U.S. Targets OPEC Oil Autonomy As Production Cuts Bear Fruit

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Two proposed U.S. legislations are threatening to deprive Saudi Arabia and Russia of autonomy in their oil policy, just as the OPEC+ collaboration between the two countries brings crude back into a bull market.

The No Oil Producing and Exporting Cartels Act (NOPEC), approved on Feb. 7 by a U.S. Congressional panel, and the Defending American Security From Kremlin Aggression Act (DASKA), originally proposed last year and revised a week ago by Congress, will have different market outcomes if enforced.

NOPEC could push oil prices lower by hindering Saudi-coordinated production cuts. DASKA, on the other hand, could send crude rallying by issuing sanctions on Russian energy projects.

Both are bipartisan bills—meaning they are supported by Republicans as well as Democrat lawmakers—and both need White House initiative for action.

But while their outcomes may be different, the two bills pursue the same agenda: preserving U.S. interests and energy policy over that of any nation.

NOPEC Strikes At Heart Of OPEC

Of the two, NOPEC in particular could inhibit the OPEC group by undermining the production policies that have been at the heart of the cartel’s six decade-long oil market management.

U.S. Targets OPEC Oil Autonomy As Production Cuts Bear Fruit

WTI 300-Min Chart

NOPEC’s timing also couldn’t be worse, coming just as the Saudi-Russian oil-price collaboration was beginning to bear fruit despite its inequities. From a Christmas Eve low of under $43 per barrel, U.S. West Texas Intermediate crude has rallied nearly 25 percent this year to above $56 this week. U.K. Brent has gone from under $51 to above $66 in the same period.

Julian Lee, a London-based oil strategist for Bloomberg First Word, wrote in his weekend column that the so-called OPEC+ production-cut pact was “standing on a single leg”—the Saudis’— and “starting to look a bit shaky”—without adequate Russian support.

Lee cited January data that showed Saudi output at 10.213 million barrels per day versus a pledged 10.3 million bpd, while Russian production cuts came in at 42,000 bpd against a promised curtailment of 50,000-60,000 bpd.

OPEC+ Deal Still Fragile

Lee added:

“It is clear that, while one leg is functioning strongly, the other is bearing little of the weight of the deal – and that could spell trouble for the future.”

“Unless somebody lights a rocket under demand growth — and even a U.S.-China trade deal may not be enough to do that — the OPEC+ output agreement is going to need at least two strong legs to stand on.”

New York-based consultancy Energy Intelligence noted in its weekly newsletter that despite its name, NOPEC reaches beyond OPEC, allowing the U.S. Justice Department to target any state for acting “collectively or in combination with any foreign state” to “limit production or distribution of oil, natural gas or product”, attempting “to set or maintain a price” for those commodities, or taking “any action in restraint of (their) trade”.

The consultancy added:

“By threatening the key lever by which producer states’ extract value from their most vital resource—and theoretically dictating production policies—the bill undermines producer notions of national sovereignty. Under a worst-case scenario, if aggressively implemented, the law could deliver a seismic shock to the global economy.”

NOPEC’s Implications Could Trigger New Oil Crash

This is because a world without restraint on energy output could trigger another oil price collapse, just like in the fourth quarter of 2018 and through much of 2014-2017. The NOPEC bill would appear to discourage OPEC members from withholding spare capacity from the market as mere suspicion of collusion to use such capacity to influence prices could make them a target for violation pleas.

The White House has so far said it was only studying whether to support NOPEC. President Donald Trump seems apt in taking on OPEC with just his tweets, though there’s no telling what such a powerful law could help him achieve.

Washington’s OPEC allies in the Mideast Gulf had hoped a Trump-led White House would reset relations after earlier tensions under the Obama administration. But U.S. lawmakers’ frustration with Saudi Arabia over the Yemen war, as well as Riyadh’s apparent involvement in the murder of Saudi journalist and U.S. resident Jamal Khashoggi, instead created an environment that would seem to favor the passage to NOPEC.

Proposed Legislations Could Cost America Too

But NOPEC could also be costly to U.S.-Saudi trade, threatening the U.S.’s own energy superpower ambitions by affecting Riyadh’s investments in the United States, not to mention critical U.S. arms sales to the Kingdom.

Similarly, in DASKA’s case the victims could go beyond Russia if that bill passes. It could include BP (LON:BP), which has already invested over $17 billion in Russia and has a near 20 percent stake in Rosneft (OTC:OJSCY). In addition to this, BP recently agreed to jointly explore two additional oil and gas license areas in Russia together with Rosneft. Shell (LON:RDSa) and Repsol (MC:REP), meanwhile, are also looking for new projects with Gazprom Neft (LON:SIBNq), including in West Siberia and on the Russian Pacific Coast.

The potential of DASKA and like-sanctions have also prompted Exxon (NYSE:XOM) and Chevron (NYSE:CVX) not to pursue new energy ventures in Russia.

Moscow, on its part, effectively blocked U.S. oil services giant Schlumberger’s (NYSE:SLB) purchase of a stake in Russia’s Eurasia Drilling Co, showing both can play the game.

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