Chatter is on; Saudi Arabia continues to deliver on the crude output cut agreement, while Russia is lagging behind.

These two leading global crude producers are key to the success of the ongoing endeavours to stabilise the oil markets. When Saudi Arabia and Russia, along with other Organisation of the Petroleum Exporting Countries (Opec) countries and some non-Opec crude producers, joined hands to cut output, so as to overcome the market glut, oil prices were down the hill. Oil producers needed to alter the scenario. And so they did.

The reason behind the effort was apparent. After all most crude oil producers are dependent, to a very great extent, on oil income for balancing their budgets.

Thus, to tighten the crude markets, late last year Opec members states and non-Opec producers led by Russia agreed to cut crude output by 1.2 million barrels per day (bpd). As per the arrangement, Saudi Arabia was to shoulder 40 per cent of the total Opec burden while Russia had consented to take up 60pc of the total non-Opec output cut.

Riyadh seems to be delivering on its promise and continues to do so. In fact, Saudi Arabia cut even more than it promised. In January, it reduced its output to 10.213m bpd, according to the secondary source data. This was well below the Saudi consent to reduce its output to just over 10.3m bpd.

In fact, Saudi Arabia has announced its intention to drop its output by a further 400,000 barrels per day to 9.8m bpd in March. If achieved, it would mean that since December, Saudi Arabia has become responsible for 70pc of the total Opec Plus target.

Russia’s performance, however, has been sluggish – to say the least. From October to the beginning of February, Moscow’s output has gone down by only 47,000 bpd. Russian Oil Minister Alexander Novak had said at the time of the deal that his country would slash output by 230,000 bpd over the first quarter and its January output would be 50,000-60,000 bpd below the October baseline. However, Moscow has failed to meet even this modest target and as per Bloomberg calculations, it cut the output by just 42,000 bpd.

Russia’s less than agreed cut in its output, resulted in public criticism from the Saudi oil minister Khalid al-Falih, who told CNBC last month, in a rather complaining tone, that Moscow had moved “slower than I’d like.” It also prompted a statement from Opec Secretary-General Mohammad Barkindo, urging all countries to achieve their obligations “in full and in a timely fashion.”

The Russian Energy Minister Alexander Novak was quick to respond, arguing at the beginning of this month, that Russia was “completely fulfilling its obligations in line with earlier announced plans to gradually cut production by May this year.”

Novak was also quoted as saying that Russia is accelerating implementation of its cuts and that “the average February level should be at least 150,000 barrels lower than in December.”

However, the thing to note here is that Russia’s production actually rose between October and December and the reduction from the October baseline, as was agreed upon. Russian pledge was to reduce its crude output by 230,000 bpd from October’s 11.421m bpd to 11.191m bpd. That target was missed and by far.

Interestingly, Moscow is now pledging to reach its target until May, just a month before the current deal expires.

What does all this mean to the output cut arrangement?

Question marks are being raised all around about the longevity of the agreement. How long would it continue? David Reid writing for CNBC says the “rolling oil pact between Russia and Saudi Arabia which seeks to support prices by reducing output looks to be on shaky ground.” Saudi Arabia and its allies in Opec appear to be doing more than meeting their supply cut commitments than Russia and its other non-Opec allies.

Julian Lee writing for Bloomberg underlines, “Saudi Arabia is bearing a greater burden for production cuts, while Russia is nowhere near the reductions it promised. That arrangement can’t last.”

Would Riyadh and its allies within the Opec continue to make sacrifices at the cost of their market share and if yes, then, for how long? That is a crucial question. Much depends on it. The next meeting of Opec and non-Opec oil producers, scheduled to take place mid-April, would be interesting in that respect. One needs to wait and see.

Published in Dawn, February 24th, 2019