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Vanand Meliksetian

Vanand Meliksetian

Vanand Meliksetian is an energy and utilities consultant who has worked with several major international energy companies. He has an LL.M. from VU Amsterdam University…

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Why Russia Agreed To Additional Production Cuts

OPEC has been dominating the oil market since its inception in 1960. Together, the members possess approximately 82 percent of global conventional oil reserves and produce 32.6 million barrels per day. Technological developments such as fracking and the cartel’s decreasing share of global production have eroded the organization’s influence. The flexibility and speed with which shale oil producers are able to add extra barrels to the market, has caught OPEC off-guard. The changing fundamentals of the oil market have led to an unprecedented development: cooperation between former rivals Russia and OPEC’s most important member Saudi Arabia.

The catastrophic drop of the oil price in 2014 led to a recession in Russia, which was already under pressure from Western sanctions due to the crisis in Ukraine. Afterward, Saudi Arabia intentionally kept prices low in order to drive relatively high-cost shale oil out of the market. This tactic eventually failed and strengthened the need for cooperation between Russia and OPEC to reduce production by 1.5 million barrels per day.


Regarding the current drop in prices, President Putin and lower-ranking officials have declared on several occasions that $60 per barrel is enough for Russia’s needs. Nevertheless, in an apparent U-turn Moscow has agreed to cut production again. This time around, the Kremlin is not primarily motivated by increasing its revenue from oil sales, but underlying political factors have created the environment under which production cuts could be helpful.

(Click to enlarge)

Saudi-Russian relations

After the demise of the Soviet Union, Moscow didn’t have the resources anymore to compete with Washington in the Middle East. However, a couple of years after 2015 and its participation in the Syrian civil war on the side of government forces, Russia has become a formidable power in the Middle East again. Moscow not only has good relations with its historic allies, but also maintains good working relations with Turkey, Iran, Israel, and Saudi Arabia.

The Kremlin’s foreign policy in the Middle East can be described as somewhat opportunistic. If it wasn’t for the ‘Pivot to the East’ strategy and relative retreat of the U.S. from the region, Moscow couldn’t have achieved so much as it has now. The power vacuum that was left behind, created the ideal environment for Russia to reinstate its influence. Currently, Moscow is repeating this tactic in the case of Saudi Arabia. After the murder of the Washington Post journalist Jamal Khashoggi in Istanbul, most western states have distanced themselves from the apparent perpetrators. Despite the CIA concluding that the Crown Prince Muhammad bin Salman, MBS, was involved in the murder, President Trump has stated that he will not to punish the Saudis on the matter. However, he can also not afford to look too close to him at the moment. Into the fray comes Putin. Related: Global Market Turbulence Caps Oil Prices

The cordial greeting of President Putin and MBS during the G20 summit in Buenos Aires speaks for itself. While other leaders were busy avoiding the Crown Prince, Putin not so conspicuously showed to the Saudis that they have a friend in Moscow. The Kremlin is trying to capitalize on this moment by drive a wedge between Saudi Arabia and the U.S.

Long-term gains

Russian’s willingness to cooperate with OPEC and Putin’s close relations with MBS are Moscow’s latest actions in its conflict with the U.S. An obvious consequence of the production cuts is that the price of oil will start rising again. President Trump has on several occasions denounced OPEC’s actions on driving prices up which obviously will also hurt American consumer. Despite Saudi Arabia’s dependence on Washington’s support vis-à-vis arch-enemy Iran, Riyadh has chosen for a ‘Saudi Arabia first’ policy.

It was widely expected that if the Russians didn’t cooperate on this round of production cuts, OPEC’s efforts would have largely failed. After the press conference on the first day of the OPEC summit in Vienna on December 6th, prices for the benchmark Brent crude and WTI dropped 4 percent as market participants expected OPEC would only manage to impose measures at the bottom end of expectations. The next day, however, the alliance and Russia agreed to cut oil production by 1.2 million barrels per day and prices were rising again.

Investment potential

Besides political gains, Russian-Saudi cooperation has positively impacted mutual investments and access to energy resources. While most westerners didn’t participate in Saudi Arabia’s Future Investment Initiative due to the Khashoggi affair, Russian investors flocked to Riyadh. Saudi Energy Minister Khalid Al Falih has said that his country could buy 30 percent of Novatek’s next big LNG project Arctic-2. The project is estimated to cost $21 billion with a planned start-up date of the first line in 2022-2023.

Of all its partners in the Middle East, Russia could gain most from long-term cooperation with Saudi Arabia. Although the countries are rivals on the energy market, cooperation has benefitted them both in recent times. Politically there is less room for cooperation as the Kremlin has close relations with Iran and Turkey, and supports the Assad regime. However, this could also be a mitigating factor as Moscow could act as a broker. Despite the pitfalls, cooperation between the countries has a bright future which can be seen in mutual investment initiatives and good personal relations between President Putin and MBS.

By Vanand Meliksetian for Oilprice.com

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  • Mamdouh G Salameh on December 16 2018 said:
    Let me start my comments with a few clarifications and corrections. The clarification is that OPEC is not a cartel. Calling it a cartel is a misrepresentation. How could it be a cartel when it was founded as a counterweight against the previous “Seven Sisters” cartel which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits.The main purpose behind the founding of OPEC was to give producers more control over their oil.

    OPEC is going from strength to strength. Evidence of OPEC’s growing stature and influence on the global oil market and prices is the US Congress’ attempts to wrest more control over global oil markets away from it by pushing a bill that would let the US sue OPEC for an alleged oil price fixing. The bill called “No Oil Producing and Exporting Cartels Act,” or NOPEC, was first introduced in May this year. OPEC is not a cartel. Moreover it will take years to play out in court.

    As for the corrections, OPEC accounted at the end of 2017 for 42.6% of global oil production and 71.8% of global proven reserves (not 82% as you mentioned) according to the 2018 BP Statistical Review of World Energy. Moreover, OPEC’s share of global oil production has not declined. On the contrary, it has been increasing at annualized rate of 1.17% between 2007 and 2016 according to BP Statistical Review of World Energy. OPEC production declined by 0.42% in 2017 due to the OPEC/non-OPEC production cut agreement.

    The 2014 oil price crash had very little to do with US shale oil production and overwhelmingly everything to do with Saudi Arabia misguided oil strategy of flooding the global oil market thus creating a huge glut in the global oil market and eventually leading to the OPEC/non-OPEC production cut agreement of 2016 which was engineered by Russia and Saudi Arabia.

    The cooperation between Russia and Saudi Arabia was motivated by their determination to bolster oil prices as both countries suffered badly from declining oil prices. However, with the huge diversification of the Russian economy ordered by President Putin in the aftermath of the US sanctions on his country after the annexation of the Crimea, Russia can now live with an oil price of $40 a barrel or less compared to $106 for Saudi Arabia.

    One can’t but notice the pivotal role Russia has been playing in OPEC decisions and its growing influence in the global oil market. If not for Russia’s efforts and agreement to cut 200,000 barrels a day (b/d) from its production, there might not have been a new production cut agreement in the OPEC meeting on the 6th of December in Vienna. In effect, Russia’s influence on OPEC decisions is now far bigger than the overwhelming majority of OPEC members. Its collaboration with Saudi Arabia is influencing the global oil market but this sometimes goes contrary to the interests of the OPEC members as was the case when they jointly added 650,000 b/d to the global oil supplies in June against the wishes of the overwhelming majority of OPEC members.

    The Russian-Saudi partnership is a tactical one used by President Putin to enhance his country’s influence over the global oil market. Between them, Russia and Saudi Arabia account for 25% and 26% of global oil production and exports respectively. Besides driving a wedge between Saudi Arabia and the United States, Russian-Saudi cooperation has positively impacted mutual investments and access to energy resources. Saudi oil minister Khalid Al Falih has said that his country could buy 30% of Russian gas company Novatek’s next big LNG project Arctic-2. The project is estimated to cost $21 billion with a planned start-up date of the first line in 2022-2023.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Steven Conn on December 16 2018 said:
    Well, when Russia devalued its currency by a factor of two in December 2014, this was some tougn medicine, but it did allow the country to weather the low oil prices and to stimulate domestic manufactring and industrial production.
    The former because local pay and other costs are in rubles while export earnings are in dollars, so Russian oil and gas extraction costs suddenly halved in dollar terms and soon leading energy firms were recording respectable profits even when oil was trading at $30-$38 a barrel in early 2016. At $60/barrel Saudi budget experiences a defcit. In the first 11 months of 2018 Russian federal budget has recorded a $50 billion surplus and 2019 and 2020 are also projected to be budget surplus years.

    The latter aspect - manufacturing - received a stimulus from import substitution, and have grown faster than the GDP: at around 2 percent in 2016, 2.5 percent in 2017 and at 3% so far in 2018. Its forex reserves have risen from a low of $350 bn in April 2015 to around $462 billion today.

    Saudi Arabia neither devalued its currency nor does it have a large non-energy sector, so its imports would become very expensive and no domestic production would receive a stimulus. At the same time, Sauids have accumulated very large forex reserves to help weather the storm.

    All in all, in the long term, Moscow can live with the current prices but Saudis needs higher ones.
  • russia_is_third_world_country on December 17 2018 said:
    @Mamdouh G Salameh are you russian troll? russia is is nothing.
    if putin says he needs $ 40 a barrel, that means he needs $ 80. russia always lies. the entire civilized world is waiting for Russia to die

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