Russian President Vladimir Putin and Saudi Energy Minister Khalid Al-Falih. Photo: Sergei Savostyanov/TASS via Getty Images

The announcement that the U.S. will not extend waivers for Iran oil export sanctions beyond May 2 sent oil prices up, though President Trump and Secretary of State Mike Pompeo signaled that Saudi Arabia and the United Arab Emirates would add supplies.

The big picture: This plan could strain production cuts Riyadh agreed to in December with OPEC, Russia and others that have buoyed prices by 37% in 2019. Saudi Arabia's broader cooperation with OPEC+ since late 2016 has provided much-needed cash to mitigate deficits, burnish sovereign assets for mortgage and fund the Crown Prince’s economic transformation plans.

Where it stands: Iran exported about 1.1 million barrels per day (b/d) this month. Saudi Arabia and the UAE could quickly add about 1.5 million b/d, but that would breach OPEC+ targets, up for review in June. Having cut beyond its targets, Saudi Arabia could pump an additional 500,000 b/d and still comply with the outstanding deal.

The impact: All this puts pressure on the 2.5-year-old OPEC+ arrangement, and specifically the Saudi-Russian partnership.

  • Saudi Arabia considers the cuts a success and supports a continued partnership with Russia to bolster prices. Washington's 2018 about-face notwithstanding, Saudi Arabia will likely boost production to squeeze archrival Iran while making itself indispensable to the Trump administration's Iran policy.
  • Despite its wavering on OPEC+ generally, Russia is unlikely to abandon the partnership and facilitate U.S. sanctions policy. Though Russia has always been less enthusiastic about production cuts, which were imposed on companies by the Kremlin for strategic reasons. As U.S. production surges on high prices, there are worries in Moscow about market share.

What to watch: It will become clear in the next few weeks how China, India and Turkey intend to respond to the sanctions and how the U.S. will enforce them. The May 19 OPEC+ ministerial monitoring meeting will indicate how participants see the oil market, ahead of a decision about extending production cuts to be made on June 26.

The bottom line: With the market tightening due to political events in Libya and Venezuela and the onset of summer driving season in the U.S., there is reason enough for Saudi Arabia to increase short-term production targets while maintaining the OPEC+ relationship.

Phillip Cornell is a non-resident scholar at the Arabia Foundation and a specialist in energy policy and economics of the Middle East.

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