oil market

Russia Planning to Destroy OPEC?

October 14th, 2015 by

Recent moves in Moscow’s strategy to take the dominant role in the global oil market away from Saudi Arabia have analysts asking “Is Russia planning to destroy OPEC?” This plan involves increasing oil production to rival the Saudis (despite a global glut of oil,) and playing “good cop” to the minor nations in OPEC, who are suffering under the current policies of the cartel.

Playing Petroleum “Chicken”

oil-wellGlobal oil surplus is estimated at 2 million barrels a day. The International Energy Agency is forecasting global demand to increase by only 1.2 million barrels a day next year, despite falling U.S. shale oil production. Iran is poised to re-enter the market in a big way (with Russian technical help) after international sanctions are lifted. Recent slowdowns in the economies of China and the U.S. may depress demand for oil at a time when all major producers continue to pump at a record pace.

Russia is at the forefront of the strategy of “gaining market share at any cost.” Instead of cutting back in the face of OPEC flooding the market, Russian oil production hit a post-Soviet high of 10.74 million barrels a day last month, nudging it into the top spot among petroleum producing nations. At the same time, Saudi Arabia announced a deep price cut for its oil, as the Gulf Oil States engage in an internal price war. This poses the question…

Who Can Hold Out Longer?

Russia has benefited from a weak ruble, which has blunted the pain of falling oil prices. Rooting out corruption and inefficiencies in old, state-run industries, as well as modernizing old oilfields, has contributed to the increase in production.

The Saudis are not standing still, despite the huge drain the oil glut has inflicted on its cash reserves. The kingdom continues to expand refining capacity and funding exploration for new oil deposits.

saudi-arabia-95500_640The insistence of the Saudis in maintaining the riyal’s peg to the U.S. dollar gives the Russians and their devalued ruble an advantage. Conversely, the huge currency reserves of Saudi Arabia dwarf those of Russia, who has expended many billions of dollars in forex intervention to prevent a total collapse of the ruble.

Of course, there are many other players in this drama, notably the “junior partners” of OPEC such as Venezuela, Libya, Nigeria, and Algeria. These nations do not enjoy massive currency reserves, and are ill situated to devalue their currencies. Their only option has been drastic cuts in government services, which has increased civil unrest.

Is Russia Planning to Destroy OPEC?

Even though Russia is contributing a large portion of the current oil glut, it is lending moral support to “have-nots” in OPEC (Iraq, Angola, Nigeria, Libya, Algeria, Ecuador, and Venezuela)—against the haves (Saudi Arabia, Kuwait, the UAE, and Qatar).

opecRussia has offered to meet with OPEC and non-OPEC oil exporting countries to discuss coordination of oil production if an emergency meeting is called. Russia will, of course, ally with the OPEC nations that are suffering most from low prices. Venezuela, which is experiencing food shortages and civil unrest, has been frantic in calling for a cut in oil production in order to raise prices.

With such a powerful ally as Russia in their corner, the smaller OPEC producers may feel emboldened to flout Saudi Arabia’s demand to continue high production. The junior members are beginning to feel like “collateral damage” in Saudi Arabia’s plan to kill off competition from higher cost shale and offshore drilling companies.

Not Just Economic Adversaries

Russia has recently signed agreements with Iran and Iraq on intelligence and security cooperation, firmly aligning it with the Shiite camp in the ongoing regional religious war. This agreement gives Russia an air corridor to supply its ally Syria with weapons and troops, if Greece and Bulgaria refuse to allow overflights.

Gulf-oil-statesSaudi Arabia and other Persian Gulf states have long been major backers of Sunni rebels and terrorist groups, and enemies of Iran, putting them on the opposite side of the conflict. Saudi Arabia is also leading an Arab coalition against Iranian-backed rebels in Yemen on Saudi Arabia’s southern border.

As long as oil prices remain low, the Saudis will have to drain their currency reserves to support Syrian rebels, pay for the war in Yemen, and keep social services at home at normal levels. By expanding their own production, Russia is putting pressure on Saudi Arabia to cut their support for the Syrian rebels. Iran, Iraq, and Syria will of course go along with Russia’s plan to reduce Saudi influence.

It’s All About That Oil

oil-pumpRussia’s goal of keeping their ally Assad in power not only keeps a “Shiite Crescent” intact across the top of the Middle East, it prevents Saudi Arabia (and Israel) from building a pipeline to Europe.  As Russian and Iranian military involvement in Syria ratchets tensions  in the region upward, concerns about transporting crude by tanker increase. Russia’s oil is mainly delivered via pipeline, which is cheaper and less subject to interruptions. If Russia and Iran can quash the Syrian rebellion, Iran and Iraq can build a Shiite Pipeline all the way to the Mediterranean, through Syria.

If Russia can splinter OPEC and get the smaller producers to take Moscow’s lead in pricing and production, Saudi Arabia will lose a great deal of geopolitical influence.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.