Over the years, Russia and the members of OPEC have worked together in times of crisis to help stabilize the oil market. The most recent cooperation began in late 2016, when OPEC and several other oil-producing nations, led by Russia, agreed to reduce their production rates for six months to help drain off some of the market's oversupply. The parties agreed to extend that agreement twice, with the current one lasting through the end of this year.
There have been talks between these two groups to extend this agreement even further since their co-operation has helped lift the price of crude from less than $50 a barrel to nearly $70 in the past year and a half. Notably, the group is now discussing an alliance that would last much longer, potentially for the next 10 to 20 years, according to a recent report by Reuters.
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Looking at the bigger picture
Led by Saudi Arabia, OPEC is looking to extend its current agreement with Russia to support the oil market well past 2018. The alliance is "working to shift from a year-to-year agreement to a 10 to 20 year agreement," according to comments Saudi Crown Prince Mohammed bin Salman made in an interview with Reuters. In fact, he said there's "agreement on the big picture, but not yet on the detail."
A 10-year agreement to support oil prices would mesh with the Crown Prince's current agenda to diversify his country's economy away from oil and gas by 2030. A major component of that strategy is selling a stake in Saudi Arabia's national oil company, Saudi Aramco, within the next year, which would give him the cash to reinvest back into the country and slowly wean it off its reliance on petrol. A sticking point of that sale has been valuation, which has been under pressure due to lower oil prices. However, with oil rising in recent months thanks to the current agreement, his desired valuation is starting to become an easier sell, with the prospects likely to improve further if prices head higher, which would conceivably happen with a long-term agreement with Russia.
Meanwhile, a two-decade deal would last nearly until 2040, which is about when the International Energy Agency believes global oil demand will finally start declining, and that's assuming a steep rise in electric-car sales. In essence, the alliance could cover the last of oil's likely remaining golden years, potentially dictating pricing at a time when demand is still on the upswing and giving these countries ample time to reinvest their petrol profits into other opportunities.
What this means for oil stocks
As they say, the devil is in the details, so it's hard to know what to make of this potential long-term alliance between Russia and OPEC until we see what's in the agreement. However, more than likely it will set production caps for each country designed to prevent them from pumping too much crude and upsetting the balance between supply and demand. That would, in theory, make oil less volatile and could cause prices to flow higher in the coming years.
A more stable oil-market environment would be a dream scenario for U.S. oil producers. Most have been banking on a far more volatile oil market, and many have driven down their operating costs so that they can thrive at less than $50 a barrel. At that oil price, leading U.S. producers Anadarko Petroleum (NYSE: APC) and EOG Resources (NYSE: EOG) can generate enough cash flow to reinvest in the wells that would boost their oil output by 14% and 18%, respectively, this year. With oil well above that level, both companies can generate excess cash. EOG Resources is on pace to produce $1.5 billion in free cash this year at $60 oil, while Anadarko could generate more than $1 billion at that price point. Those numbers would keep rising along with crude prices, giving both more cash to pay higher dividends and, in Anadarko's case, repurchase more stock. Those increasing cash returns could reward investors richly in the coming years.
Lifting the floor
Russia and OPEC have joined forces in the past to solve market-supply problems, and now it appears that they'd like to keep their relationship going to prevent future ones. An extended agreement could remove one of the risks in the oil market, potentially pushing crude prices even higher. That scenario could fuel windfall profits for U.S. producers that banked on prices staying much lower for a lot longer, setting oil stock investors up to possibly make a mint in the coming years.
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