Russia trying to become the Saudis ‘plus-one’ at OPEC

The “lower for longer” mantra for oil started to lose meaning beginning in late 2016. The decision by the Organization of the Petroleum Exporting Countries (OPEC) in conjunction with other producers to cut production led to an upward price swing, and between the end of 2016 and Tuesday, oil’s price trajectory has been up.

We’re only six months into 2018, and the price is up by 15 percent. The problem now is the price getting too high: Consuming countries don’t want to bear the burden and costs of higher oil prices, and they are making their displeasure known.

{mosads}$80 and above sounds great for some producers but others fear pushback from consumers who are becoming increasingly frustrated with the economic risks of high-priced oil.

The U.S. and China may find it hard to agree on trade, but when it comes to the price of oil, there’s a consensus that an oil price spike right now is not welcome. On April 20, President Trump put his view forward with a tweet directed toward OPEC, and more specifically Saudi Arabia: “oil prices are artificially Very High! No good and will not be accepted!“

Most recently, Nur Bekri, head of China’s National Energy Administration, also recommended Saudi Arabia take a firmer role to ensure enough supply and stabilize the international oil price.

In response to increasing price pressures, Alexander Novak, Russia’s energy minister, and Khalid al-Falih, minister of Energy, Industry and Mineral Resources of Saudi Arabia, met last week in St. Petersburg and announced their countries were in agreement to raise output and stabilize prices.  

Novak reiterated, “We will do what is necessary,” and now it appears a tempering of the earlier deal to constrain production is in the works. The final details of the agreement will be confirmed when OPEC meets on June 22 in Vienna.

It’s looking more like Russia is securing its position as Saudi Arabia’s “plus-one” when it comes to OPEC decision-making.  

Last week’s meeting suggests Saudi Arabia and Russia intend on being accommodating, but even without the tweets and subtle demands, both countries were poised to increase production — though it’s a better story when told through the lens of a larger OPEC agreement.

Some background is important here to understand this recent announcement, what it means for oil markets and Russia and Saudi Arabia’s earlier decision to cooperate by reducing supply to raise prices.

HE Bekri expressed his support for #KSA’s efforts & other major producers to stabilize oil market. I reiterated #Saudi’s commitment, in collaboration with other producers, to guarantee availability of sufficient oil supply to compensate for potential loss & to meet rising demand.

— خالد الفالح|Khalid Al Falih (@Khalid_AlFalih) May 25, 2018

Given the current detente between Russia and Saudi Arabia, it is easy to forget how different their relations looked before the historic oil deal set in late 2016. They operated under an atmosphere of tension and mistrust and disagreed on most issues in the Middle East.

Even today, the two countries are on different sides of the ongoing Syria crisis. And then there’s the issue of Iran. Russia is cozy with Iran and is deepening ties in the Iranian oil and gas space with Russian state oil companies, Zarubezhneft and Rosneft taking significant stakes in projects where other countries can’t or won’t out of fear over existing and new sanctions. For Saudi Arabia, Iran continues to be a regional threat and source of great contention.

Despite these significant conflicts, relations between Russia and Saudi Arabia are at a high since coming together in late 2016 and agreeing to production cuts. Last October marked the first time a Saudi monarch visited Russia. King Salman, with great fanfare and pomp, signed over $3 billion in investment deals with Russia.

Last week’s pre-OPEC meeting announcement to raise output seems to further cement the two countries’ relationship. Putting political differences aside benefits both countries; higher oil prices provided some much needed budgetary cushion, and now stabilizing prices to soothe market fears of overheating will also provide more opportunities for oil production in the long term.   

It’s hard not to look at Russia and Saudi Arabia’s new line of cooperative strategy in oil markets and not wonder about Russia’s growing influence in OPEC. Putting an “R” before OPEC might be an apt way of understanding the cartel and its decisions moving forward.

Russia has effectively given itself not only a seat but also a strategic position within the cartel. Saudi Arabia understands the hard numbers — other OPEC members are showing little to no production growth, and Venezuela and Iran are both projected to lose what some analysts forecast to be a total of million barrels a day (mbd).

Saudi needs to negotiate with a major player to have an effective hand in global oil markets. Russia and Saudi Arabia pump more than 20 million barrels per day, and if they wanted to, they could increase together between 2-3 mbd.

Russia may not officially become the 15th member of OPEC, but it will continue to exert pressure and influence. Ed Chow from CSIS calls the Russia-Saudi relationship a new “bromance.” 

Whatever it is, there’s no question about national self-interest and convenience playing a role here. It’s not just about squelching criticism from the U.S. and China, but also about bringing more oil into the market when geopolitical tensions are high and U.S. production is still growing.

Next year, the U.S. will have added 1 mbd or more to the market, producing close to 12 mbd per day, and then it might be time for Russia and Saudi to replay its earlier move by reigning in supply to support a higher price. 

Carolyn Kissane is the academic director of the graduate program in global affairs at the Center for Global Affairs at NYU School of Professional Studies and also a clinical professor, teaching graduate-level courses examining the geopolitics of energy, comparative energy politics, energy, environment and resource security. She is a non-resident fellow at the Payne Institute for Earth Resources.