Analysts Doubtful Saudis, Russia Can Follow Through on Promises to Get Tough on Cutback Cheaters

Analysts have questioned the efficacy of Russia's on-going aid to Venezuela's PDVSA.

Given that the crude market surges and ebbs depending on what producers promise and then deliver, analysts are now wondering if Saudi Arabia and Russia, which last month promised to get tough on Organization of the Petroleum Exporting Countries (OPEC) cutback cheaters, can actually walk the walk.

The question comes as officials from oil producing nations including those two countries meet in Abu Dhabi on Monday and Tuesday to determine how to improve compliance under OPEC's reduction initiative, which seeks to remove 1.8 million barrels per day (bpd) of crude from the market.

Helima Croft, global head of commodity strategy at RBC Capital Markets, said, "Saudi has signaled that it is going to be stern with those states with less than stellar compliance track records; but the big question is, what tools does it have at its disposal to compel better behavior?"

Andrew Slaughter, executive director of Deloitte's Center for Energy Solutions, replied, "There's no compliance mechanism in the sense that there's punitive actions that can be taken; OPEC doesn't work like that," and he added that the cartel will likely have to fall back on the questionable efficacy of diplomatic persuasion and finger-pointing.

The two OPEC cheaters under the most focus, Nigeria and Libya, will likely be the main topic of discussion next week, and Croft speculates that Russia may put pressure on fellow exporters to impose limits on the latter.

As for Nigeria, it joins the United Arab Emirates and the Saudis as countries that have vowed to reduce production and limit exports but have yet to follow through on their word.

While it's anyone's guess whether trouble-plagued Venezuela will be a topic for discussion next week, Russia is doing its bit to prop up its rapidly-collapsing economy via its largest oil company, Rosneft PJSC, paying $1.02 billion to Petroleos de Venezuela SA in April for future crude supplies, according to a statement released on Friday.

Rosneft has loaned between $4 billion and $5 billion to Venezuela in recent years, mostly to be repaid with oil, but observers are questioning the efficacy of Russia's latest action: "There is no immediate impact on PDVSA, as the company still faces very material liquidity challenges under current oil prices," said Alexander Griaznov, a Moscow-based credit analyst at S&P Global Ratings.

Fitch Ratings Ltd. suggested that a default of PDVSA's debt is "probable" due to lower output, depressed oil prices. and weak liquidity.

Meanwhile, Venezuela's dealings with the former Soviet Union come at the expense of U.S. refiners: Reuters reported that PDVSA has reduced crude sales to its U.S. refining unit Citgo Petroleum while increasing supply to Rosneft.

Sources state that PDVSA expects total exports of Venezuelan crude to Citgo will remain below 120,000 bpd compared with 230,000 bpd stipulated in the supply contracts.

Last week, Croft predicted a "disorderly default" of PDVSA and said that Venezuela "appears poised to earn the dubious distinction of being the first sovereign oil producer to fully fail."