Saudis Can Live With $80+ Oil, But Russia Sees Post-Sanction Price of $50

Russia sees post-sanction oil price of $50. File Image / Pixabay

Tuesday's increase in crude prices due to allegations that neither the Organization of the Petroleum Exporting Countries (OPEC) nor Saudi Arabia are keen on further boosting output to compensate for shortfalls in other countries was accompanied by assurances that current high prices are only short term, and that the Saudis are merely testing the U.S.

Alexander Novak, energy minister for Russia, on Tuesday told a meeting of government officials and the heads of domestic oil majors that "The current situation, related to the price rise to $70-$80 [per barrel], is mainly... connected to the premium in the price linked to the possible risks of sanctions and lower supply."

He went on to say that that the long-term price would stand at around $50 per barrel, based on estimates by analysts and oil companies.

As for the Saudis, Tom Petrie, chairman of Petrie Partners Inc., told Bloomberg, "I think this is a way to test president Donald Trump on the issue of supply and demand and who's causing the tightness to occur."

He added, "It is clear that the tightness is in no small part a function of the seriousness with which the U.S. sanctions on Iran are being treated."

Stuart Wallace, a reporter for Bloomberg television, mused, "I don't really think they're setting a price target as such; what's changed here is a very subtle shift, [and] as we approach $80 on the Brent price the market assumes that Saudi Arabia would intervene, largely because they're trying to keep the U.S. on side as well.

"It appears now the position they're taking is, given that the sanctions in Iran are so effective, given that the increase in volume from OPEC is coming from very precarious jurisdictions like Libya, like Nigeria, and so on - given all of that, maybe there's very little they can to do stop [oil] from popping over $80; that doesn't mean they like it, they're aware that this is in the danger zone, but it also means that they're not going to panic every time it gets to $80."

As for the notion that OPEC may not be able to pump enough oil to compensate for shortfalls in countries such as Iran and Venezuela, Wallace said, "they can probably get  few hundred thousand more barrels out...but the same with Saudi Arabia...they've never had to test the top end [of their capacity].

"Yes, you could spike production for a month or two, but after that can you really keep it going, is the infrastructure there, is the engineering there - again, that remains to be seen."

Of course, Wallace's comments as well as those of Petrie are pure speculation; somewhat more informed were follow-up remarks made by Novak on Tuesday to the effect that although global markets remain fragile, he expects his country's production in 2018 to total 553 million tonnes (11.105 million barrels per day), up from around 547 million tonnes in 2017, and that production would peak at 570 million tonnes in 2021.

He also outlined several measures aimed at encouraging a boost in oil production, which is declining in West Siberia - in short, Russia is determined to do its part to ensure that the long-term crude price of $50 becomes a reality.

In the broad realm of speculation over where the crude market was headed, Russia earlier this week made a remarkable but under reported declaration with Novak saying his country was ready to discuss cooperation with the U.S. for the sake of balancing the market.