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Russia, OPEC married, at least for now, to help avoid another painful downturn

  • OPEC and other oil producers, like Russia, are expected to formalize the relationship that led to a production cut.
  • Russia's deputy energy minister says the group has not yet met their goal of stabilizing the market and could in the second half of the year.
  • OPEC's alliance with other energy nations is seen as a necessary step to prevent another deep downturn.

OPEC, Russia and other non-OPEC nations are likely to turn their production-cutting deal into a longer-term relationship to help fend off the next downturn and make the oil market less volatile.

The agreement to reduce oil output by 1.8 million barrels a day extends through the end of the year, and multiple ministers endorsed retaining a relationship that could help prevent another destabilizing collapse in oil prices, like the one in 2015 and 2016.

"We realized it was a negative sum game; all of us producers and consumers were losing when the oil price went down," said Mohammed Saleh Abdullah Al-Sada, Qatar Minister of Energy and Industry. Al-Sada, speaking at IHS Markit's annual CERAWeek conference, was instrumental in bringing fellow OPEC ministers into agreement on a deal in 2016, when they met on the sidelines of an industry conference in Algeria.

"A year earlier we opened channels with Russia, and again we found they were thinking alike," he said. "We found once we agreed among ourselves, Russia was very positive."

The thorn in the side of major oil-producing nations has been U.S. shale, which started to boom in the last decade as the industry applied and continued to improve new technologies. The message from CERAWeek was that OPEC will continue to hold the market steady, for now.

OPEC and Russia motivations may ultimately diverge

While OPEC and Russia agreed to cut back, shale drillers are driven purely by economics and they increased production as prices stabilized. Now at record oil production of more than 10 million barrels a day, the United States is ahead of Saudi Arabia since it pared back production.

"Russia and OPEC have a major problem in the long run. The fact that the Saudis are pegging to the U.S. dollar and the Russians have a floating currency means in the long run the Saudis want more dollars and the Russians want more barrels," said Francisco Blanch, head of global commodities and derivatives research at Bank of America Merrill Lynch.

"It's worked out well for the last year and a half, and they are investing in each other's countries," he said recently. "At the end of the day, if the Russians extend the deal into 2020, they lose more market share to the U.S., and I don't think they're willing to do that."

OPEC Secretary General Mohammad Barkindo described the agreement, which will be reviewed in June, to be "as solid as the Rock of Gibraltar. Here he is seen shaking hands with Russian President Vladimir Putin (right) at the Russian Energy Week 2017 forum in Moscow in October.
Sputnik | Kremlin | Reuters
OPEC Secretary General Mohammad Barkindo described the agreement, which will be reviewed in June, to be "as solid as the Rock of Gibraltar. Here he is seen shaking hands with Russian President Vladimir Putin (right) at the Russian Energy Week 2017 forum in Moscow in October.

But OPEC General Secretary Mohammad Barkindo describes a larger relationship with non-OPEC producers as an "insurance policy" against future volatility and cycles. He is also reaching out to shale players, and he and OPEC oil ministers met with producers at a dinner during the CERAWeek conference for a second year in a row. He plans to do it again next year.

"It was obvious this would trigger more rapid rise of shale production," said Alexey Texler, Russia's First Deputy Minister of Energy, and he said the rise of more than 1 million barrels was taken into consideration when Russia entered the agreement.

Prices have recovered to above $60 per barrel after crashing down to about $30 in early 2016, and Barkindo described the agreement, which will be reviewed in June, to be "as solid as the Rock of Gibraltar."

The deal will be reviewed again in December.

"The need to work together is obviously so needed by the market," Texler said. "We do not have plans to join OPEC as a a member," he added, but there is a desire to continue the relationship, and the format is being debated.

"I don't think there's a strong need to cement something or cast it in stone," he said, but he thinks the alliance would help with coordinating on technology and other issues.

Texler said the goal of rebalancing the market has not yet been met, but it could come in the second half of the year, "maybe third quarter."

"The Russians care more about volume than price, and the Saudis care more about price. ... I think they appear to be working through those strains, which will show up in the June meeting," Blanch said. "My expectation is it takes three years to unwind the deal and in those three years, Russians are the first to bring back capacity and the Saudis are the last ones to bring back capacity."

The growth in demand, with the growth in the global economy, is also helping stabilize the market.

BP CEO Bob Dudley, also speaking at the CERAWeek conference, said the oil industry has learned to be more cost efficient and use technology and big data better as a result of the downturn.

"We just recovered from one of the most protracted downturns we ever encountered," Dudley said.

He sees oil prices steady in a $50-$65 range for the next couple of years. Dudley said he knew of the meeting between shale companies and OPEC but that the international major was not part of it.

More from CERAWeek:

OPEC: $1 trillion lost investment sowing seeds for global energy crisis

Saudi and US oil producers are looking past their rivalry

Putin's power play in the Middle East born in oil crisis

WATCH: Saudi Aramco on relationship with Russia

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