4, as they did in their previous meeting in April.

Just a day before that meeting, and against all expectations, OPEC opted to surprise the market when several major crude producers, including Saudi Arabia and the United Arab Emirates (UAE), said they would collectively cut more than one million barrels per day (bpd) from their production between May and December as “a precautionary measure aimed at supporting the stability of the oil market.” This output cut surprised the markets, spiking crude markets, at least for a few days. The Saudi’s current position can be seen as a response to some of that recent softness.

On the other hand, higher than-anticipated crude exports, despite Western sanctions, have led to a rebound in Russia’s oil revenues. According to an analysis published by the Centre for Research on Energy and Clean Air, an independent Finnish think tank, Russia’s oil revenues rebounded in March and April to reach the highest level since November last year. Moscow wants that trend to continue.

Charles Kennedy, in his piece for Oilprice.com quoting OANDA’s senior Market Analyst Ed Moya, underlined: “The Saudis were trying to talk up oil prices and dangle a threat of more production cuts, but it looks like Russia won’t be on board for additional cuts.”

So the June 4 OPEC+ meeting could help pinpoint the direction oil markets would take over the next few months. Riyadh has mostly succeeded in ensuring that OPEC+ goes its way in the recent past.

Will that happen again?

Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.

For interview requests, click here.


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