Why Tomorrow's "Secret" Meeting Between Russian, Saudi Oil Ministers Will Not Lead To A Cut In Production

Tyler Durden's picture

For the past two weeks recurring flashing red headlines of an agreement, or at least a meeting, between Russia and Saudi Arabia - the world's two largest oil producers - have led to aggressive short-covering rallies in oil on just as recurring hopes that the Saudi strategy of flooding the market with excess supply (by its own calculations as much as 3 million barrels daily) adopted during the 2014 Thanksgiving Day OPEC massacre, will come to an end.

Tomorrow this endless "headline hockey" will come to an end, following what is now a confirmed "secret" meeting between the two oil superpowers when, as Bloomberg reports, Saudi Arabia’s oil minister will meet with his Russian counterpart in Doha on Tuesday "to discuss the oil market."

According to Bloomberg, Ali al-Naimi, the most senior oil official of the world’s biggest crude exporter, will speak with Russia’s Alexander Novak in the Qatari capital, "according to the person, who asked not to be identified because the talks are private." The person didn’t say what the agenda of the meeting will be, which will also be attended by the kingdom’s fellow OPEC member Venezuela. The energy ministries of Russia and Saudi Arabia declined to comment.

Going into the meeting, one thing is certain: over the past 15 months Saudi Arabia has never once indicated any interest in curtailing production: after all, that would go against its unstated directive of putting marginal oil producers, read US shale companies, out of business:

Saudi Arabia has insisted that it won’t reduce production to tackle the global oil glut unless major producers outside the Organization of Petroleum Exporting Countries co-operate. While Novak has said he could consider output cuts if other producers joined in, Igor Sechin, chief executive officer of the country’s largest oil company Rosneft OJSC, said last week he would defend traditional markets and expressed doubts over coordinated action.

To be sure, the Saudis have felt the pain from collapsing oil prices resulting in a record budget deficit, accelerating austerity at home, and the alleged liquidation of Saudi FX reserves, including European financial stocks and potentially US and other sovereign bonds. The market has gone as far as pricing in a very high probability of a Saudi Riyal devaluation as expressed by the currency's forward market as observed here previously.

It is this "pain" that has made the market doubt Saudi's steadfastness in sticking to its excess production plan: "the slightest signs of an accord have roiled oil markets. West Texas Intermediate futures rallied 12 percent on Feb. 12, the biggest surge since 2009, after the United Arab Emirates reiterated OPEC’s long-held position that the group is prepared to engage with non-members."

But even if the Saudis are receptive to some token compromise, Russia itself may be unable to cut production. As Bloomberg writes in a separate piece, "neither a recession nor a collapse in revenue has yet been enough to convince Russian President Vladimir Putin that it’s time to join with OPEC in cutting oil output to boost prices. His reasons may be pragmatic rather than political."

As Russia’s oil minister meets his Saudi Arabian counterpart in Doha on Tuesday, the world’s second-largest crude producer faces numerous obstacles in cooperating on such a deal even if Putin decides it’s in the national interest. Reducing the flow of crude might damage Russia’s fields and pipelines, require expensive new storage tanks or simply take too long.

To be sure, the jawboning on Russia's side has been quite loud: energy minister Alexander Novak has said he could consider reductions if other producers joined in. Igor Sechin, chief executive officer of the country’s largest oil company Rosneft OJSC and a close Putin ally, said last week in London that coordination would be difficult because no major producer seems willing to pare output.

Still, many are skeptical that just like in the case of Mario Draghi, talk will escalate into actions: "The history of relations with OPEC suggests that Russian companies are not keen to cut production," James Henderson, an oil and gas industry analyst at the Oxford Institute for Energy Studies, said by phone. "There are certain practical difficulties, and the companies would rather somebody else did that, and they could benefit once the price goes up."

Here are some of the all too practical challenges facing Russia should it indeed plan to cut production:

In Siberia, Russia’s main oil province, winter temperatures can go below minus 40 degrees Celsius (minus 40 Fahrenheit). That’s a challenge for anyone thinking of turning off the taps.

 

The oil and gas that flows from wells always contains water, so once pumping stops, pipes may freeze, Mikhail Pshenitsyn, who has worked for more than 10 years in the Russian oil industry, said by e-mail. The problem goes away in summer, but there’s still the risk of a long-term reduction in output because a halted reservoir can become polluted with salts and residues, he said. Production from a shut-in well might never be restored in full, Maxim Nechaev, director for Russia at consulting firm IHS Inc., said by phone.

Furthermore, Russia is running into a problem that is facing both the U.S. and China: running out of land-based storage space:

Russia could reduce exports to global markets without cutting production simply by putting more crude into long-term storage. Trouble is, the country has too few facilities.

 

The bulk of onshore storage capacity in Russia is owned by pipeline company AK Transneft OAO and already in full use to ensure steady flows to refineries and ports, Vladimir Feigin, head of the Moscow-based Institute for Energy and Finance, said by phone. Building the massive new reservoirs required to store a significant proportion of production for an extended period would cost billions of dollars and couldn’t be done quickly, he said.

Additionally, unlike the U.S., Russia has little offshore storage: while crude can be stored in vessels moored just offshore, Russia has "only seven tankers -- four products and three crude -- in floating storage,” Antonia Mitsana, marketing manager at London-based Drewry Maritime Advisors, said by e-mail. Their total capacity is just over 643,000 metric tons, according to Drewry, or about 0.1 percent of the nation’s production last year."

And while chartering foreign vessels to store significantly more oil could be done, it would be very expensive. Freight rates are up in the short-term tanker market and ships in limited supply, Mitsana said. Also, keep in minda that this is a Russia which is now considering dumping diamonds in the market just to sporadically fill holes in its budget.

Ironically, when taking Russia's deteriorating financial situation in consideration, Russia actually has an incentive to boost not reduce production: the government is seeking ways to increase revenues from the energy industry, which generates more than 40 percent of the national budget. Finance Minister Anton Siluanov suggested cutting the price threshold for oil exempt from production taxes to $7.50 a barrel from $15, according to a report from RIA Novosti, a domestic news agency. More production therefore would mean more taxes; less production would lead to an immediate hit to the Russian budget.

Also, as Bloomberg notes, changing the tax regime is a slower process than the “emergency” response Venezuela is seeking. "Usually such big tax changes would come into force from January of the next year" if they were included in the annual draft budget due in October, Sergei Likhachev, associate director for tax practice at Moscow-based law firm Goltsblat BLP, said by phone.

Finally, as a reminder, after his recently concluded meetings in Moscow and Tehran, Venezuelan Oil Minister Eulogio del Pino said six nations were ready to meet and discuss output cuts. The problem is that as the above demonstrates, the probability of such an agreement including Russia remains distant.

"Last year, things didn’t move beyond talks," said IHS’s Nechaev. “I am sure the same is going to happen this year.”

Which means that all that will happen tomorrow is that the biggest short squeeze trigger, the threat of an imminent production cut and recurring flashing headlines hinting at this, will be eliminated. At that point the market can focus on the real underlying dynamics: not only excess supply but clearly slowing global demand...

 

... and U.S. oil land storage, which as we and the market have been warning, is about to overflow.

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buzzsaw99's picture

In 2005, Congress directed the SPR to take actions to fill to its authorized size of one billion barrels. Because the Reserve had a design capacity of 727 million barrels, the SPR prepared a plan to expand to one billion barrels and conducted a site selection process to construct additional storage facilities. An environmental impact statement was also prepared. However, efforts to expand the SPR to one billion barrels were terminated in 2011.

salvadordaly's picture

I wonder why they are meeting on Tuesday , instead of today? Hmmmmm, seems weird. Maybe they are looking for a market driver? Naaaa, that would be to predictable. Carry on.

nuubee's picture

Saudi Arabia abandoning the Riyal peg maybe? But if so, why meet with Russia?

philipat's picture

If Saudi surrenders now, all that pain and hundreds of Billions in lost revenues will have been for nothing. My bet is they will stay the course at least until the bankruptcies of US shale producers reach a critical mass and there is no (financing for) going back...

freewolf7's picture

I wonder if Syria will be mentioned.

Freddie's picture

The Syrian Army and friends destroying Daesh near East Aleppo.

http://www.liveleak.com/view?i=209_1455567233

Also "cauldron" is in place around Azaz.

 

http://syrianperspective.com/2016/02/saudi-bluster-and-turkish-fluster-d...

The map below is already out dated...though it is the most current one. Kafr Nasih has fallen to the SDF/YPG few hours ago. What a bad day for the Turkish backed terrorists, they lost Tal Rifaat, Misqan, Ahras, Ayn Daqna and Kafr Nasih. Huge defeat for 1 day.

https://twitter.com/sayed_ridha/status/699314545945260032

Rumors that civilians from Mare are negotiating to surrender to SDF/YPG, expect that cauldron that was formed to be totally liberated very soon, leaving only Azaz and the border towns to be liberated afterwards, with that, all political advantage of the Aleppo corridor will be reduced to nothing, no strategic value for the turkish terrorists, and Azaz will be taken after the cauldron is sealed and liberated.


Read more at http://syrianperspective.com/2016/02/saudi-bluster-and-turkish-fluster-d...

johngaltfla's picture

Russia's is playing chess. The Saudi/Qataris are playing camel dung toss...

Russia’s Plan to Blackmail OPEC at the Secret Qatar Meeting on Tuesday
COSMOS's picture

US shale production gets sold mostly at home, and is not threat to the Saudis.  Rather by trying to destroy a producer that is not in major competition with them the Saudis are losing far more money than the previous status quo.  Also USA gets a lot of its oil from Venezuela, while Europe gets more of its oil from SA.  Pretty obvious that the intent here is to get Russia and Iran/Iraq.  In the end by trying to make the road slick with their own blood for the others to slip and fall the Saudi monarchy may just bleed itself to death.  I sure hope we can see the princes get the same treatment that was given to Qadaffi.

Sages wife's picture

Or even Nimr al-Nimr. Off with their heads!

Chuckster's picture

They should have sent me.  I can keep a secret.  It's the assholes I tell that can't keep a secret.

chairman mao's picture

NO cut until US oil shale industry collapses.

KesselRunin12Parsecs's picture
KesselRunin12Parsecs (not verified) chairman mao Feb 15, 2016 6:36 PM

Which basically means that the jews who printed the money out of thin air to usher in the development of that infrastructure, will, once again, OWN it in 'fee simple' (while water carrying sychophant fools busy themselves junking this comment)...

Still Losing Money's picture

so Adolph, you tink it's all the fault of the joooooooos. if hitler was a nut job and you think just like him that makes you a.........

cornflakesdisease's picture

LOL.  Rather, no cuts until Putin capitulates.

jaxville's picture

  All they have to do is announce they have reached an accord.  Oil will pop by ten bucks and it might drive the price higher on short covering.

  They don't have to do a thing as far as actual production goes.

NotApplicable's picture

NO cut until US oil shale industry is owned outright by Yellin Capital, LLC.

Secret Weapon's picture

Seems to me that Syria is a more important topic for the agenda than oil. 

waterwitch's picture

Maybe they'll agree to go into a joint pipeline project through Syria? 

Reaper's picture

Only a fool trusts a Wahhabi.

wow thats is crazy's picture

Can't trust someone who is well to blow themself up! and take you with them!

Bangin7GramRocks's picture

Doesn't even matter. A simple conversation between oil countries is good for a 20 to 30% increase in the price of oil. Even if they are merely discussing which camel has the juicier back pussy.

iggenFlot's picture
iggenFlot (not verified) Feb 15, 2016 6:28 PM

Who's got Vlad's suicide watch tonight?

COSMOS's picture

Only a little wireless monitor tied in to his heartbeat that will automatically launch all nukes Russia has at the USA if his heartbeat even skips a beat :D

So can I ask you iggen, who has your Duck and Cover or Shelter in Place watch going on tonight ??

Tell you what, just take some chalk and trace out your body outline on the ground and write your name on it, wherever you plan to be when Putins heart skips a beat.  Cause that is the only mark you will ever leave in this world.

Charming Anarchist's picture

That is so good that I would feel bad repeating it without proper credit. 

The Real Tony's picture

Just like the favourite is overbet at the racetrack the quote investors are nothing but a bunch of scared chickens. A yellow streak all the way up their backs no conviction can't even hold a position over the weekend. It's the mathematics of variables the end result being the people long oil or the people short covering will be sorry as usual. Oil presently is overbet.

NoWayJose's picture

WTI seems to be enjoying it right now. I'll sell my oilies if they spike a couple more percent.

johnnycanuck's picture

Reads like an elongated fortune cookie.  I would remind the interested, those who try to predict what Putin will or won't do haven't been very accurate lately.

Gregory Poonsores's picture
Gregory Poonsores (not verified) Feb 15, 2016 6:49 PM

Sounds like someone's self-soothing to convince themselves a cut isn't coming.

Me? I don't know. But I've got nothing riding on the outcome...

SumSUN's picture

So I have another day to buy puts on BAC.

 

Colonel Klink's picture

Fuck you Saudia Arabia!  Hope Russia eats your lunch.

Quinvarius's picture

Of course there will be cuts.  Why the hell do you think they are meeting?  This is OPEC 2, with Russia in the driver seat.  They will get the others on board.  US shale is DOA based on existing debt alone.

MSimon's picture

There are reports that shale can be produced at $5 to $20 a bbl.

 

Why do you think there are STILL 600 rigs operating in the US. Low performance rigs have been sidelined.

Aleksi22's picture

Hopefully, they discuss killing the petrodollar.

Still Losing Money's picture

Their target is NOT US Shale companies, it's RUSSIA. Saudi Arabia is fighting a proxy war for the US. Russia relies heavily on energy exports, low prices are killing the Russian economy. The "war" in Ukraine is about bringing a huge nat gas field in Ukraine on line, thereby cutting off Western Europe's need for Russian gas.

too_big_to_fail's picture

I agree the target is Russia, but what about China's petro industry? If the US and China are going at it via who gets reserve currency, wouldn't they also be part of the objective?

Is that also the reason for the islands that China is building in that sea? Oil shipping lanes.

me or you's picture

From tomorrow US market cannot use rumors about "oil cut" to pump the stocks up.

besnook's picture

let's see. their biggest customer just visited for the first time to make sure the world knows saudi arabia is important to china. 2 weeks later the saudi oil sheikh visits their main competitor and china's close ally. peace in our time is brewing. the sauds have received their payoff and now realized how much power the suppliers of china's oil have as long as they supply chinese oil.

SweetDoug's picture

'
'
'
'
Solar power is about to reach grid parity in 2 years, 4-5 at most depending upon who is yapping.

It will only get cheaper.

Musk's battery system is coming with cheap lithium cells.

In 5-8 years, the energy companies are gonna be up schidt's creek.

The moment I'm talking of-the-grid, for my cottage or home, 8-12 year pay back?…

Bu-bye!

And the stampede with be deafening.

•?•
V-V

MSimon's picture

Grid parity when the sun is shining means 4X to 6X the announced cost.

 

And that "griid parity" does not include the cost of batteries.

onmail1's picture

Saudis : 'We will lower oil production if..
you leave Syria'
Russia : 'screw u
& bye bye to a nuclear hell'

Joe A's picture

It would be interesting to be a fly on the wall during that meeting. I'm sure they need to conduct it at some location with maximum protection against listening devices.

HYMN's picture

My guess: The Russians will inform the Saudis if they don't cut production they and Iran will destroy Saudis ability to produce so much.