Putin Is Putting OPEC’s Patience To The Test

Russia has so far been able to maintain its relationship with the Organisation of Petroleum Exporting Countries (OPEC) and certain other oil and gas powers, mainly in the East. However, over a year into the conflict, Putin appears to be gradually fracturing his relations with Saudi Arabia and other OPEC members. Over the last year, Russia has been developing energy relations with powers that are open to its cheap oil and gas, after having strict sanctions imposed on its energy sector by the U.S. and Europe. It has succeeded in attracting the huge Indian and Chinese markets, becoming China’s main crude exporter earlier this year. But now Russia may be harming OPEC, the very organisation that has bolstered its oil and gas industry all these years.

OPEC expanded to include Russia in 2016, in OPEC+, under a deal led by Saudi Arabia. As Russia lost out on oil sales to the West, OPEC+ appeared to support Putin in his aims to profit from high oil prices, agreeing to production cuts across its member states to support high oil prices. However, at the OPEC+ meeting earlier this month, it was reported that Saudi officials were unhappy with Russia’s behaviour. The organisation agreed to reduce its oil output by 500,000 bpd at a meeting in April, and yet Russia was continuing to supply large amounts of discounted oil to the market to support its faltering economy and help its efforts in the conflict against Ukraine. This is happening even though the G7 group of nations has imposed a $60 per barrel cap on Russia’s oil exports.

It now appears that Putin wanted to gain OPEC’s support to benefit from high energy prices to the detriment of the group’s other member states. OPEC’s repeated output cuts have pushed prices higher and higher in the past, which has allowed Russia to undercut OPEC’s prices to attract buyers and continue to sell crude. India, China, and several other countries have so far ignored Western sanctions, using this moment as an opportunity to stockpile cheap oil. This has led OPEC member states to lose their market share. For example, in the first two months of the year, Russia overtook Saudi Arabia as China’s biggest oil exporter, shipping around 1.94 million bpd to the Asian giant, an increase of 23.8 percent from the same period in 2022.

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But now OPEC is taking notice, meaning that Putin may not be able to continue this tactic for long. OPEC’s member states are rapidly losing confidence in Russia, with Saudi Arabia’s energy minister reportedly saying that he was “fed up with OPEC members not meeting oil output goals” and was seeking “more oil output transparency from Russia.” To date, member states looking to increase their production levels, such as the UAE, have been patient. But if Russia continues to undercut OPEC prices and ignore its quotas, it could lead to chaos in the so-far stable energy alliance. In addition, due to Russia’s strong oil exports, despite OPEC output cuts, the price of oil has been falling. This suggests that Russia may eventually need to sell its crude at a loss to maintain export levels, to the detriment of its economy and war effort.

Meanwhile, it appears that OPEC cannot agree on its quotas. The group and its allies met earlier this month to discuss a new deal, with the possibility of adjusting member state quotas. Additional production cuts of up to 1 million bpd were considered at the meeting to drive oil prices up. But the idea was dismissed due to concerns about global economic growth and the rising energy demand. It is believed that the OPEC+ chair needs to have the Brent crude benchmark reach above $80 a barrel to pay for its government spending and import bill.

The price of oil has been highly volatile in recent years owing to the Covid pandemic and, last year, to the Russian invasion of Ukraine. The Brent benchmark rose to over $130 a barrel following the start of the conflict in 2022 and has since fallen to lows of under $70 a barrel in March this year. David Fyfe, from Argus Media, stated: “We are seeing a sharp slowdown in economic growth in developed countries, almost to the point of them going into recession… And we don’t think the demand for oil in China will increase a great deal in the next few months. So the market will not be that tight in the second half of the year.”

The price of oil has fallen dramatically since the start of the war, thankfully for consumers facing economic hardship after the extremely high energy bills of 2022. This is largely due to the fact Russia used OPEC’s production cuts – meant to drive crude prices up – to undercut the organisation by supplying cheap oil to two of the world’s biggest consumers – India and China. If Russia continues to play this game, it is unlikely to keep the backing of OPEC+, which has so far not condemned or punished Russia’s actions.

By Felicity Bradstock for Oilprice.com

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