Why Russia needs to be onboard OPEC+ more than ever

Why Russia needs to be onboard OPEC+ more than ever

OPEC headquarters in Vienna, Austria. (AFP)
Short Url

OPEC+ efforts have been successful for 38 months in maintaining adequate supplies and absorbing a crude oil surplus. 

Even during the pessimistic days of 2019, where concerns over slowing global growth and the impact of the US-China trade dispute dominated sentiment, OPEC+ managed to keep the market in balance.

Such collaboration is now needed more than ever as the coronavirus adds a new twist to the supply-demand narrative.

Cooperation between Saudi Arabia, Russia and other exporters within OPEC+ has been a calming force in otherwise turbulent times for the global economy.

That cooperation looks set to continue throughout the rest of the year, ensuring that the upcoming meeting of oil exporters in Vienna will start on a positive note.

Global oil demand is certain to be impacted by the virus as China is the world’s largest crude oil importer. It buys more than 10 million barrels per day (bpd), which is 10 percent of global oil demand.

Saudi Arabia and Russia appear to be heading toward the fourth consecutive year of OPEC+ collaboration when producers gather in early March. A continuation of the output cuts agreement with a possible deepening of agreed reductions is widely anticipated.

However, some analysts have argued that the coronavirus outbreak may mark the end of Russia-OPEC cooperation. 

Shrinking Chinese oil demand as a result of coronavirus outbreak is hitting Russia hardest because oil arriving by pipeline rather than tanker, cannot be easily diverted elsewhere

Faisal Faeq

On the contrary, Russia need to be onboard OPEC+ more than ever in both output cuts scenarios — whether extending or deepening.

Russia’s economy depends on hydrocarbons. Oil and gas accounts more than 60 percent of Russian exports and more than 30 percent of Russian GDP.

Not only is the country one of the top oil producers in the world, it is also the second largest producer of natural gas and the major gas supplier to Europe. 

Natural gas markets showed a strong relationship with the crude oil market. 

Natural gas exports prices in Russia are linked to crude oil prices. Hence Russia is more concerned about sustainable oil prices than other OPEC+ members.

More importantly, Russian ESPO crude oil reaches China by a 4,188 kilometer-long pipeline. This is the only crude oil that arrives onshore in the country by pipeline. 

Last December 2019 Russia exported around 1.7 million bpd of crude oil to China. ESPO crude accounted for about 500,000 bpd, which is almost 30 percent of all Russia crude exports to the country.

Therefore shrinking Chinese oil demand as a result of coronavirus outbreak is hitting Russia hardest because oil arriving by pipeline rather than tanker, cannot be easily diverted elsewhere.

Similarly, Russian gas that is transported to Europe cannot be transported elsewhere for the same reason.

Russian ESPO crude oil also the most popular crude grade for the independent Shandong “teapot” refineries.

Such realities reveal just how dependent Russian oil exports are on the world’s second largest economy and why continued cooperation with OPEC is more important than ever.

• Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. 

Twitter:@faisalfaeq

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view