Saudi Arabia and Russia: May the force be with them
It was Obi-Wan Kenobi who declared to Anakin Skywalker, “Goodbye old friend, and may the force be with you.” However, in the case of the two leading roles played by Saudi Arabia and Russia, we need to alter the narrative just slightly and say, “Hello new friend, may the force be with us.”
With the international price of oil above $60 a barrel, Khalid Al-Falih and Alexander Novak — the respective energy ministers of the two largest oil producers — silenced critics and can claim victory, even if it may not be a permanent one.
At the last meeting of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC ministers over their historic production-cuts agreement, there was talk that Russia was becoming increasingly restless since the price recovery had come too far, too fast — and, in turn, was assisting US producers.
The chatter at OPEC HQ was that, despite the strategic tilt by Saudi Arabia toward Russia, it would be the market share of Russia’s energy companies that would take top billing in Moscow. A public split, OPEC watchers noted, was a distinct possibility.
This tension provided some drama but those betting on a breakup were left disappointed. Having followed Al-Falih in his previous role as CEO of Saudi Aramco and now minister of not only energy but also industry and mining, I can confidently say he is a powerful but low-key force. He emerged after 48 hours of meetings, beaming with pride. As the rotating president of OPEC, he not only vowed to keep this disparate group of 21 producers on board for another 12 months but also took the role as co-chairman of the committee to monitor their progress.
Al-Falih declared on Nov. 30 that Saudi Arabia and Russia will do whatever it takes to rebalance the market, even if that means not making any adjustments to their game plan of removing 1.8 million barrels a day of supply. In an interview after their joint press conference, Al-Falih’s Russian counterpart made it clear that he bargained for flexibility.
“When we see that rebalancing is happening, when (the oil price) moves faster, we always have the option to sit down together, look at the market’s fundamentals and look at what adjustments we need to make,” said Novak.
Right now, it is fair to say that the force is with them — but the reality is much more complex according to Christof Rühl, the global head of research at the Abu Dhabi Investment Authority, the sovereign fund, who formerly served in a similar role at oil giant BP.
The two countries have enjoyed stellar success with the OPEC production-cuts agreement, bringing ‘A New Hope’ to the global oil market — but 2018 will have its own challenges.
“It is not clear if the glue of oil politics will be strong enough to keep them together through 2018,” he told me. This is mainly due to domestic politics and business back in Russia.
“I do know that from the perspective of Russian companies because of their tax system, there is no advantage of higher prices. They care much more about volumes than about prices,” he added.
Rühl described 2018 as a pivotal year because many major projects for Russian oil companies will be coming online.
This is further complicated by year-end research from OPEC, representing the producers, and the International Energy Agency on behalf of the consuming nations. Both said the glut of oil is being mopped up, but acknowledged that if prices stay at this level, US production will surge above 10 million barrels a day and allow it to at least match the levels of Saudi Arabia and Russia. This will not go down well with producers in Russia, so ultimately President Vladimir Putin may need to choose between keeping the deal intact or letting oil companies open the taps as they have done in the past.
Next year is equally as challenging for Saudi Arabia, having declared plans to float 5 percent of its state oil giant Saudi Aramco to raise $100 billion and land a lofty valuation of $2 trillion. To have a shot at success, energy strategists say, protecting the oil price at $60 a barrel is essential.
“I think they want $60 and more. Because if you are an investor and you start from $40 and you want to offer a valuation for something, it’s not the same as $60, irrespective of the outlook for the future,” said Carole Nakhle, founder of Crystol Energy, a consultancy.
Observers of this energy partnership need to chalk one up for the persistence, determination and steady stewardship of Energy Minister Al-Falih. Now the hard part: Making a call on whether the force will be with him and his Russian counterpart next year as well.
• John Defterios is CNNMoney Emerging Markets Editor and presenter of CNN Marketplace Middle East.
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