Energy

OPEC oil deal seen as test of Russia’s new friendship with Saudi Arabia

Key Points
  • The two countries have been warming to each other of late
  • But analysts believe OPEC and Middle East unrest could test the relationship
Oil market expecting a 9-month cut extension, this is built into price: Wood Mackenzie
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Oil market expecting a 9-month cut extension, this is built into price: Wood Mackenzie

The OPEC meeting in Vienna Thursday looks set to be a crucial test of relations between Russia and Saudi Arabia.

The two countries have been warming to each other of late and King Salman's visit to Moscow in October this year marked the first ever state visit to Russia by a reigning Saudi monarch.

But this week the pair must resolve differences over petroleum output, with Saudi Arabia pushing to keep prices high as it readies an initial public offering of its state oil company, Aramco.

Ann-Louise Hittle, senior vice president of macro oils at Wood Mackenzie, said Wednesday that the OPEC meeting agenda could seriously affect how Moscow and Riyadh get along.

"There's a little bit of disagreement right now, there are some issues that have to be ironed out," she told CNBC Wednesday in Vienna.

"How do we end the agreement? How do we deal with increasing production and bring it into the market without collapsing prices?"

Hittle added that it appeared that Saudi Arabia was attempting to avoid any head-to-head confrontation with Moscow, despite misgivings over Russia's opposing stance on Syria or its alliance with Iran.

Saudi King Salman bin Abdulaziz
Faisal Al Nasser | Reuters

Russia and Saudi Arabia reportedly signed more than $4 billion in arms and energy deals in October, symbolizing the improved relations between the two, as well as the growth of Russian influence in the Middle East.

This week, oil traders expect OPEC to announce a nine-month extension to supply caps that are currently due to finish at the end of March 2018.

Helima Croft, the global head of commodity strategy at RBC Capital Markets, said Tuesday it was Russian President Vladimir Putin that led the market to believe in a full-year extension.

But she said a number of chief executives within Russia are privately unhappy with the supply cap freeze and there is some chance Russia could decide to break up its oil pact with Saudi Arabia and other countries.

"Before he (Putin) said that no one was thinking about a full-year extension and then OPEC went to work on a full-year extension so now that is the market expectation. So we're set for a disappointment if Russia doesn't show up for the 'bromance' (with Saudi Arabia) anymore," she said.