Brent crude exceeded $85 yesterday
A new report from Reuters says that Russia and Saudi Arabia “struck a private deal” in September to increase production in order to suppress oil prices. Intriguingly, the pair apparently phoned the U.S. before the Algiers meeting in late September to relay the details of their plan.
The report is an indication that Saudi Arabia was trying to respond to pressure from President Trump to lower oil prices. If the White House was informed about the secret private deal, it didn’t seem to resolve Trump’s concerns.
Just a few days after the Algiers meeting, Trump blamed OPEC for high oil prices at the UN General Assembly in New York.
Also, the secrecy behind the private deal is interesting. It demonstrates that the Saudis do not want to be perceived as doing Trump’s bidding. “The Russians and the Saudis agreed to add barrels to the market quietly with a view not to look like they are acting on Trump’s order to pump more,” one source told Reuters.
However, the downside of keeping the strategy secret is that if the oil market doesn’t know about it, or the fact that Saudi Arabia and Russia decided to ramp up production, then the effect on prices is muted. After all, Brent surged to $85 per barrel in recent days, evidence that oil traders are not convinced about OPEC’s strategy.
It may not be surprising then that the Reuters report came out when it did. Was that a deliberate strategy by the Saudis to leak the details to the press in order to inform the market? Who knows, but it came shortly after Brent rose its highest level in four years, which seems unlikely to be a coincidence.
On Wednesday, Saudi oil minister Khalid al-Falih confirmed the increase in supply, telling reporters that Saudi output currently stands at 10.7 million barrels per day (mb/d), right around the country’s all-time record high. That is up sharply from the 10.4 mb/d it produced in August, and the increase offers some evidence to back up the story that Saudi Arabia and Russia agreed to boost output weeks ago, and may have told American officials about it. Al-Falih also said that production would be “slightly higher” in November compared to October levels.
Russia added 150,000 bpd in September, pushing output up to a new post-Soviet record high at about 11.35 mb/d. “I would expect Russia’s oil production will hover at around 11.4 to 11.6 million bpd until the end of 2018 and may increase further to 11.8 million bpd later on in 2019,” a source at a major Russian oil company told Reuters. Those are serious numbers, and should be taken with a grain of salt, but they offer a window into the thinking in Moscow.
Nevertheless, the White House still does not appear to be completely mollified. At the end of September, Trump reportedly called the Saudi King, and although the nature of that conversation was not disclosed, most oil watchers believed that the call was an attempt to pressure the Saudis into increasing oil supply.
Trump continued the pressure campaign at a campaign rally in Mississippi on Tuesday, where he offered some details about the conversation. “How about our military deals where we protect rich nations that we don’t get reimbursed?” Trump said. “I love the king, King Salman, but I said, ‘King, we’re protecting you. You might not be there for two weeks without us. You have to pay for your military, you have to pay.’” Whether or not he actually said this to the King is questionable, but the fact that he appears to be insulting the Saudi monarchy in public offers more evidence that he wants them to lower oil prices from today’s highs.
It remains to be seen if Trump can convince the Saudis to take a more aggressive line, although it should be noted that Saudi Arabia’s decision to increase production by 300,000 bpd from August levels is not trivial. Qatar’s Minister of Energy and Industry Mohammed Bin Saleh Al-Sada defended the current OPEC strategy on Wednesday. “OPEC is not trying to manipulate the price, it's trying to bring the market to balance,” he told CNBC.