Axis of Producer Resistance

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  • Opec-plus ministers on Dec. 4 rolled over their 2 million barrel per day cut decision.

  • Ministers are not scheduled to meet again until June, but market challenges will require close coordination between producer heavyweights Russia and Saudi Arabia.

  • Their bilateral relationship is the foundation of Opec-plus and has been given new relevance by the Ukraine crisis.

    The Issue

    The Ukraine crisis has thrown up challenges for the alliance between Saudi Arabia and Russia that underpins the Opec-plus producer group, including competition in the key Asian market, US political pressure and extreme price volatility. But common interests are exerting stronger forces in keeping the alliance united. These include protecting oil revenues, resisting consumer interference, adapting to changing global geopolitics and maintaining producers’ influence over the broad energy agenda. 

    Avoiding Internal Tensions

    Historically, adversity has tended to drive producer unity. The rise of US shale oil helped push producers to come together to create Opec-plus. The challenging market and geopolitics generated by Moscow’s invasion of Ukraine seem to be doing the same.

    In some respects, the war looks to have defused potential tensions. For instance, back in January, Saudi Aramco’s announcement that it would buy a 30% stake in Poland’s Gdansk refinery raised eyebrows in some quarters, where it was perceived as a marketing challenge to Moscow. Today, Russia may not say it, but it will be privately happy at every Saudi barrel that heads west, where it will not compete with Russia’s new target markets in Asia-Pacific.

    Opec-plus has so far managed to avoid any problems over competition in Asia. Mideast heavyweights Saudi Arabia, UAE and Kuwait have all increased their sales to China this year, despite Chinese crude imports heading for an unprecedented second successive annual decline. So, too, has Russia, which hiked its crude sales to China by 145,000 b/d in January-October versus the same period last year, according to Chinese customs data. This masks potential hidden imports: Recent Chinese data for Malaysian crude shows imports running about 500,000 b/d higher than average 2021 levels of 376,000 b/d.

    As Russia sought alternative markets to Europe and the US this year, Gulf imports of Russian crude and products have also increased somewhat, although they remain modest. Most notably, the UAE storage and trading enclave of Fujairah is playing a significant role, with crude and product inflows since March averaging around 200,000 b/d, compared to 43,000 b/d in 2021, according to data firm Kpler.

    United Against Consumer Interventions

    The most significant driver of producer solidarity by some distance has been Gulf dismay at the repeated oil market interventions by consumer countries. Gulf producers view Western measures such as the price cap and sanctions, and market moves such as the US’ use of Strategic Petroleum Reserve releases, as a direct challenge to Opec-plus’ own control of the oil market — and indeed as nothing less than an attempt to wrest control away from producers. Such sentiments come against a backdrop of mounting tensions over the past year regarding the pace of the low-carbon transition, which in effect also serves to shift control of the energy agenda from producers to consumers. Opec-plus leaders Saudi Arabia and Russia share an interest in either slowing the pace of the transition or ensuring that it maintains a place for fossil fuels, as key to both their economies and their global clout.

    For Russia, its Opec-plus membership previously enabled it to project influence on oil markets, and by extension on the global political economy, in a way it hadn’t been able to previously. It also gained diplomatic influence in the Gulf, an area that had previously been the preserve of the US. With the Ukraine crisis, the value of Opec-plus to Moscow has evolved. It now offers an important counterbalance to Western efforts to isolate Russia politically, alongside other organizations such as the Shanghai Cooperation Organization and Brics, and a tool to limit the impact of sanctions on oil revenues.

    Even before the war, both parties saw political and potentially wider economic synergies from the alliance, on top of the obvious market management benefits. For Riyadh, the new relationship enabled it to diversify foreign relations away from Western countries in general and the US specifically, in line with its strategy to pivot to key markets in the East. There is no doubt that personal chemistry and a similarity in leadership styles between Russian leader Vladimir Putin and Saudi Crown Prince Mohammed bin Salman has helped.

    The key point for Riyadh has been Russia's critical role in playing midwife to the Opec-plus group back in 2016, which has done so much to revive producer market management, the kingdom’s geopolitical relevance and revenue flows in the process. Its relationship with Moscow has also allowed Riyadh to signal to Washington that it has options, and that the US should not take it for granted.

    All that said, there has been little progress on developing deeper economic cooperation between Russia and Saudi Arabia, despite much talk. Moscow has been interested in getting involved in Saudi nuclear power, agriculture, healthcare, oil production technology and equipment. There have also been discussions on military cooperation. But given Saudi dependence on US military support, it is hard to see this materializing in any substantial way.

    Regional Geopolitical Shifts

    Washington’s slow pivot away from the Gulf and differences over Iran have seen Moscow improve relations all round the region. Qatar has invested heavily in Russia, and Russian oil firm Lukoil took a stake in the United Arab Emirates’ Ghasha project in 2019. Both Qatar and the UAE have maintained direct contacts with Moscow, including Putin, during the crisis. Just this week, Putin and his UAE counterpart Mohammed bin Zayed had a lengthy phone conversation about the price caps.

    Moscow’s friendship with Tehran and Damascus puts it on the opposite side of many of the region’s conflicts from its Gulf allies. Nevertheless, their relationship has enabled a modicum of de-escalation in Syria. And in Libya, Moscow and the UAE’s Abu Dhabi found common cause to back eastern strongman Gen. Khalifa Haftar.

    Opec/Opec-Plus, Opec-Plus Supply , Sanctions
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