Despite thorny U.S.-Russia relations, the U.S. may press Russia and other producers to expand on their just-announced deal to increase crude output, as the U.S. attempts to cut off Iran from the world oil market.
U.S. Energy Secretary Rick Perry is expected to meet with his Russian counterpart, Energy Minister Alexander Novak, in Washington on Tuesday. Both are speaking at the World Gas Conference.
Novak arrives in the U.S. just days after he co-chaired a Vienna meeting between OPEC and non-OPEC producers, where they agreed to add more oil to the market. Analysts say the agreement calls for producers to return somewhat less than 1 million barrels a day to the market, though Saudi Arabia says it will be about 1 million barrels a day and Russia had initially sought a 1.5 million-barrel increase. Novak told CNBC on the weekend that the hike was sufficient for now.
However, Perry told reporters Monday the agreement “may be a little short” of what is needed to prevent shortages. Analysts expect sanctions against Iran to remove about 500,000 barrels a day from the world market by the end of the year.
But other outages are also a concern. Venezuela, for example, was down about a half million barrels a day this year, as of May. Libya lost 450,000 barrels per day in June because of attacks on its two largest export terminals. The outages are expected to be temporary, and the Libya National Army reported that it has regained control, but it's unclear how stable they will be. There was also a surprise outage of 360,000 barrels a day in the Canadian oil sands due to a transformer failure, and that could extend through July.
“It’s not a big leap to think he’s going to ask Novak for more oil after today’s commentary," said John Kilduff of Again Capital. Kilduff said the request would be unusual, “but these are strange times.”
The Canadian outage occurred after a bad transformer cut power supplies to Syncrude's Alberta plant, which processes the heavy crude from oil sands into synthetic light oil for the U.S. market. That comes as supplies at the U.S. hub in Cushing, Oklahoma, are falling.
Russia used its diplomatic muscle and close alliance with Iran to help steer the OPEC member to agree to the new production deal. Iran had been holding out for an OPEC statement that would condemn the U.S. for re-imposing sanctions, but it failed to do so. The sanctions on Iran and the U.S. exit from its nuclear agreement were also opposed by Russia, but sources say Russia was key in swaying Iran.
“We have a lot of countries and, quite naturally, a lot of diverse interests. Yet given that the ultimate goal is rather important for all, we manage to find these balanced decisions, these sensible resolutions and solutions,” Novak told CNBC in an interview after the Saturday meeting.
“This is why Russia is a critical part of this whole thing,” said Michael Cohen, head of commodities research at Barclays. He added that Russia serves as a link between Iran and its nemesis Saudi Arabia. “Without Russia … the link isn’t there.”
In his interview with CNBC Saturday, Novak discussed the difficulty of Iran’s sanctions. Russia is also living under U.S. sanctions for its invasion of Ukraine and its election meddling.
Cohen said, “The broader thing is the sanctions have a potential to get much worse on Russia. I don’t know how friendly a meeting it will be."
But Helima Croft, global head of commodities research at RBC, said Novak can make the case that he was very helpful to the U.S. in Vienna, and he may be looking for some relief from sanctions.
“It looks like they played a key diplomatic role in getting Iran to say yes on Friday, and they were a first mover in calling for increased supply. Now Novak did say that they had been calling for higher output for months and put in the clause calling for a June review at the November 2017 meeting. Even if this is just a case of Russian and U.S. interests being aligned, a case can clearly be made that Washington benefited from the alignment of those stars,” said Croft.
In a note, she said while it remains to be seen exactly what Russia will seek in return, "sanctions relief seems to be a safe assumption. Russia’s strategic influence continues to expand 18 months after the initial production agreement was inked, with Novak stating that the Moscow-Riyadh partnership now extends well beyond oil."
Analysts believe the U.S. had asked Saudi Arabia to increase oil production as it pulled out of the Iran nuclear deal and planned to once more put sanctions on Iranian crude this fall. President Donald Trump had also tweeted more than once that OPEC has been keeping prices too high.
Novak, in the interview Saturday, said Trump's tweets had nothing to do with the decision, and he had proposed raising production prior to the tweets.
Cohen said Perry and Novak are likely to discuss the oil market and what the Vienna alliance means in terms of oil production. “If they are saying we are going to raise output, we have to take them at their word. I think the market is still trying to figure out how much,” he said, noting information on shipments will be important. “Their communications with the market are extremely important.”
Cohen said the discussions between Perry and Novak could also focus on nuclear nonproliferation.