Witt Jacques/Reuters
Could the rapprochement in US-Russian relations under President Trump lead to a fundamental reordering of the global oil market? Jim Burkhard, who leads crude research for S&P Global, certainly thinks it could.
At last week’s CERAWeek conference of energy leaders in Houston, he caused a stir at one panel session by suggesting that Saudi Arabia, the US and Russia, which between them hold a commanding 40 per cent of world crude markets, may be privately thinking of an alliance that would rip up conventional thinking on oil.
Burkhard’s comments were a distillation of a presentation he made recently to S&P clients. “In a potentially paradigm-shattering move”, he wrote, “the Big Three are pursuing shared interests in oil and geopolitical matters.”
Houston oil people familiar with Washington thinking confirmed that the US administration is indeed contemplating an initiative along those lines, even if its deliberations have not yet crystallised into hard policy proposals.
Burkhard appears to be thinking at least two steps ahead, assuming a peace settlement of some kind over Ukraine, and a Saudi willingness to engage again in a pan-global oil arrangement, as the kingdom did when the crude markets were in crisis at the peak of the pandemic in spring 2020.
“A lasting rapprochement between the US and Russia – and Saudi Arabia’s relations with both – would have far-ranging geopolitical implications, including for the oil market,” Burkhard said.
If this triple power bloc were established in global crude, it would certainly change things. Between them, the three could firmly and conclusively set output levels, and therefore determine prices for the rest of the world.
The problem, as Burkhard recognises, is that “oil price preferences are not aligned” between the three.
Many experts assume that Trump wants crude oil prices to fall to around $50 a barrel, in order to restrain US inflation and fulfil his election promise of cheaper gasoline at the pumps.
Burkhard, however, believes Trump’s real “preferred price range” is between $70 and $80 a barrel of Brent crude, and that the president is aware of the potential for his “drill baby drill” policy to damage the US oil industry.
“To be sure, Trump is likely to be more concerned about oil prices being too high than too low, but expect him to act in some way if prices fall below an investment threshold,” he writes.
The president rightly identifies oil with power, which he values, and it must rankle with him that he cannot order the US industry to raise or lower oil production in the way that Russian and Saudi leaders can.
In Trump’s mind, a Big Three alliance would be presented as an historic achievement of global significance
You can see how, in Trump’s mind, a Big Three alliance would be presented as an historic achievement of global significance. But what would be in it for the other two?
For Russia – which is assumed to want as much oil revenue as fast as possible – such a deal may be accompanied by a removal of sanctions imposed by the US after the invasion of Ukraine, and even more favourable consideration by the US of the terms of any peace settlement there.
President Putin spoke nostalgically after his phone call with Trump last month about a three-way conversation involving him, the US president and King Salman of Saudi Arabia in 2020 and concluded: “Such a format is still in demand today.”
For Saudi Arabia, the benefits of the Big Three deal are not so immediately obvious. It has borne the lion’s share of the cuts that began with that 2020 meeting, and which are only now being slowly unwound.
Although some analysts set the unofficial Saudi price target at more than $100 per barrel, the kingdom has been reasonably comfortable with prices in the same range Burkhard identifies as Trump’s target range – $70 to $80.
Saudi Arabia can rely on its strong credit rating in international capital markets – upgraded to A+ by S&P just recently – to help bridge any funding gap in the Vision 2030 national transformation programme.
Trump could offer the kingdom other benefits too. “Would Saudi Arabia be willing to compromise on oil prices or production if it was linked to cooperation on Middle Eastern security matters?” Burkhard asks.
As he recognises, “much could still go wrong” in the Big Three scenario. The Ukraine peace process is far from any final deal, Trump could halt the US rapprochement with Putin, and Saudi Arabia may not want to swap its existing position as a leading force in global crude markets via its position as the largest producer within Opec.
But for a president who has already brought us the Gaza riviera, the Gulf of America and Canada as the 51st US state, the Big Three could be the next grand legacy project.
Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He acts as a consultant to the Ministry of Energy of Saudi Arabia and is a media adviser to First Abu Dhabi Bank of the UAE
