This past Saturday at the G-20 meeting in Osaka, Russian President Vladimir Putin announced that Russia and Saudi Arabia had struck a deal to maintain their current output cuts at least until the end of this year and perhaps through the first quarter of next year. The announcement came ahead of the semi-annual meeting of the Organization of the Petroleum Exporting Countries (OPEC) set to begin Tuesday in Vienna.

The extension of the cuts will keep 1.2 million barrels of crude off the market. More important, perhaps, is that the agreement between Putin and Saudi Crown Prince Mohammed bin Salman pretty much confirms that the Russian tail now wags the OPEC dog.

Ever since Russia agreed in late 2016 to cut production in an effort to raise prices, we should have seen this coming. Prior to that, Russia always had taken advantage of OPEC production cuts to ramp up is own production and grab market share. Putin’s decision to cast Russia’s lot with OPEC only makes sense if there is something in it for Russia.

What’s in it is more than just money. Putin believed then and believes now that Russia does not get its proper share of respect in international affairs. Its nuclear arsenal and vast deposits of oil and natural gas should command deference to its — more accurately, Putin’s — wishes. Now he, and bin Salman, are betting that maintaining the production cuts will have the effect of putting more pressure on United States production growth in order to keep up with global demand.

According to the OPEC’s June Oil Market Report, U.S. production grew by 1.2 million barrels a day last year. OPEC production dropped by about 151,000 barrels a day in 2018 to 32.01 million barrels, while Russian production rose by about 181,000 barrels a day.

For 2019, OPEC forecasts global demand growth of 2.1 million barrels a day, with U.S. production rising by 1.8 million barrels a day to 18.5 million and Russian production rising by 190,000 barrels a day to 11.53 million. The cartel sees demand for OPEC crude reaching 30.5 million barrels a day in 2019, about 1.1 million less than in 2018.

OPEC and Russia see rough waters ahead for U.S. production, particularly for U.S. onshore shale fields. Crude prices in the $50 a barrel range have led to a slowdown in U.S. capital spending by exploration and production (E&P) companies. Rather than pump more oil that barely makes a profit, many of these firms are returning capital to shareholders.

Even low borrowing costs, with the promise of lower to come since the Fed’s most recent meeting, aren’t boosting production. In large part that’s due to the heavy debt that many of these E&P firms have incurred as they increased production. Capital spending for new drilling by E&P firms was cut back for 2019, and even the second quarter’s sharp rise in crude prices has not led to any upward revisions to those earlier forecasts.

In the commodity markets, long futures and options contracts posted an increase of 19 million barrels last week, following an eight-week stretch in which short positions added 389 million barrels. John Kemp, an oil industry analyst at Reuters, believes that the shift marks the beginning of what could be more short covering. But, Kemp notes, “the fundamental outlook has not changed. Global growth is slowing, which will hit oil consumption, while OPEC+ is trying to stabilise prices by extending production limits for an extra 6-9 months.”

Absent significant events like the attack on two oil tankers in the Gulf of Oman in mid-June or the explosion and subsequent decision to shut down the Philadelphia Energy Solutions refinery, as long as U.S. production continues to grow in rough proportion to the OPEC+ cuts, crude oil prices are going to remain under pressure as a result of slower global growth.

West Texas Intermediate (WTI) crude oil traded above $60 a barrel briefly Monday morning, up nearly 2.5%, and traded around $59.70 at last look. Brent crude traded at about $66 a barrel.

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