The decision by Russia and Saudi Arabia to drive up oil prices by extending the production cuts to 2018 points to a deepening alliance between the two countries. In the latest sign of these growing ties, oil ministers from the two countries on Monday said they would hold consultations with other countries on an agreement that seeks to have the oil production-cuts deal that was struck by both non-OPEC and OPEC producers extended from the current six months to nine months.
The deal will see approximately 1.8 million barrels kept away from the market and will likely spur more activity from shale producers in the United States. But for Saudis the deal will also be for political expedience. The announcement of the cuts extension comes just a few days before U.S. President Trump jets into Saudi Arabia for an official visit.
“Think about what they get from Trump and the Republicans. They want to get a whole lot of precision-guided missiles,” RBC’s global commodities research head, Helima Croft, said.
Other than weapons deals, Saudi Arabia will also require from the United States affirmation that the world’s superpower has the back of the Saudis and that it will do everything in its power to curtail the growing influence of Iran. The announcement of the production cuts extension was made by Khalid al-Falih, the energy minister of Saudi Arabia and Alexander Novak, the energy minister of Russia.
Saudi Arabia was one of the oil producers whose national budgets were highly impacted by the low oil prices and the kingdom needs higher oil prices to meet its financial obligations. Additionally, the kingdom is embarking on a plan aimed at the diversification of the country’s economy away from the country’s overreliance on oil. The diversification plan is hedged on the initial public offer of Saudi Aramco, Saudi Arabia’s state-owned oil firm. With higher oil prices, the IPO is likely to perform better.
The higher oil prices witnessed in the couple of months have also been of help to the Russian economy and marked the first year the country moved out of recession, a development which has been linked with the better prices.
Though the deal proposed a cut of 1.8 million barrels, commodity analysts are of the view that this number could be increased. However, it will be complicated not just by rising production in Libya but also by shale producers in the United States and the rising crude oil inventory in the world’s biggest economy.