The OPEC and its partners’ deal to extend the output cut till the end of 2018, nine months longer than the original agreement, present a significant milestone in the developments witnessed by global oil markets. The latest meeting in Vienna had put an end to the ongoing concerns about the possibility of Russian participation in any extension of the output cut agreements. In addition, the agreement included 24 oil producing countries including OPEC members, as well as Nigeria, and Libya. The outcomes of this meeting positively affected oil markets, which witnessed an increase in the prices reaching USD 64 per barrel, the highest record in a month.
In this regard, what was achieved in this meeting reveals that what the global oil markets have witnessed was only a transitional phase. Such transitional phases foreshadow the end of a previous phase and foretell there will be a new phase. Therefore, there is no doubt that the current transitional phase foreshadows the end of a previous phase in the development of markets and foretells the arrival of a new phase with different features and characteristics.
Amid these circumstances, it’s logical – or rather necessary – to inquire how the current transitional phase will change and what is the anticipated influence on the global oil markets and affect those involved in them, particularly traditional oil producers.
Clarity of Features
The real beginning of the transitional phase which oil markets are going through began in 2014, specifically in mid-2014. This is when global oil prices began to decrease and reached less than USD 120 for a barrel. Prices continued to decline until they hit a bottom low at USD 26 per barrel in January 2016. Prices did not decrease as much even during the worst phases of the global financial crisis, which erupted in 2008 as during this phase, the lowest price was USD 34 per barrel, and this was in March 2009.
The huge decrease of oil prices, which occurred between mid-2014 and January 2016 with an average of 78 percent decline, made traditional oil producers worried as it reflected the depth of changes in oil markets. These changes were mainly related to the emergence of oil shale as a new competitor in the market.
The Most Prominent Feature: Saudi-Russian Rapprochement
This pushed major traditional oil producers to put their differences aside and get closer to control the market’s activity towards guaranteeing their interests and restoring their leading posts in the markets.
Saudi-Russian rapprochement is the most important transformation which oil markets witnessed due to the recent transformations.
This rapprochement occurred due to several important considerations. The first consideration is that the Saudi kingdom and Russia are the two largest oil producers in the world. Saudi Arabia has been the largest crude oil producer in the world ever since 1992, while Russia comes in second. They have switched these ranks ever since but they have always been the two largest producers. According to OPEC’s data, Saudi Arabia’s daily oil production was 10.46 million barrels per day in the end of 2016. It was, thus, the largest producer, while Russia came in second with an average oil production of 10.29 million barrels per day. This means that these two countries produce 20.75 million barrels together which amounts for 27.5 percent of global oil production per day. This percentage makes the Saudi-Russian rapprochement more significant and is one of the substantial variables in the oil market, amid the current transitional phase.
The second consideration is that the current, also successful, rapprochement between Saudi Arabia and Russia came after several failed rapprochement attempts over the past decades. These attempts failed due to Russia’s continuous rejection to cooperate with any efforts that OPEC and its members, mainly Saudi Arabia, exerted to control the market’s activity. The last failed attempt was following the OPEC meeting in December 2014, i.e. six months after oil prices dropped. This is when the depth of disagreements between the two parties surfaced, especially when Russia said it will maintain its production rate even if oil prices decrease to USD 20 per barrel. Back then, Saudi oil minister Ali al-Naimi said the Russian oil production will collapse as a result of the decreasing prices.
Therefore, the success of the current rapprochement between Saudi Arabia and Russia shows that previous disputes which led to the failure of previous rapprochement attempts no longer exist. It also shows that both countries actually realized that their interest as well as the market’s interest requires their joint efforts. Moreover, Russia’s approval to participate in the extension of the output cut extension till the end of 2018 reveal that this rapprochement is sustainable in the foreseeable future.
The third consideration is the agreement, which OPEC members reached with some traditional oil producers in the end of 2016. Saudi Arabia and Russia played a major role in reaching this agreement as Saudi Arabia brought OPEC closer to non-OPEC oil producers and Russia convinced these producers to support OPEC’s efforts. The agreement stipulated cutting out daily oil production by 1.8 million barrels, equivalent to 2 percent of the global production, implemented since the beginning 2017. This agreement put an end to the manifestations of disputes, which controlled Saudi Arabia’s and Russia’s stances towards one another for years. It also put an end to debates between them specifically as they discussed the agreement’s articles and implementation mechanism.
Implementing this agreement had positive results such as pushing global oil prices to having stable prices above USD 50 per barrel, then USD 60 per barrel currently, as well as it limited the expansion of American oil shale. This was the basis towards more oil rapprochement between Saudi Arabia and Russia and it was clearly seen when they strongly supported extending the agreement until the end of March 2018.
The fourth consideration is that rapprochement between Saudi Arabia and Russia has not been limited to oil-related matters as it also includes other economic affairs. This was seen during Russian President Vladimir Putin’s meeting with Prince Mohammad bin Salman in Moscow in 2017 as he confirmed that cooperation between the two countries “positively reflected on trade’s growth between them in an unprecedented manner as it increased by 130 percent in 2017, compared with 2016.” The prince confirmed that “Saudi Arabia and Russia achieved a lot together and there is still a lot to achieve.” This paves way towards more bilateral cooperation apart from oil-related matters.
The rapprochement was further crystalized in the historic visit of the Custodian of the two holy mosques, King Salman bin Abdulaziz, to Russia in early October 2017. The visit results in the conclusion of various economic agreements, which redrafted the map of relations between both countries.
It is worth noting that Russia made a proposal Aramco in June 2017, as it invited it to participate in a giant Russian gas project in the North Pole. The proposal was conveyed by Russian Energy Minister Alexander Novak who told Reuters in an interview that energy cooperation with Saudi Arabia was a “top-flight” and that in order to expand this cooperation Russia offered state-owned Saudi Aramco a role in the Arctic LNG-2 project. Perhaps the project’s characteristics add great value to the Saudi-Russian rapprochement as the project is led by Russia’s largest private gas producer Novatek and aims to produce over 16.5 million tons of liquefied natural gas per year. This will contribute to transforming Russia into a major producer of liquefied gas by increasing its share in the global liquefied natural gas market from less than 5 to 10 percent by 2020.
All this reflects the size and value of openness between Russia and Saudi Arabia and shows the positive development in their bilateral economic ties. Developing ties as such forms a basic pillar for oil relations and guarantees the sustainability of these ties on the long term.
Russia; Unofficial Member in OPEC
The more important question is about the form which Saudi-Russian rapprochement may take in the oil sector and the possibility of having Russia join OPEC and how this will influence the organization’s future and the global oil markets. This Saudi-Russian rapprochement may lead to the formation of a strong “bilateral oil alliance” that puts an end to the transitional phase, which oil markets are currently living through. This alliance will also foretell the beginning of a new phase in which traditional oil producers restore their leading roles, under the leadership of Saudi Arabia and Russia. This is an important transformation, especially that it comes after oil markets were affected by the increased influence of oil shale and its producers during the past few years. Oil markets also submitted to pressures pertaining to slow demand and to pressures exerted by major oil consumers.
As to how this alliance will influence OPEC, it is unlikely that it will lead to Russian membership in OPEC. Yet, it will improve direct coordination between Russia and OPEC and, thus, this alliance will not be formed at the expense of OPEC’s role and future, but will rather support it especially that oil relations between Saudi Arabia and Russia rely on adopting stances that harmonize with the interests of other traditional oil producers, whom OPEC represents the major ones among them.
In all cases, the Saudi-Russian alliance and its operation mechanisms makes Russia an “unofficial member of OPEC.” This is reflected in how the alliance positively affected the performance of global oil markets throughout the past months. It further harmonizes with what OPEC Secretary General Mohammed Barkindo confirmed when he said: “Saudi Arabia and Russia are the leading lights of the Declaration of Cooperation between OPEC and non-OPEC which has opened a new chapter in the history of oil.”
