Date: 6 April 2018

A Petroleum Flirtation, but Not a Marriage

Saudi Arabia and Russia are the biggest producers of crude oil in the world. They jointly supply 21 percent of the global oil demand. Both countries are also key members of the agreement with oil producers from outside OPEC on limiting crude output. Riyadh wants it consolidated and Moscow does not say “no”, because it is interested in the best possible cooperation with the monarchy from the Gulf. But at the same time, it does not want to make binding declarations. A current form of the short-term agreement from the end of 2016, extended every year is more suitable for Russia. Anyway, much points to the fact that it will come to an end soon, because it weakens the potential of Russian oil extraction sector and exporting possibilities with every next month.


OPEC and 11 other producers with Russia ahead have made an agreement at the end of 2016 on limiting crude output, to bid up the prices after the period of drastic drops; global extraction was limited by about 1.8 million barrels per day (Russian contribution: 300,000 barrels). At the end of 2017 in Moscow, King of Saudi Arabia Salman declared the will of sustaining this cooperation – Putin was also all for and the agreement was extended till the end of 2018. But Riyadh is becoming more and more interested in strengthening the cooperation. In February this year after the telephone conversation with president Vladimir Putin, king Salman announced that both sides were interested in “extension of coordination” on the global oil market. At the end of March representatives of Riyadh in OPEC announced that the organisation wanted to make a long-term deal with Russia (for 10 or 20 years), which would replace the current short-term agreement.

But the Kremlin avoids this topic and a recent interview with Minister of Energy was full of elusions. At the beginning of April, Alexander Novak agreed that Russia and Saudi Arabia should consider a permanent mechanism of Russia’s cooperation with OPEC. Such a mechanism would contain, among others, the possibility of oil market monitoring, exchange of information and “if necessary” realisation of joint actions, similarly to the agreement on extraction limits from the end of 2016. However, such a prospect is much different from the idea proposed by the Sauds of oil extraction limits for many years ahead. Novak implied that Russians would limit the oil extraction only as a last resort. He excludes the possibility that Russia would join OPEC, but he suggests the institutionalisation of the current cooperation form between part of oil producers and OPEC.

So far, it is not known whether the agreement limiting the oil production, which is valid till the end of this year, would be extended for the first half of 2019. The decision is to be taken in the middle of this year. The future of the agreement, in fact, depends on the USA – the level of their production and their stock. So far, such a move induced the rise of oil prices – in last year the American oil stocks have decreased by one fifth from record-breaking 533.9 million barrels in March 2017. But the USA is still breaking records of extraction: in November 2017, 10.1 million barrels a day. While a global demand for oil has increased, the extraction in Russia has not. Therefore, Russian contribution into the global market has fallen to 11.2%, OPEC’s contribution to 33.3% , and the USA’s contribution has risen to 9.6%. In the long run, the agreement limiting the oil production is not profitable for Russia. Domestic players have already started incurring losses. Further actions of raising oil prices can also be dangerous as they open the possibilities for shale oil producers. By sustaining the oil agreement with the Sauds, Russia gains political points in the Middle East. On the other hand, it weakens its own oil industry. It is unlikely that in the long term Russia will passively observe the American expansion on the global market.

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