Lukoil pump jacks in Kogalym, Russia. Photo: Reuters, Sergei Karpukhin
Lukoil pump jacks in Kogalym, Russia. Photo: Reuters, Sergei Karpukhin

Citibank analysts write that concerns regarding the durability of the OPEC production cut agreement are overblown, and that the Russian-Saudi cooperation on oil management is stronger than many are saying:

“Oil skeptics appear to be right and wrong in believing the OPEC/non-OPEC accord struck in late May will unravel due to a coming US production surge and a lack of compliance. It’s not just the increased output from the US, where rig counts have more than doubled over the last 12 months, but increased flows from unconventional oil sands and deep water as well. Combined the unconventionals alone could sate oil demand by 2019.

Yet skeptics seem wrong in underestimating the durability between Riyadh and Moscow on oil market management…

But it’s underlying geopolitical tectonic shifts that tie Russia and Saudi Arabia by the hip well beyond the 1Q’18 expiry of the current production agreement. The kingdom confronts two durable existential crises, one in oil markets, the other in its region: neither we believe will end quickly and both require on going ties to Russia…

Simultaneously [Russia’s] national champion producer is moving from being a giant at home and a smaller player abroad to being a global investor upstream and downstream – hence we see managing and taming its competition with the kingdom in China and elsewhere as a critical permanent new condition.

Meanwhile OPEC has become increasingly challenged by ‘petro-state failure’ pointing to institutionalizing arrangements between Moscow and OPEC and its main producer. Even as markets focus attention on the pace of producer cutbacks impacting global crude and product inventories, the US lurks in the background both politically and in energy markets, preventing the Russo-Saudi duopoly from dominating price formation and becoming perhaps the most potent factor in price formation ahead.

Before end 2018 the ‘call on US’ is likely to fall below US production levels unless prices crater before then. What’s more, in the Middle East, the US reaffirmation of its commitment to the Kingdom reduces the degree to which the Kingdom needs to reach out to Russia for improving its optionality. But meanwhile Citi expects the Russo-Saudi alignment in global oil to last well into 2018, bringing markets into balance and Brent up to the $60 range.”