Saudis, Russia Differ Again on Oil Strategy Before OPEC+ Meeting
Saudi Arabia and Russia are once again heading into an OPEC+ meeting on opposite sides of a crucial debate about the oil market.
Riyadh is publicly urging fellow members to be “extremely cautious,” despite prices rebounding to a one-year high. In private, the kingdom has signaled it would prefer that the group broadly holds output steady, delegates said. Moscow, on the other hand, is indicating that it still wants to proceed with a supply increase.
The positions mirror those taken at recent meetings, but this time the Saudis have a new bargaining chip — 1 million barrels a day of voluntary cuts. The kingdom pledged to make these extra curbs only in February and March, but some see signs that could change as the negotiations get underway.
“The key question for me is how they return the Saudi barrels,” said Bill Farren-Price, a director at research firm Enverus and veteran observer of the cartel. The kingdom could potentially use them as “leverage for getting a deal,” he said.
Bargaining Chip
Ten months after slashing crude production when Covid-19 crushed global demand, the Organization of Petroleum Exporting Countries and its allies are still withholding 7 million barrels a day from the market, about 7% of global supply.
It’s been a sacrifice, with members such as Iraq and Nigeria struggling economically as exports dropped. But it has yielded results, reviving prices to above $65 a barrel in London and shoring up producers’ battered revenues.
By most estimates, the cuts have meant oil demand exceeded production this year by a wide margin. The supply gap grew even wider last week as freezing weather in Texas caused a slump in U.S. output.
When OPEC+ gathers on March 4, it will discuss whether to provide more crude to the market in April. There will be two crucial decisions.
First, the group as a whole must choose whether to restore as much as 500,000 barrels a day, the next step in a gradual revival of production that was agreed on in December, but paused at the January meeting.
Second, Saudi Arabia must determine the fate of the extra 1 million barrels a day of extra voluntary cuts it is making this month and next to help clear surplus inventories even more quickly.
The kingdom initially announced this reduction would be reversed in April, but their latest thinking is fluid and the next move hasn’t been finalized, delegates said. Offering to maintain some part of this voluntary cut in April could give Riyadh a useful bargaining chip if it’s seeking to limit the group’s overall output increase.
“Some easing in production restraint is likely at the March meeting,” said Bob McNally, president of consultant Rapidan Energy Group and a former White House official. “The real bargaining has yet to start and no decision has been pre-baked.”
Looming Debate
Having differed over the pace of supply increases at the last two ministerial meetings, public comments from Riyadh and Moscow indicate that another debate looms.
Russian Deputy Prime Minister Alexander Novak said on Feb. 14 that “the market is balanced.” While he hasn’t publicly expressed a policy preference for the March 4 discussions, Novak argued at the last two OPEC+ meetings for production increases.
Novak’s Saudi counterpart also appears to be sticking to a familiar position.
Acknowledging his stance might be unpopular, Saudi Energy Minister Prince Abdulaziz bin Salman warned his fellow producers against complacency. The group must recall the “scars” of last year’s crisis and be “extremely cautious” in its next move, he said.
“The football match is still being played, and it’s too early to declare any victory against the virus,” the prince said. “The referee is yet to blow the final whistle.”
Saudi Gift
Both arguments have merit.
This year’s 20% rally in crude prices has been sharp enough for major consumers such as India to complain about the squeeze, and for Wall Street banks and trading houses to predict further gains.
Global inventories are falling “very fast” and are set to diminish sharply later this year, according to the International Energy Agency. Demand for petroleum products that cater to societies working and consuming at home is booming.
After freezing storms in Texas shuttered as much as 40% of U.S. crude production in the past week, the clamor for barrels from refiners in some regions has grown stronger. There’s also the risk for OPEC+ that, once the weather-related disruption in the shale heartlands abates, high prices would provoke a new flood of supply.
But at the same time, inventories remain significantly above average levels and the IEA forecasts they could pile up again next quarter. The supply disruption from the U.S. freeze won’t last long enough to cause a shortage, according to OPEC+ delegates, who asked not to be identified because the information isn’t public.
Even after the rally, prices are still below the levels most OPEC members need to cover government spending, giving Riyadh extra leverage.
“The elephant in the room is Saudi Arabia’s gift of 1 million barrels a day in extra cuts,” said Bjornar Tonhuagen, an analyst at consultants Rystad Energy AS. “If the gift is snatched back, prices cannot do else but decline.”
HAMBURG – Nord Stream 2, the almost-finished pipeline running directly from Russia to Germany, is not really about securing cheap natural gas. It is about personal gain and these two countries’ national interest.
The pipeline across the Baltic has pitted the United States and the European Union against Germany, and a swelling chorus of domestic critics against Chancellor Angela Merkel. If it were just a matter of gas molecules, the project might never have seen the light of day. So, why did it?
Go back to 2005, when Gerhard Schröder and Russian President Vladimir Putin sealed the deal just before Schröder stepped down as chancellor. Shortly after handing power over to Merkel, the Russian energy giant Gazprom, essentially a Kremlin affiliate, named Schröder chairman of Nord Stream AG’s shareholders committee. In 2016, Schröder rose to the top of Nord Stream 2, with Gazprom the only shareholder.
Ever since, Schröder has been Putin’s tireless point man. Schöder never tires of repeating that he did it for the good of Germany, because it locked in energy security at decent prices.
In fact, Germany and Western Europe do not need Nord Stream 2. The oil price has more than halved since its 2008 peak. And with ever more new gas fields coming onstream, especially in the Mediterranean, not to mention North America, the price of gas has dropped by almost four-fifths over this period. Nor is the gas glut likely to be temporary, given ever more renewables surging into the market.
There are already 13 pipelines running from Russia to Europe, delivering some 250 billion cubic meters (m3) of gas. Nord Stream 2 will raise dependence on Russia, but much more is at stake, because the pipeline circumvents Ukraine and Poland. For Putin, Ukraine, a former Soviet republic, rightfully belongs to the rodina, the Motherland, and he has already grabbed two pieces: Crimea and the Donbas. Likewise, he believes that Poland, a former satrapy, should be part of Russia’s sphere of influence.
Nord Stream 2 enables Putin to weaken both countries by depriving them of transit fees and breaking Ukraine’s grip on the tap. In 2020, Ukraine earned $3 billion in fees from transporting some 50 billion m3 of gas. Nord Stream 2 could pump about the same amount of gas – a neat coincidence. Schröder’s Gazprom gambit would enable Putin to apply the screws to Ukraine (and Poland), at a time when the government in Kyiv is desperately trying to resist Russian pressure on Ukraine’s already-weak economy.
Schröder was not really thinking of Germany or Europe when he got his friend Putin to top up his modest chancellor’s pension of €93,000 ($113,000) per year. The real puzzle is Merkel. When former US President Donald Trump told her, “You’ve got to stop buying gas from Putin,” she did not budge. An unnamed German official vowed: “We will do anything it takes to complete this pipeline.”
Presumably, energy supplies are not uppermost in Merkel’s mind. This is not about the “low politics” of gas and cash, but the “high politics” of states seeking power and position. Regardless of how often Germans and Russians have been at each other’s throats, the enduring reflex goes back to Bismarck, who famously told the country in the middle: “Never cut the link to St. Petersburg.” In other words, keep the peace with the giant on Germany’s eastern flank.
Though now sheltered by NATO, the Federal Republic has been honoring Bismarck by practicing propitiation, or at least benevolent neutrality. With her fine sense for power, Merkel is not swooning over Russian gas, but sticking to a classic rule of German diplomacy.
Even during the Cold War, West Germany defied three American presidents – Nixon, Carter, and Reagan – by bartering steel pipes for Soviet energy. But what might have made economic sense during the global oil shocks of the 1970s now reflects only Bismarck’s admonition: Don’t rile the Russians.
Today, however, Merkel is acting on a new stage, and not only because of oversupply and dwindling demand as the industrial world shifts to solar, wind, and higher efficiency. Suddenly, Merkel is “home alone.” It is not just the US, Britain, and nervous East Europeans who want to reduce Nord Stream 2 to scrap. Even the French are turning against the deal.
Reliant on nuclear power, France doesn’t need Russian gas. It worries more about Germany’s “special relationship” and Russia’s lengthening shadow over Europe. Just this month, Russian foreign minister Sergey Lavrov threatened to rupture relations with the EU if it imposed new sanctions.
In addition, Merkel faces unprecedented headwinds on her own turf. Even prominent fellow Christian Democrats and the pacifist-minded Greens have turned against Putin. So have parts of the liberal media, which usually zeroes in on imperial America.
Why? Two words: Alexei Navalny. Facing his most dangerous rival yet, Putin has overplayed his hand. The Kremlin’s attempted murder of Navalny, and now the longish prison sentence meted out to him, has rattled Germany’s political class. In democracies, moral revulsion beats Merkel-style realpolitik.
The wheeling and dealing has already begun. Germany is dangling some juicy carrots before Biden, promising to raise subsidies for the construction of German liquefied natural gas terminals that will take in American LNG. Germany also vows to work hard on new rules that would ensure the continued transit of gas through Ukraine. Poland will get funds for LNG terminals. There is talk that Germany would shut off Nord Stream 2 if Russia violated international law and human rights. Please, President Biden, just lift the sanctions.
A deal will be struck. But who will “negotiate” with the energy market? The court of supply and demand may issue this definitive verdict: no need for another pipeline. If so, Nord Stream 2 may just rot away underneath the Baltic – a monument to greed and folly.