Why Russia holds the wild card in OPEC’s high-stakes meeting
Many in the oil market believe that the next OPEC gathering on Friday will be another difficult meeting for the bloc.
Such a reading doesn’t go far enough, however; if member states fail to agree on production increases, it could be a dangerous meeting.
OPEC has met many times in similar, challenging circumstances, only for the meeting to end without agreement on anything. Such was the case with the gathering in the summer of 2011, described by former Saudi oil minister Ali Al-Naimi as the “worst meeting” he ever attended.
The bloc has survived several such meetings. So why should the resistance of Iran and other countries to an increase in production — proposed by Saudi Arabia and Russia — matter?
The answer is because this meeting is a test not only of OPEC’s unity and its strategy to keep the market in balance but also of the strength of OPEC’s alliance with Russia and other major producers, known as OPEC+.
Political pressure on OPEC from the US to increase production, after oil prices touched $80 a barrel last month, is raising the stakes. President Trump’s angry tweets — accusing the group of keeping prices high — come as US lawmakers reconsider antitrust action against the bloc.
Since the OPEC+ alliance was forged in late 2016, a gap has opened between its members and those who have taken charge of the group’s strategy, beginning with the creation of the Joint Ministerial Monitoring Committee (JMMC) and its sub-committee, the Joint Technical Committee (JTC).
The JMMC began life as a routine ministerial gathering to monitor countries’ compliance with the group’s agreement to trim production by 1.8 million barrels a day to restore market stability and balance. Such a mechanism was hardly new to OPEC, which had a similar committee in place until 2013 when its quota system was dropped.
But the JMMC — dominated by Saudi Arabia and Russia — grew in influence as global inventories fell and prices recovered, with the original six-month production deal extended until the end of 2018. What began life as a temporary alliance has morphed into something potentially far more influential for energy markets in the long term.
Particularly significant is the growing influence of Russia; all OPEC members realize that Russia is the cornerstone for the success of the OPEC+ alliance, as the country has the means to get the job done, by way of both soft and hard power.
OPEC+ may emerge from this week’s meeting as a more formal institution, if statements from Russia, Saudi Arabia, and UAE are anything to go by.
OPEC’s alliance with Russia was a resounding success in lifting prices; but now that the market has rebalanced, another side of Russia has come into view. The country has announced that it doesn’t want to see production cuts continue in their current form, not least because many of its companies are looking to expand production.
Such a sentiment is shared by many producers outside OPEC. Beyond the bloc, production is in the hands of oil companies whose shareholders want to see more output as global demand for oil keeps increasing.
Kazakhstan, which is a member of OPEC+, is one example. The country has been working with international oil companies for years in order to pump more crude out of its giant Kashgan field. It comes as no surprise that the country was one of the first to support a relaxation of the production cuts by OPEC+.
So how will Russia deal with resistance to such increases from within OPEC? It has already acted unilaterally, raising production above its quota under the OPEC+ deal in the first weeks of June. Things are under control so far; but the danger to OPEC comes as Russia seeks to forge a new alliance with Saudi Arabia and other major OPEC producers, potentially undermining the bloc.
OPEC+ may emerge from this week’s meeting as a more formal institution, if statements from Russia, Saudi Arabia, and UAE are anything to go by. This institution would become the pillar of the world’s new oil order.
It may be a new organization or a club or just an agreement but regardless of the format, Russia and Saudi Arabia may not need to go through OPEC every time they need to do something big in the market. They could instead work in parallel to achieve their goals.
So the stakes are high for OPEC at this week’s meetings in Vienna. If the bloc fails to agree on a production increase, the train will leave the station without it. Russia will forge its own path, while Saudi Arabia will try hard to preserve OPEC’s unity but, if frustrated, may decide to focus instead on OPEC+ and its relationship with Russia instead.
Saudi Arabia can’t afford to ostracize both Russia and OPEC. But going forward, there is much more room for development and business cooperation with Russia than with other OPEC members.
The failure of this meeting might signal the end of OPEC and the rise of OPEC+. In its growing collaboration with Russia, Saudi Arabia has a historic opportunity to walk alongside another big producer with political muscle and work together to stabilize the market.
OPEC has to reach an agreement this week, or learn to live without Russia and non-OPEC producers. And if OPEC members aren’t happy with the bloc’s decisions, they could throw in their lot with OPEC+ instead.
- Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” Twitter @waelmahdi