Rashid Husain Syed is an energy analyst and consultant based in Riyadh and Toronto. For almost 25 years, he has served as vice-president of a leading Saudi trading and consulting house.
Oil markets are perplexed. The widespread chatter that Russia and Saudi Arabia are finally ready to talk oil – rather than politics – is having an impact.
Russia wants to talk with all the players, Kremlin spokesman Dmitry Peskov said on Friday. "Russia is interested in discussing the situation on the oil markets with its peers, with all parties related to formation of the market, and obviously Russia will be bringing about such contacts," Mr. Peskov said.
This development followed a Venezuelan initiative calling for an emergency meeting of ministers from the Organization of Petroleum Exporting Countries and other crude-producing states. Venezuelan Oil Minister Eulogio Del Pino announced last weekend he planned to meet energy officials from Russia and OPEC to garner support for production cuts.
Mr. Del Pino, who is also head of the state oil company PDVSA, planned to see Russian Energy Minister Alexander Novak and the politically influential Rosneft chief executive officer Igor Sechin, beginning early this week. On Wednesday, Mr. Del Pino is expected in Qatar. And this is to be followed by meetings in Iran and Saudi Arabia.
The objective of the diplomatic flurry is clear: "I will be holding these meetings to discuss a proposal to address the fall in oil prices and seek to stabilize the oil market," Mr. Del Pino told the Financial Times.
However, the key to success remains in the mellowing of Saudi Arabia's stance. Riyadh has maintained all along that it was ready to make a move and cut its output, provided that all stakeholders – both within OPEC and beyond – agree to rein in production and cut output.
The Kremlin's position had also been firm: Russia could not mothball its producing wells because of harsh winter conditions, and its oil resources are mostly privately owned and controlled, beyond state influence.
But plummeting oil revenues have put immense pressure on that position. Producers desperately need the markets to stabilize. Early last week, OPEC secretary-general Abdallah Salem el-Badri called for all producers to work together. "Tough times require tough choices. It is crucial that all major producers sit down and come up with a solution," he emphasized.
Some Gulf Arab members also seem to want to push the process. Nawal al-Fuzaia, Kuwait's OPEC governor, was quoted as saying last Tuesday that OPEC countries were ready to cut output. She told an energy forum in Kuwait that the organization was ready to "co-operate" with others to stabilize the oil market. And Iraqi Oil Minister Adil Abdul-Mahdi underlined in a statement that Saudi Arabia and Russia might be ready to become "more flexible."
Talk of a co-ordinated, 5-per-cent output cut has generated market optimism, but significant gaps remain.
Initial reports said the proposal came from Saudi Arabia. But Al Arabiya television, quoting an unnamed Saudi source, denied that. (However, the source reiterated, Riyadh was ready to co-operate with other producers to support the oil market.)
Dow Jones later quoted a senior Persian Gulf OPEC official as saying the Saudis did not ask Russia to cut output by 5 per cent. The official also said the proposal was an old suggestion from Algeria and Venezuela.
Dampening the expectations, Russian Deputy Prime Minister Arkady Dvorkovich also insisted that Moscow would not intervene to balance the market. "We assume our oil sector is private and commercially focused. It is not under control of the state."
The Iran issue also needs to be weighed into this equation. In an era where parties are calling for output cut, Iran has been talking about raising output. Following the lifting of sanctions, the Iranian government ordered its Energy Ministry to increase crude production by half a million barrels a day. The move in itself has the capacity to be a spoiler.
There are questions marks about Iran's technical abilities, yet given the level of political discontent between Riyadh and Tehran, an agreement between the two to cut output seems far-fetched at this stage.
The Russia-Saudi political divide, especially on Syria, may also be difficult to bridge. Geopolitical considerations could easily come between any agreement on output cut. On the other hand, any improvement in market sentiments could also give boost to U.S. shale output. With emphasis on market share growing, neither Moscow nor Riyadh would welcome such a development.
All told, a co-ordinated move to cut crude output remains, at best, a distant reality.