Splits have started to appear in the agreement between Russia and oil cartel OPEC over production curbs aimed at pushing up the price of crude.
Speaking ahead of Friday’s OPEC meeting in Saudi Arabia, Russia’s Energy Minister Alexander Novak said producers could ease output restrictions before the end of the year, signed in January 2017, is due to end in December.
The deal has seen prices recover from a low of $34 per barrel in 2014 to a current price of around $68 (20 April 2018).
“The agreement lasts until the end of the year. In June, we can discuss, among other issues, a question about reduction of some quotas during this time, if it is expedient from the market’s point of view,” Novak told Russian news agency TASS.
At the Jeddah meeting, OPEC agreed to "continue to think through further means of strengthening cooperation" on production limits. The governing committee also welcomed assurances on this front from Iraq, Kazakhstan, Libya and Venezuela, and expressed its satisfaction with Iraq and Kazakhstan’s expression of support for improving levels of conformity.
Industry sources told Reuters this week that Saudi Arabia would be happy to see crude rise to $80 or even $100 a barrel.
Shale – a thorn in OPEC’s side
That seems unlikely to happen, however, given the vast reserves of US oil shale that become viable to extract with prices above $50 a barrel.
The 2014 price crash came as a result of OPEC trying to take out shale oil producers by flooding the market with cheap oil.
It worked in the short term, with many US rig contractors going to the wall.
Then, towards the end of 2016, OPEC nations decided they had had enough of cheap oil and tried a different tactic – turning off the taps.
Saudi Arabia persuaded a group of 24 countries, including the 13 other OPEC members and Russia, to curb global output by 2% to 1.8 million barrels a day.
The supply cuts pushed prices back up above $60 – but that just allowed the US shale-oil drillers to get back in business, pegging the price in the $60s.
There are other factors, too – notably Iran and Venezuela, two of the world’s biggest producers.
Iran sanctions looming
Iran had been locked out world oil supplies as a result of global sanctions, only lifted in 2016. But the country is bidding to regain its share of the world’s oil market – it was producing 4 million barrels per day prior to sanctions being imposed.
US president Donald Trump could stop that plan in its tracks, however. He has made no secret of his dislike of the “terrible deal” that brought sanctions over Iran’s nuclear programme to an end.
With the sacking of former US Secretary of State Rex Tillerson, things are going to get a whole lot tougher. His replacement, the hawkish ex-CIA director Mike Pompeo, signals a major toughening of foreign policy, and Trump has warned the US will reimpose sanctions if further concessions are not made by Iran ahead of the 12 May deadline.
Venezuela facing further hit
The US has also imposed sanctions on Venezuela. The country has the world’s largest proven reserves of oil, but is on the verge of economic collapse after years of mismanagement by Marxist leader Hugo Chavez, and his successor Nicolas Maduro, who took over after Chavez’s death in 2013.
As a result of President Maduro’s attempt to change the constitution to consolidate his power, the US imposed new sanctions last August.
The move has seen oil exports fall by up to 800,000 barrels a day, according to RBC Capital Markets, but further sanctions threatened by Trump could see that slump deepen to one million barrels a day.
Conflicting forces at work
There are, then, effectively, two conflicting forces at work in the oil market. On the one hand you have OPEC’s production curbs, and the prospect of sanctions on Iran and Venezuela. On the other, you have the US shale drillers – the higher prices go, the more profitable fracking becomes.
Furthermore, as the West and other major economies such as China look increasingly to green energy sources, demand for oil is likely to continue to flatline. In fact, the latest figures (Q1 2017) show demand falling to 96.5 million barrels per day, from 96.8m b/d in the previous quarter, according to figures from the International Energy Agency.
Russia’s economic recovery, after a two-year recession ending in 2017, is fragile. It will be further undermined by global isolation following the nerve-agent attack in the UK, and its support for the barbaric Assad regime in Syria, and its use of chemical weapons. Russia needs those petro-dollars, and the appeal of curbing production seems to be waning.
Whatever Saudi princes may wish for, don’t expect oil to hit $80 a barrel any time soon – while hopes it may one day return to three-figure territory are little more than a desert mirage.