With oil prices falling, Putin has OPEC over a barrel
OPEC is learning the dangers of dealing with the Kremlin. President Vladimir Putin now has the group’s Middle East kingpin Saudi Arabia over a barrel and can name his own terms to continue their partnership.
The oil cartel depends on extending its alliance with Russia to keep restricting supplies if it stands any chance of engineering a quick rebound in prices.
The price of Brent crude has collapsed by almost 15% since April, briefly falling below $60/b last week. Depressed prices are good news for consumers, but bad for OPEC’s petrodollar economies led by Saudi Arabia, which wants the group and its allies to extend production cuts at least until the end of the year.
“On the OPEC side a rollover is almost in the bag,” said Saudi oil minister Khalid Al-Falih trying to reassure the market ahead of bilateral meetings with his Russian counterpart. “The question is to calibrate with non-OPEC,” he added. This primarily means Russia.
Russia’s economic strengths
Moscow can drive a hard bargain if it wants. Its diverse economy and flexible currency can better absorb the blow of a tepid oil market and can handle prices as low as $40/b if required. A bigger concern for Moscow and its major producer Rosneft is the potential loss of market share to the US. The world’s largest economy has now leapfrogged Russia to become the biggest producer of crude.
“We have certain disagreements, linked to a different understanding of the fair price,” warned Putin in an interview with local media in St Petersburg last week.
Without the constraints of OPEC and the disruptions caused by recent pipeline problems, Russia could easily exceed its current output of 11.1 million b/d. In return for continuing his co-operation with OPEC and Saudi, Putin may insist Russia has more leeway to increase output. This could ease pressure from powerful figures such as Rosneft’s chief executive, Igor Sechin, who has repeatedly criticised the OPEC alliance.
However, Russia also has a strong diplomatic incentive to maintain the alliance, which is about more than just oil. The Kremlin has built a strong political and military presence in the oil-rich Middle East since its intervention in Syria. Partnering with OPEC has added economic clout to its now formidable influence in a region, which still provides around a quarter of the world’s crude.
Russia could also ask for more investment from OPEC’s Arab members, which have deep pockets. This could include Saudi Arabia investing in a new giant liquefied natural gas (LNG) project in the Arctic and committing to buying Russian LNG to meet its domestic power generation needs. Last year, the UAE cranked up its presence in Russia, buying into oil fields and a fitness chain.
“Russian corporates for their part are once again expressing displeasure about being forced to rein in output, reigniting concerns that Moscow will not be along for the ride,” warned RBC Capital Market’s research team led by Helima Croft this week. “However, given that President Vladimir Putin has the final word on the OPEC decision – and he has derived significant soft power benefits from being in the deal – we believe that Russia will ultimately sign on for an extension.”
Middle East presence
For Saudi Arabia, keeping Russia onside is vital not just for boosting oil prices. The kingdom and the UAE are effectively fighting a proxy war with Iran in Yemen and Russia’s help in isolating the Islamic Republic is vital. Russia has positioned itself as both a peacemaker in the conflict and a potential supplier of arms, marketing its defence equipment to Arab sheikhdoms, but refusing to sell Iran its most sophisticated equipment such as the feared S400 air defence system.
Iran is also acutely aware of Russia’s growing influence in the region and closeness with Saudi Arabia. Tehran has opposed a Russian request to delay OPEC’s next planned meeting this month until early July, adding an awkward twist to already fraught negotiations. If Saudi Arabia wishes to secure a deal then this will probably mean it will have to continue shouldering the majority of the 1.2 million b/d of cuts already in place.
Russia could also argue there is no need to panic about oil prices. America’s trade dispute with China has weighed on the market, counterbalancing significant concerns over geopolitical tensions with Iran. Sanctions blocking Iran’s oil exports have also failed to generate a feared spike in the market. There are also early signs that US shale producers are beginning to feel the pain of lower prices.
The number of operating US oil and gas rigs has fallen to its lowest level since the beginning of January last year, according to the latest data from S&P Global Platts Analytics. Prices are expected to rebound back towards $80/b by the end of the year as tougher new fuel regulations imposed by the International Maritime Organization (IMO) outweigh concerns over rising stockpiles.
“Oil markets should soon hit a new stride,” said Chris Midgley, global director Platts Analytics. “We see major crude stock draws starting in June on the back of a strong recovery in refinery activity and IMO-related crude buying starting in September, which should support oil prices, barring a major macroeconomic slowdown, which remains unlikely in this timeframe.”
Putin is undecided, but given the strategic benefits of his alliance with OPEC, Russia will probably continue to play along with its production cuts. However, the price of keeping Moscow at the table keeps rising.