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Market Update: Saudis and Russians Working on a Historic Long-Term Oil Pact

Saudi Arabia and Russia are working on a landmark long-term deal that could extend the limitations on world oil supplies by major exporters for up to two decades. Saudi Crown Prince Mohammed bin Salman said that his country and Russia were considering a contract to make a major extension to a short-term alliance on oil curbs that began in January 2017 after a fall in oil prices. “We are working to shift from a year-to-year agreement to a 10 to 20 year agreement,” the crown prince commented. “We have agreement on the big picture, but not yet on the detail.”

Non-OPEC member Russia has worked alongside the cartel during previous crude gluts, but a 10-20-year contract between the two countries would be historic and unprecedented. Top OPEC producer Saudi Arabia recruited Russia and other non-OPEC economies to gain support when oil prices plummeted to less than $30 per barrel in 2016 from $100 in 2014. Oil price has since recovered to $70 but fast-rising production from US shale producers has capped prices.

“This is all about whether the arrangement is a short-term expedient to deal with this particular crisis in the oil market, or whether it reflects a realignment in world oil,” said oil historian Daniel Yergin, Vice Chairman at consultancy IHS Markit. “OPEC countries want to find a way to institutionalize this relationship rather than to have it be a one-shot deal.” Another consultancy, Rapidan Energy Group, added that the Kingdom was seeking help in breaking the boom-bust cycle that is characteristic of international oil markets by keeping crude on the upside as well as by helping raise oil prices further.

 

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