OPEC pops the question – will Russia say ‘I do’?

OPEC is drafting an agreement to tie Russia into a so-called "super group" of oil producers.

Details on the proposal are vague and the Kremlin’s willingness to consider such a betrothal is uncertain, despite some positive vibes between Russia and OPEC kingpin Saudi Arabia at the moment.

In trying to formalize a permanent marriage to a powerful but unpredictable partner like Vladimir Putin, OPEC Secretary General Mohammed Barkindo is no doubt aware of the stakes of a divorce.

Any end to the production cut pact is likely to be messy with several countries having touted in recent weeks their plans to boost their production capacity in short order.

And for Saudi Arabia, it is counting on keeping Russia on side as its highly anticipated public listing of state oil company Aramco looks to be delayed.

Talk of the super group “pushes away the conversation that [OPEC] wants to be avoided: what is the exit strategy?” noted veteran OPEC watcher Jamie Webster, senior director at Boston Consulting Group’s Center for Energy Impact.

As the oil market has tightened, OPEC and its allies have remained coy on outlining how they plan to exit their output cut deal, save some vague pledges not to open the taps all at once.

Rather, they have obfuscated on the matter – first by declaring that their target of drawing down inventories to the five-year average may be changed, and now by announcing that the draft agreement with Russia and the other non-OPEC partners is in the works.

Perhaps it’s not a huge surprise, given that OPEC has never defined any exit strategy from previous production cut accords but has merely looked the other way on cheating until talk of the cuts simply faded away.

Barkindo has made no secret of his desire to “institutionalize… a permanent framework” of cooperation with non-OPEC, as he said in London last October.

The output cut deal, which is scheduled to run through the end of 2018, commits the 24-country OPEC/non-OPEC coalition led by Saudi Arabia and Russia to cutting 1.8 million b/d to help rebalance the market.

Deal members initially talked of aiming to get oil inventories held by OECD nations down to the five-year average.

But as that goal has neared — the IEA estimates OECD oil stocks were 52 million barrels above that benchmark at the end of December, down from 311 million barrels at the start of the cuts — OPEC is now wavering.

Saudi energy minister Khalid al-Falih has suggested that a new metric will be developed at the coalition’s next meeting on June 22, perhaps incorporating regional stock data and consideration of the crude grades held in storage.

There is merit to that idea, given that the oil market is a changed one since the deal was negotiated in late 2016, with surging demand and growing supply from the US.

Keeping the market guessing on how and when the cuts will end is a way for the bloc to ensure that their efforts to tighten market balances won’t be undone in short order, said Harry Tchilinguirian, global head of commodities markets strategy for BNP Paribas.

“My take is that they do not want to tie their hands with the current accord,” he said.

Kicking any hard decisions down the road “avoids getting boxed in in terms of policy, giving them options and ultimately reflects forward thinking,” he added.

All the better, then, for Saudi Arabia as it tries to keep its handle on the oil market’s rudder in anticipation of the Aramco IPO.

The delayed IPO — the pet project of Saudi Crown Prince Mohammed bin Salman — remains very much in flux, and Saudi officials have quietly dropped their target of listing the shares in the second half of this year.

An abrupt end to the production cuts would roil the oil market and make it more difficult for Aramco to achieve the kingdom’s desired $2 trillion valuation.

In fact, Saudi Arabia has doubled down on its market rebalancing efforts, announcing Tuesday that it would slash March crude production by 100,000 b/d from February levels and hold exports to below 7 million b/d.

“Market volatility is a common concern for producers and consumers, and the Kingdom is committed to mitigating this volatility and moderating its negative impacts by responsibly meeting its pledges under the Declaration of Cooperation between OPEC and non-OPEC producers, while proactively working with other producers to stabilize global markets,” the Saudi energy ministry said.

Not the most romantic declaration of love for its OPEC/non-OPEC brethren, but an earnest one. Whether it is reciprocated by its main partner remains to be seen.