OIL

A badge marking the OPEC + alliance with Russia is seen pinned to a jacket.

Bloomberg

It was supposed to be a six-month fling, but Saudi Arabia and Russia have instead signed up for eternity.

Complete with poem and celebratory badges, Moscow and Riyadh this past week led two dozen countries in signing a charter to formalize the OPEC+ group that for the past two-and-a-half years has coordinated supply to prop up the price of oil.

OPEC Secretary General Mohammad Barkindo compared the pact to a “Catholic marriage,” saying it would last for “eternity.”

“The charter may end the perennial questions of whether Russia-Saudi is a relationship built to last,” said Helima Croft, chief commodities strategist at RBC Capital Markets. “The charter is the ring in the relationship.”

It was a moment that would have been hardly imaginable three years ago, when decades of distrust were poisoning relations between the world’s two largest oil exporters as prices languished. In late 2016, in the face of skepticism from analysts and some senior figures in both countries, Khalid Al-Falih of Saudi Arabia and Russia’s Alexander Novak promised the output cuts they’d agreed on would last six months.

This past week, the group agreed to extend the cuts into a fourth year, to March 2020. But signing the charter was a key moment in a much broader Saudi-Russian diplomatic effort.

It was Russian President Vladimir Putin who first telegraphed the result of the OPEC+ meeting, after discussions with Saudi Crown Prince Mohammad bin Salman in Osaka the previous Saturday. And when Putin visits Saudi Arabia later in the year, Riyadh is planning to invite other heads of state from the OPEC+ group for a signing ceremony of the charter.

For Saudi Arabia, turning what had been an ad hoc coalition into a formal group provides a hedge against future oil-market turbulence. The kingdom can now lean on a group representing almost half of global oil output for support.

For Russia, the formalization of the group helps expand Putin’s influence in the Middle East. That’s a blow to the U.S., which has spoken out against Russia’s growing clout in the region. “I am very confident that Vladimir Putin’s efforts will fail,” said Secretary of State Mike Pompeo when asked earlier this year whether the Russian president could use oil diplomacy to supplant the U.S. in the Middle East.

The charter is, implicitly, a recognition of the long-term nature of the problem facing Saudi Arabia and the other major oil producers. Oil slid this past week in spite of the agreement, with West Texas Intermediate and Brent dropping 4.8 percent and 4.1 percent the day it was announced, respectively. Prices edged higher Wednesday and Friday, but still finished the week lower.

Breakneck growth in U.S. shale oil production, combined with worries about slowing demand growth, mean that the OPEC+ group has little choice but to continue its cuts or see prices plunge.

Al-Falih acknowledged as much, saying that oil producers would need to “keep adjusting” until U.S. shale production eventually peaked.

That’s a particularly painful reality for Saudi Arabia, which is doing the bulk of the cutting. Russian output in June of 11.155 million barrels a day is just 0.5 percent below its level in December 2016, before the cuts deal began. Saudi Arabia’s oil production, on the other hand, is more than 7 percent lower over the same period.

‘Russia pulls strings’

“Russia pulls the strings while Saudi output swings,” said Roger Diwan, a veteran OPEC-watcher at IHS Markit.

The consummation of the Saudi-Russian relationship was almost derailed at the final moment. Suhail Al-Mazrouei, the United Arab Emirates’ energy minister, tempted fate on Monday morning by predicting one of the “easiest ever” OPEC meetings.

Indeed, the ministers rapidly agreed on the substance of the meeting, the nine-month extension of the output cuts.

But then things got bogged down. It was Bijan Namdar Zanganeh, Iran’s veteran oil minister, who threw a spanner in the works. When it came to agreeing the new charter, Zanganeh resisted, according to several people involved in the negotiations.

Zanganeh had been a critic of the growing dominance of Russia and Saudi Arabia in the group’s decision-making, warning before the meeting that it could be the death of OPEC. Now, with his country’s production about 1.5 million barrels a day lower than a year ago because of U.S. sanctions, he was determined to assert Iran’s authority as a founder member of the producer group.

Algeria also wanted to be sure that Saudi Arabia couldn’t use the OPEC+ charter to impose its views on the other members of OPEC, an organization that traditionally works by consensus.

The Iranian minister started by insisting that the OPEC+ charter should be governed by the statutes of OPEC, a proposal that would have bound Russia to OPEC’s rules. At that point, according to one person in the room, the meeting almost ended, with some suggesting that delegates should spend a few more weeks working on the charter.

A well-worn routine of OPEC wrangling began. With food supplies in the secretariat running low and a banquet dinner getting cold at a Viennese palace across the road, a series of meetings over three hours was fueled by vast quantities of pistachios.

The Venezuelan oil minister, who’s the rotating chair of the OPEC meeting, worked to bring his Iranian counterpart around, as did Saudi Arabia’s state minister for energy affairs, Prince Abdulaziz bin Salman, a veteran negotiator who stepped in on previous occasions to smooth over differences with Iran. Eventually a fudge was found, in typical fashion: an OPEC resolution, separate from the OPEC+ charter, stating that the new charter would be “without prejudice to the sanctity of the OPEC Statute.”

“It’s a technicality in the text,” said Thamir Ghadhban, Iraq’s oil minister. “One of the member countries raised it and just wanted to make sure it wouldn’t impinge on OPEC sovereignty.”

By Tuesday morning, when the OPEC ministers were joined by their counterparts from Russia and other non-OPEC members, all that remained were formalities: a team photo, with each minister holding a copy of the new charter and wearing a badge with a new logo representing the group’s cooperation. Also, a poem that ended with an assessment of what lies ahead that was both optimistic and sobering:

“Uncertainties remain, the challenge gets harder,But the future’s bright, now we’ve a charter.”