OPEC and Russia reset oil market ignoring Trump’s urgings

(Energy minister of Russia Alexander Novak and Saudi counterpart Khalid al-Falih)

Belying most predictions by analysts and energy experts, OPEC and Russia and its allies have agreed on Friday on a larger than expected cut in oil production to the tune of 1.2 million barrels a day. The deal aims to mop up the oil supply glut and stabilize the price.

The OPEC members will cut their production by 80000 bpd and non-OPEC members by 40000 bpd. Significantly, Iran has been exempted as a special case, due to the US sanctions, from any cut in its oil production.

At its core, the collective agreement of the so-called OPEC+ is a deal between Saudi Arabia and Russia and how far they would decide to cut production in the face of President Trump’s demands not to resort to cuts was the ‘known unknown’ until Friday afternoon in Vienna where the OPEC and Russian ministers were in session for the past two days.

Clearly, the 30% drop in oil prices in the recent period did not suit either Saudis or the Russians. But there has been lurking suspicion that Saudis are far too beholden to Trump following the Jamal Khashoggi affair.

The point is, oil prices (around $59 per barrel) have been far below levels many OPEC members would need to balance their budgets. The fiscal break-even for oil price sharply varies – Venezuela ($216), Nigeria ($127), Libya ($147) are extreme cases, but below that come Saudi Arabia ($88), Algeria ($84), Angola ($83), Oman ($77) and Iran and the UAE ($72). Relatively comfortably placed oil producing countries are just a few –Kazakhstan ($62), Azerbaijan ($59), Iraq ($55) Russia ($53) and Kuwait ($48).

The OPEC delayed a decision pending clarity on Russia’s stance. Reports say Russia has agreed to cut output by 200000 bpd. The Russians also seem to have mediated successfully between the Saudis and Iranians. According to reports, the Saudis were initially not agreeable to an exemption for Iran (although the US sanctions have already significantly reduced its oil exports.) The OPEC has now exempted Iran, Venezuela and Libya.

The details of specific quotas for individual countries are not yet known, but the bulk of the cut in output will have to come from Saudi Arabia. This may alienate Trump who has been blaming OPEC for rising oil prices and demanding low oil prices. On Wednesday, even as the OPEC oil ministers were heading for the meet in Vienna, Trump had tweeted, “Hopefully OPEC will be keeping oil flows as is, not restricted. The World does not want to see, or need, higher oil prices!”

A fortnight ago on November 21, Trump had tweeted on a triumphalist note: “Oil prices getting lower. Great! Like a big Tax Cut for America and the World. Enjoy! $54, was just $82. Thank you to Saudi Arabia, but let’s go lower!” To be sure, today’s decision by OPEC will draw Trump’s ire since his political interest lies in fuel costs falling at US gas stations. The OPEC has been in his crosshairs in the recent months.

In geopolitical terms, three things stand out here. First and foremost, when in June OPEC had agreed to increase the output heeding Trump’s urgings – with Saudi Arabia spearheading most of the surge (reportedly surpassing a record output of 11 million bpd in November – the Trump administration was preparing to reimpose sanctions against Iran, OPEC’s third largest oil producer.

The Saudis were fully on board Trump’s professed Iran strategy, which was to curb Iran’s production while ensuring additional oil supply in the market to make up for any shortfall. But what happened was that with Trump unilaterally giving ‘waivers’ to major importers of Iranian oil, instead of supply shortages pushing up the price, the oil market swung into oversupply. And the price collapsed by 30 percent during the past two-month period alone.

On the contrary, the Saudis are today not only cutting back production to ensure a rise in oil price, but OPEC is also exempting Iran from any cut in production. This hits Trump both ways – not only will oil price go up (it has already risen by $4 by Friday evening to $63 per barrel) but Iran will not suffer any loss of income.

Curiously, Saudis have acted in this fashion although Trump has defended the Saudi leadership despite a CIA assessment reportedly that Crown Prince Mohammed bin Salman was most likely involved in the killing of Jamal Khashoggi on October 2. There is already a campaign that Trump and his family would have business interests, which do not allow him to act against the Saudi regime.

On the other hand, what emerges is also the strategic autonomy that the Saudi regime enjoys in taking decisions in its national interests even knowingly that such decisions may alienate Washington. (See my blog Trump’s fawning over Saudi ties backfires.)

Secondly, what is truly extraordinary is that the Saudis have relented by separating their Iran policy from the OPEC decision today on oil production. The Iranians are jubilant that today’s OPEC decision works in their favor at a juncture when they are battling Trump’s sanctions. The big question is how Trump can rev up his sanctions policy against Iran’s oil exports if Saudi Arabia does not play ball. In fact, Trump’s entire strategy to reduce Iran’s oil exports depends critically on Saudi guarantee to make sure there is abundant oil supply in the market.

(Meeting of Russian President Vladimir Putin and Saudi Arabia’s Crown Prince Mohammed bin Salman meeting on the sidelines of the G20 leaders summit in Buenos Aires December 1, 2018)

Thirdly, without doubt, the Saudi-Russian axis has gained traction. This became evident when the Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin met on November 30 in Argentina and took a decision between the two of them on how to stabilize the oil market. What happened in Vienna today is that the OPEC+ ministers fleshed out the decision handed down to them by the Saudi and Russian leadership. Actually, the OPEC ministers took time out on Thursday even as the Russian energy minister Alexander Novak flew to St. Petersburg to take Putin’s instructions and returned to Vienna today for striking the final deal.

Quite obviously, all this underscores that a critical mass has developed in Saudi-Russian relationship based on an extraordinary level of mutual understanding. What will be keenly watched in the period ahead, therefore, is how the new alchemy transforms Russian-Saudi relationship on the whole, especially given the backdrop of cloud of uncertainty hanging heavily on US-Saudi ties at present. Suffice to say, today’s OPEC+ decision becomes a curtain raiser for Putin’s forthcoming visit to Saudi Arabia, which promises to be a defining moment in the Middle East politics.