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A stronger OPEC needs Russia

In his book, former Saudi Oil Minister Ali Al-Naimi expresses skepticism about the willingness of Russia to join efforts made by the Organization of the Petroleum Exporting Countries (OPEC) to rebalance the market.

Al-Naimi’s pessimism was not unfounded. He spent years talking to Russian officials about efforts to rebalance the market during several crises since 2000, but to no avail. The Russians always pledged to share some of the burden but did not deliver in the past. One of the main reasons why Russia was never interested in helping OPEC was Igor Sechin, the leading figure in the Russian oil industry, who had little interest or trust in OPEC. Even today, after the formation of an alliance between Russia and OPEC producers nicknamed by some “OPEC+,” Sechin is still a critical voice.

The alliance, however, is working well and both Russia and OPEC came to the realization that they are able to work together to save the market. This alliance was born out of necessity: Russia and OPEC need each other to combat the rise in power of the US shale oil industry, where producers can flood the market with crude and crash prices.

The Russians needed a deal with OPEC since the start of 2016, when Brent briefly went down below $30. They reached an initial agreement to freeze production in March, although that agreement did not come to pass, as not all OPEC members were on board. That left the Russians disappointed, but they continued in their efforts to work out another deal.

A few months later, the situation looked more positive. Hope was revived after Russian President Vladimir Putin met with Saudi Arabia’s Mohammed bin Salman, who is now the crown prince, on the sidelines of a G-20 meeting in China. A new round of OPEC talks emerged and in September the group held an extraordinary meeting in Algeria, where an agreement was reached to cut production for the first time since 2008. Russia joined the OPEC and non-OPEC alliance to cut output, the first such deal in almost 15 years. The agreement was sealed in December, with the oil market now on course to rebalance.

Saudi Arabia is the defacto leader of OPEC but it cannot do everything alone. Russia’s involvement was necessary because Moscow enjoys strong political ties with many OPEC countries such as Venezuela, Algeria, Iraq and Iran. Dissent in OPEC, therefore, is becoming minimal now that Putin supports the alliance.

OPEC was always missing a political force to unite members, and now this vacuum is filled by Russia. This was evident when Putin bridged differences between Saudi Arabia and Iran a few days before the meeting in November, allowing the deal to go ahead.
The Riyadh-Moscow axis is gaining more power, with the two countries signing many initial agreements last week during King Salman’s visit to Russia, the first of its kind by a sitting Saudi monarch.

The sky is the limit for what this axis can do, but there are many challenges ahead when it comes to stabilizing the oil market.
First, Russian oil companies are still resisting long-term cooperation with OPEC countries. That is understandable because they are seeking higher profits and a bigger market share. This was clear in China, where Russian producers captured most of the increase in demand in the first eight months of this year, while Saudi exports to China fell. The result was that Russia became the biggest oil supplier to China this year, according to official customs data.

Second, Russian Energy Minister Alexander Novak has signaled that the current accord cannot go on forever, and an exit strategy must be clear for when it expires next year.

Third, both Saudi Arabia and Russia must look beyond next year. The OPEC+ alliance must be turned into an institution that will always assure the market it is there when needed.

Saudi Arabia, Russia, and the US are the biggest three oil producers in the world. These countries played a great role in reshaping the energy and oil markets over the last three years and are destined to carry on doing so for years to come. The US, however, was never part of any global effort to stabilize the market. So, the responsibility will fall on OPEC, Saudi Arabia and Russia.

OPEC realized the importance of working with Russia two decades ago, but the Russians did not understand the importance of working with OPEC until lately. In a world where shale oil and other unconventional sources of supply may destabilize the market, a stronger OPEC is needed. For OPEC to become more efficient and stronger it needs to be politically stable, and for this to happen Russia must be involved, and it must not turn its back on OPEC. Otherwise, producers must learn to deal with a “lower for longer” scenario when it comes to oil prices.
Source: Arab News

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