OPEC Cutback Booster Russia Calls For Smooth Exit Strategy as Saudis Say $40/bbl Oil in 2020 is OK

Friday May 19, 2017

Russia, which along with Saudi Arabia has agreed on the need to extend the Organization of the Petroleum Exporting Countries (OPEC) oil cutback initiative to March of 2018, is now calling for a smooth exit from the deal once it expires in order to ward off undue market volatility.

The call was delivered Wednesday by Igor Sechin, chief executive of Rosneft, who said he was also in talks with Russian energy minister Alexander Novak to determine what form an exit mechanism would take.

He told media, "We have asked our minister to agree with partners such a mechanism within the framework of this deal so that the exit from it, once it expires, would be quite smooth and won't lead to serious volatility."

Sechin also stated that his company is planning strategies to be competitive after the cutbacks end: "We will plan our work till the year-end in the way that while complying with the agreements, paying a special attention to mature fields not to lose oil resources and do preparations needed for new field launches, so in case the deal is stopped be ready for competitive work on the markets and not to lose our market share."

As for the potential for the OPEC extension to finally bring about sustainable market balance - something many critics doubt will happen - Sechin said, "We should see how shale oil production [in the U.S.] will perform."

Meanwhile, Saudi Arabia, which has cut beyond its quota to compensate for renegade nations refusing to cooperate with the OPEC initiative, now says it doesn't care what happens to prices in the long term.

That's because, according to Mohammed Al Jadaan, finance minister for the Saudis, "We have gone significantly out of our way to be independent of the oil price."

Al Jadaan is referring to his kingdom stabilizing its economy by cutting government subsidies, announcing new taxes, and borrowing billions to balance its books.

After stating that he wouldn't be bothered if prices drop to $40 per barrel by 2020, he added, "We are planning to totally [end] that dependency that we have been living for the last 40, 50 years; hopefully by 2030, I wouldn't care if the oil price is zero."

But presumably the Saudis very much care about prices in the near term: the International Monetary Fund estimates the kingdom will need oil prices of $84 a barrel to run a balanced budget in 2017 and $74 next year.

Unfortunately, few if any critics think an OPEC cutback extension can achieve those price gains; in fact, the consensus is the extension will keep prices rangebound at best, and earlier this week Helima Croft, global head of commodity strategy at RBC Capital Markets, also pointed out that a single rogue nation such as Iraq pumping full-out could plunge the market back into chaos.