Putin could be about to send the oil markets into a tailspin

CNBC

  • Oil traders eagerly anticipating an extension of the current OPEC-led production cut could be left sorely disappointed this week;
  • OPEC oil ministers will be in Vienna Thursday and there is widespread expectation that members will decide to extend oil output cuts beyond a deadline of March 2018.
  • However, there is some anxiety that the biggest non-OPEC producer that also signed up to the output cut, Russia, could pull out of an extension, sending markets sharply lower.

Alexei Druzhinin | TASS | Getty Images

Oil traders eagerly anticipating an extension of the current OPEC-led production cut could be left sorely disappointed this week, according market analysts including RBC Capital Market’s Helima Croft.

OPEC oil ministers will be in Vienna Thursday and there is widespread expectation that members will decide to extend oil output cuts beyond a deadline of March 2018, a move that has helped to stabilize prices. However, there is some anxiety that the biggest non-OPEC producer that also signed up to the output cut, Russia, could pull out of an extension, sending markets sharply lower.

Croft, the global head of commodity strategy at RBC, told CNBC that Russia — or specifically Russian President Vladimir Putin — was the wildcard that could disappoint markets.

“We still think the most likely outcome is to extend through 2018 because that was a Putin plan,” Croft said Tuesday. “It was Vladimir Putin who raised the issue of a full-year extension in October but since then a number of his corporates have said ‘we’re not so excited about that and we want to exit on schedule’ so the end of (the first quarter of 2018),” Croft added.

OPEC appeared to take Putin’s comments to heart with the cartel’s Secretary General Mohammad Barkindo saying in October that Saudi Arabia and Russia’s energy minister were taking their “cue” from Putin when discussing a possible extension to the end of 2018.

Mostly likely that OPEC extend cuts throughout 2018, says RBC strategy head

Mostly likely that OPEC extends cuts throughout 2018, Helima Croft says  

But, Helima Croft noted that Putin had led the market on with talk of a full-year extension, saying it could disappoint traders if Russia decided to break up its oil pact with Saudi Arabia.

“Before he (Putin) said that no one was thinking about a full-year extension and then OPEC went to work on a full-year extension so now that is the market expectation. So we’re set for a disappointment if Russia doesn’t show up for the ‘bromance’ (with Saudi Arabia) anymore,” she said.

‘Mission accomplished’

The price of oil collapsed from near $120 a barrel in June 2014 due to weak demand, a strong dollar and booming U.S. shale production. OPEC’s reluctance to cut output was also seen as a key reason behind the fall. But, the oil cartel soon moved to curb production — along with other oil-producing nations — in late 2016. The exporters reached the current deal last November and have already extended the agreement once through March 2018.

Now, oil markets are already showing jitters over the OPEC meeting this week, which will be attended by Russia. Oil prices slipped on Monday night amid the uncertainty and on Tuesday morning, a barrel of U.S. West Texas Intermediate (WTI) for January delivery was fetching $57.75 and a barrel of benchmark Brent crude was $63.62.

Expect Russia to delay making a decision at next OPEC meeting: Expert  

Putin is under pressure at home to not overdo the extension of output cuts, with a number of Russia’s largest oil companies reportedly showing displeasure at a possible extension to the current deadline of March 2018.

There are also differing budgetary needs between Russia and its OPEC ally Saudi Arabia that Putin has to consider. While Russia is basing its 2018 budget on an oil price of $40 a barrel, OPEC’s de facto leader Saudi Arabia needs a higher price per barrel to break-even, requiring $70 a barrel in 2018, according to the International Monetary Fund (IMF), and as such sees cutting for longer as a way to achieve this.

The 1.8 million barrels a day cut has been widely credited with setting oil markets on a path towards rebalancing, helping to balance the global supply of oil so that it matches demand, and helping to raise prices as a result.

“The Russians are essentially saying ‘mission accomplished’,” Helima Croft said.

“They’re saying that prices are where they want them and if we continue the cuts longer then all you’re going to do is give a lifeline to U.S. shale oil producers. Also Russian corporates have lower breakevens so from their standpoint, they are profitable in this price environment and they don’t want to forego future projects and they basically want to exit on schedule,” she said.

Why Venezuela is the country we all have to watch in 2018

Why Venezuela is the oil producer to watch in 2018: RBC  

“But the problem is that a lot of OPEC producers want higher prices for the duration of the year because they need it to fund their budgets,” she said.

What might prevent Russia from deciding against exiting the oil output cut deal as scheduled is that it is likely to cause a meltdown in markets, Croft said, an event that could be politically unpalatable if Putin does decide to run for the presidency again in Russia’s presidential election in March 2018. Likewise, Croft said that a sell-off in markets would not be popular in Saudi Arabia where Crown Prince Mohammed bin Salman is overseeing a reform drive to reboot the economy.

“If we don’t get the full-year (extension) and they exit at the end of the first quarter as scheduled I think it’s going to be a selling signal and if you’re Vladimir Putin and you’re going into March elections, do you want an oil price sell-off right before you’re poised for the polls?,” she said.

“(And) for Saudi Arabia, now is not the time to have another post-OPEC sell-off. Mohammed bin Salman is pressing ahead with an incredibly ambitious reform effort and $60 Brent provides the enabling environment for many of those key reforms, it keeps the population as feeling like everything is going to be OK … Now is just not the time for a sell-off for Saudi Arabia,” she added.

Russia’s Rosneft to take control of major Kurdish oil pipeline

CNBC

  • The deal is part of President Vladimir Putin’s bid to boost Russian influence
  • Investment in the pipeline is seen at $1.8 billion

Andrey Rudakov | Bloomberg | Getty Images

Russian energy major Rosneft has agreed to take control of the main oil pipeline in Iraq’s Kurdistan, further boosting its role as the main international investor in the semi-autonomous region.

The move is an apparent part of a broader strategy by President Vladimir Putin to ratchet up Moscow’s political and economic influence in the Middle East. It came amid the crisis in Kurdistan’s relations with the central government in Baghdad, which erupted after the region held an independence referendum last month.

Rosneft said its share in the project may total as much as 60 percent, while the current pipeline operator KAR Group will retain 40 percent.

Sources familiar with the deal said Rosneft’s investment in the project was seen totaling about $1.8 billion.

The deal comes days after Baghdad threatened to re-route a big chunk of oil flows towards an old oil pipeline, which has been out of operation for several years since Kurdistan built its own infrastructure to the Turkish Mediterranean port of Ceyhan.

The main lifters of the oil there are trading houses Vitol, Petraco, Glencore and most recently Rosneft via pre-financing deals.

Rosneft’s influential Chief Executive Officer Igor Sechin said on Thursday that Kurshish authorities and Baghdad have to resolve their differences by themselves.

Iraq, along with neighboring Iran and Turkey, has pledged to isolate Kurdistan in the wake of last month’s referendum.

That includes cutting off air and banking ties and reviving an old pipeline to Turkey to deprive Erbil of a big chunk of oil revenues.

Rosneft will be investing in expanding Erbil’s independent pipeline, which Baghdad has targeted, hoping to boost its capacity by a third to 950,000 barrels per day. That is the equivalent of about 1 percent of total global supply.

With Rosneft acquiring 60 percent in the project, the Kremlin oil major effectively becomes a controlling stakeholder in Kurdish oil infrastructure. That should give Erbil some sense of security as it faces unprecedented pressure from its neighbours.

Rosneft has already agreed to invest $400 million in five oil blocks in Iraqi Kurdistan.

It also had previously loaned Kurdistan $1.2 billion, guaranteed by oil sales, and is seeking to help Erbil build two major oil and gas pipelines.