Parth Mukherjee, P.Eng, PMP

The oil market is witnessing some interesting dynamics this week: On one hand Russia thinks (at least as stated in their public statement on Saturday) there were risks that global oil markets could be facing a deficit; on the other hand, OPEC (of which Saudi Arabia is the most influential player) hinted last week that it may have to reimpose output cuts as global inventories rise. This public divergence seems to be confusing the traders. The confusion stems from the fact that major oil players Saudi Arabia and Russia were apparently working in tandem, at least up until now, in regard to calibrating oil supplies to the world market. So why is this apparent divergence between OPEC and Russia’s view points?

In oil politics (like in politics, in general), nobody is nobody's ally or friend - the key players could and would change their tune according to what is best suited to their policy objectives. Russia may be wanting the world to get the feeling that it is distancing itself from Saudi Arabia - for the time being. The reasons could be anything but apparently it might have to do with the aftermath of killing of the Saudi journalist. Though Russia has refrained from making any detailed specific comments in public about the killing, it probably wants to maintain a safe distance from all of it especially since Turkey is involved in the matter and Russia has been wooing Turkey quite diligently in the recent times.

Also, Russia (and may be the OPEC members) realizes that it is better to wait and see the extent of impact of US sanctions on Iran’s oil exports. Already the oil exports from that country has reduced and it is expected to decline further. Traders would in any case automatically react to discernible impact on Iran’s oil export volumes. Further, it should be borne in mind that the impact of the US sanctions may not be that severe after all since the US was reportedly open to keep the SWIFT mechanism in place for Iran’s trade transactions, which would mean Iran may be able to export some quantity of oil, albeit, in reduced quantities.  

Thus, it makes sense for Russia to keep the supply going at the current rate till the dust settles on Iran’s oil exports post-US sanctions and then make a determination whether to cut supplies or not. In any case, OPEC and non-OPEC are supposed to meet in December this year to review the situation. And, it does not hurt Russia too much if the WTI remained <$70/barrel since their president reportedly stated recently that price range of $65-$75 suits them.

It may also be prudent for Russia to wait and watch how the situation in the EU unfolds after the reported decision of German Chancellor Angela Merkel to step down as leader of her party this year and as Chancellor in 2021. Russia may want to see if Merkel’s stepping down has any impact on Russia’s Nord Stream 2 project’s future. Merkel’s ally in EU - Macron of France - is not doing too well either in the popularity polls. Compounding all this is the Brexit chaos and Italy's proposed budget which EU is not willing to accept. All in all, EU seems quite directionless and muddled at the moment.

Another factor that would most likely come in to play in global policy dynamics on key issues is the outcome of the November 6 congressional elections in the US. If Democrats win the House of Representatives, political equation in the US will change significantly and President Trump’s policy trajectories might also get altered. Various key policy decisions of the US administration, e.g., USMCA, tariff spat, might get bogged down in Democrat vs Republican political football. 

One would like to believe that OPEC may also want to take a cue from Russia’s recent overtly stated stance on oil supply situation and decide to wait and watch the key political events unfold in the US, EU and Middle East over the next few weeks and then decide their next course of action after the OPEC and Non-OPEC meeting in Dec this year. Till then the key oil players may want to play by the ear and adjust their key policy statements and decisions, as necessary, should any key political development take place in the meantime.

In view of the above, the oil traders may not have any choice but to coast along accordingly based on the prevalent sentiment on the day.