Russia and OPEC get closer

The increase of American shale oil production and the oil crisis of 2014 have brought the OPEC closer to Russia.

The OPEC and Moscow have agreed on a deal, in 2016, to keep their production of oil low and thus keeping the price high.

The deal known as the Vienna Alliance by analysts brought together 24 countries who produce  47 million barrels of oil a day, or almost half the world’s output.

If bringing Russia in OPEC negotiations has proven to give the organisation more weight on the international market, the relations between the organisation and Moscow comes with a lot of ups and downs.

Russia is, indeed, proving hard to manage for the organisation. The OPEC+ had to meet on the 1^st of July to take a decision regarding the continuation of the deal which will be, eventually, continued until March 2020.

However, the Russian minister decided not to wait for a decision to be taken, to publicly announce that the deal would be prolonged for nine months. This announcement was made during the G20 held in Japan after a meeting between Saudi Arabia’s Crown Prince Mohammed Bin Salman and Vladimir Putin.

This epitomises the leading role that Russia is trying to take in an organisation where it is not even a member. It also epitomises the special relationship that Moscow is building with Riyadh. This relationship built behind closed doors is not to the taste of everyone in the organisation, especially to Iran.

Russia OPEC relations in the current geopolitical context

The OPEC found itself in a dysfunctional state due to the ongoing competition between Saudi Arabia and Iran. Russia being in good terms with the two states managed to position itself as a conciliator.

Furthermore, with the development of the shale oil industry in the US, Washington could afford to be more assertive on Riyadh. Thus, the Moscow interests for the OPEC came at a very suitable time for Riyadh.

However, Moscow may have done some questionable diplomatic moves. Russia meeting with Saudi Arabia to discuss about major issues beforehand seems to irritate other OPEC members and especially Iran.

Iran might then be less thrilled about having Russia having such important role in the organisation However, Tehran has no interest blocking the deal: being target by sanctions, low production and high prices are in its interests.

According to analysts, Russia is pulling a lot of effort in fostering Saudi Arabia to keep playing its regulator role, in order to avoid a crash similar as the one from 2014.

Additionally, Saudi Arabia has publicly stated that it was interested in diversifying its energy supply and thinking moving towards more LNG. Moscow and Riyadh have been said to discuss about LNG imports coming from the Russian Arctic.

A state that has a lot to lose is China, as it is the biggest importer with 10.6 Million barrels a day in April 2019. It is, thus, the state that is the most impacted by the OPEC strategy. The OPEC and Russia, then, run the risk of seeing China getting closer to other importers or to develop other sources of energy even more.

Russia and OPEC compromise on oil

Russia has failed to meet the output cut requested, according to Bloomberg : Russia’s compliance was only at 80% in comparison with the rest of the OPEC which was at 150%. Russia seems less enthusiast at diminishing its oil production in order to keep prices high than the OPEC countries.

Russia has committed to reduce its oil production of 230,000 barrels a day,

while Saudi Arabia has agreed to reduce its production by 320,000 barrels a day, although it already produces 1 Million barrels a day less than in 2017.

Other countries such as Iran, Libya and Venezuela were exempts from cuts but this exemption results more from economic realities and sanctions than national political agenda.

Putin’s entourage is divided when it comes to cutting oil output. Alexander Novak, the minister of Energy wishes to cut oil’s production in order to keep prices high while Igor Setchine the CEO of Rosneft wishes to produce hefty amount in order to have a high benefice.

The strategy of keeping oil output low in order to guarantee oil prices might prove to wear itself thin. Indeed, the OPEC countries and Russia, already, started to lose some share on the international market as the US and non-OPEC countries are increasing their offers.

Saudi Arabia’s goal is to increase the price at $80 per barrel. Before the G20, Putin said that he would be fine with the barrel falling at $60. Russia has a flexible currency which allows more resilience as the oil price are falling.

The American Congress has already been discussing a bill that would sanction those countries that are willingly taking measures to raise oil price, since February.

Future of OPEC and the Geo-economics of Oil

The only thing that unit the OPEC countries is oil. Within the group tensions are rising, mainly between Iran and Saudi Arabia. Saudi Arabia getting closer to Russia, might leave Tehran with an even deeper isolation feeling which might weaken the organisation.

As the production from other country such as the US rise, the impact of the OPEC on prices might be less consequential. The outputs could have some negative effects on the OPEC’s states economy. Hence, states within the organisation with a wealthier economy such as Saudi Arabia could give up on this strategy as it can afford lower prices.

A factor that will influence the demand for oil and thus the future of the OPEC will be the global demand for other source of energy such as renewable energy. High oil prices might foster customers to shift towards renewable source of energy, thus OPEC might take a hit in its pursuit of high oil prices.

Finally, something to watch will be the reaction of China to the OPEC strategy. Indeed, China has a lot to lose since it the biggest importer. On the opposite, the US is probably the only state that will be the least impacted, although its shale oil development is one of the roots of the inclusion of Russia in the OPEC + process.