London — Russian President Vladimir Putin on Thursday laid the onus on Saudi Arabia to make the case for continuing a supply cut agreement set to expire at month's end, saying he was comfortable with current oil prices, even with a 20% slide over the past four weeks.
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"We have certain disagreements, linked to a different understanding of the fair price," Putin said in St Petersburg, where his energy minister Alexander Novak was due to meet his Saudi counterpart Khalid al-Falih late Thursday.
Russia can do just fine with an oil price in the range of $60-$65/b, the president said, given that its budget is built on a $40/b price assumption. At the same time, OPEC's largest producer and de facto leader, Saudi Arabia, which has a less diversified economy, has a budget based on higher oil prices, Putin said.
The International Monetary Fund estimates Saudi Arabia's fiscal breakeven oil price this year at $85.40/b, with the average for OPEC's Middle Eastern members at $82.40/b.
OPEC and 10 non-OPEC allies led by Russia agreed in December to cut a combined 1.2 million b/d in supplies through June to help drain global oil inventories and bolster prices. But despite strong comments from Falih that he would like to see the cuts extended, the coalition has not yet announced any decision.
With some Russian oil company officials, notably Rosneft CEO Igor Sechin, chafing under the output restraints, Putin was circumspect in tipping his hand on agreeing to an extension. But he said Russia would like to continue cooperation with OPEC on oil market management in some form.
"We have to take into account all the factors: output drop in Iran [and] Venezuela, problems in Libya, Nigeria...and an increase in consumption in the summer season," Putin said. "I won't tell you now what considerations we have over what we need to do in the second half of the year, but we will be taking a consolidated decision together with our colleagues in OPEC."
Despite Putin's noncommittal comments, analysts said the prevailing market conditions point towards a rollover of the production cuts.
Crude prices have plunged since Saudi Arabia hosted a key OPEC/non-OPEC monitoring committee meeting in Jeddah in mid-April, with oil inventories continuing to build in the US and trade tensions between the US and China clouding global economic growth forecasts.
Tighter market outlook
"We expect tightening balances and crude stock draws in the second half of the year to raise the call for OPEC+ crude, but market weakness and rising demand-side concerns reduce any urgency to deviate from the current strategy of rebalancing markets," said Paul Sheldon, chief geopolitics adviser for S&P Global Platts Analytics.
In Jeddah, Falih advocated for a continuation of the cuts, saying he saw no danger of any shortage in the market, even with US sanctions on Iran and Venezuela poised to tighten supplies in the months ahead.
The subsequent price plunge has likely steeled his resolve further, with some analysts saying Saudi Arabia may slash its production even more, to bolster prices. Saudi production averaged 9.82 million b/d in April, its lowest level in 15 months, according to the latest S&P Global Platts survey of OPEC output.
Falih's meeting with Novak will take place on the sidelines of the St. Petersburg International Economic Forum, and the two officials are also expected to attend a Saudi-Russian summit in Moscow on Monday.
Venezuelan oil minister Manuel Quevedo, OPEC's president for this year, is also at the St. Petersburg forum. Among his tasks are brokering an agreement for the date of the next OPEC/non-OPEC meeting in Vienna.
Originally scheduled for June 25-26, Russia has requested a date change to July 3-4, but several members, notably Iran, Algeria and Kazakhstan, have said they are opposed to moving the meeting.
The benefits of cutting
Rosneft's Sechin has been among the most outspoken of Russia's critics of the production cuts. At the company's shareholder conference earlier this week, he said Russia was risking ceding its market share to the US, whose production continues to rise.
Due to Russia's tax structure, its oil companies do not benefit as much from higher oil prices, and Sechin said he would appeal to Putin for tax relief if the OPEC/non-OPEC supply cuts were extended.
Putin himself has said the geopolitical benefits of allying with Saudi Arabia and OPEC go beyond oil prices.
"The losses to the companies seem to be significantly offset by the gains the Kremlin has secured in terms of global strategic and economic influence," said Helima Croft, global head of commodity strategy at RBC Capital Markets. "Thus, we believe that the stars are in the process of aligning for an extension of the 1.2 million b/d production cut in a few weeks' time and potentially even deeper adjustments by Saudi Arabia."
At least some Russian oil companies are in favor of keeping the cuts.
Lukoil CEO Vagit Alekperov said at the St. Petersburg forum that he saw no need for the OPEC/non-OPEC coalition to raise crude output and that a Brent price between $60-$70/b was "comfortable."
"Today it is at the lowest range, so we hope that those efforts that our ministers are making will allow it to rise to the highest level of the range," he said.
Gazprom Neft CEO Alexander Dyukov said there was no need for the coalition to rush any decision on increasing production, with oil prices impacted more by market sentiment than fundamentals.
Growing seasonal demand and US-China trade tensions were adding "nervousness to the market," he said.
Even so, he said Gazprom Neft, which pumped 1.2 million b/d in May, stood ready to boost its production by 40,000 b/d by the end of the year, if the production curbs were lifted.
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