The oil market would have shrugged off five years ago any analysis indicating that OPEC and Russia could be working together. The historic rivalry between the main OPEC producers and the former communist Soviet oil and gas empire was still seen as a unbridgeable fact. US shale and a global financial crisis have changed this paradigm for good. After the emergence of US shale (oil) and the unexpected free-fall of oil prices, the so-called OPEC oil cartel and Moscow have become friends forever it seems. Saudi, Russian and Emirati energy ministers are stating as choir boys that there is an inherent drive in all parties involved to extend the current production cut deal indefinitely. OPEC Secretary-General Barkindo has already given his blessings for a possible long-term deal since months.

Still, the oil market was surprised again, maybe as a sign of still living in the past of most analysts, when Saudi minister of energy Khalid Al Falih and his Russian counterpart Alexander Novak stated that they are discussing the option of setting up a joint organization for cooperation between OPEC and non-OPEC countries. Long-term cooperation and more in-depth coordination are the main targets at present. Moscow and Riyadh have indicated that this new “organization” could see the light before the end of 2018. Novak indicated the last days that the main function would be to cooperate long-term, including the possibility of market monitoring, information exchange and if needed the implementation of some joint actions. Moscow again reiterated that Russia is not (yet) considering joining OPEC.

Even that officials are denying any possible new alliance, already dubbed ROPEC (Russia OPEC), the signs are there that both sides are considering it. The possible new (unofficial) organization could be a new step towards a controlling mechanism of the oil (and gas) supply side of the market. The answer to US shale is clear, market power is still in the hands of the old guard, but now with a new member, Moscow. Geopolitics are playing a major role in the current developments. The perceived retraction of US military and economic power in the Middle East, the unclear international strategy of US president Trump towards Syria, Iraq, Hezbollah and Iran, and the assertiveness of Moscow’s Tsar Putin, has opened up the doors for an Arab-Russian alliance of unknown magnitude. The latter is also being supported by the click between Putin and Saudi Crown Prince Mohammed bin Salman, who is being supported by Abu Dhabi’s leader Mohammed bin Zayed in this realignment. The fact that most OPEC countries have felt the negative effects of US shale, and the decision by the Washington Administration to allow crude oil and gas exports, has forced the hand of MBS and MBZ. Putin’s willingness to cooperate or even support OPEC’s market moves has only be very helpful.

A potential major strategic shift in the ongoing OPEC – non-OPEC production cut agreement is already in place. MBS has openly stated that they are going to discuss the set up of a long-term 20 years production agreement with Russia and others. The latter is officially meant still to reduce the still large volumes of crude oil and products in storage worldwide. A long-term agreement however is not anymore needed to counter possible high storage volumes for long. The new discussions are clearly meant to rearrange the market drivers and power players. Actively managing the global supply side is the underlying driver. A ROPEC approach would make this feasible and manageable. Other players are also being involved, as new producers in Africa or in the Arab world, such as Egypt and Bahrain, could be strategic players in the coming years too.

For OPEC it looks a slam dunk approach, as real in-depth cooperation with its former main rival Russia, and possibly several FSU producers such as Kazakhstan, Uzbekistan and others, will support a more stable market. Without having to really push for a full-fledged membership of OPEC, Saudi Arabia can now fully coordinate all with Moscow, as the majority of the oil cartel seems to have given the green light. If put in place, a de-facto ROPEC will be able to counter any possible destabilizing collapse in oil prices, like the one in 2015 and 2016. Based on the current success, as oil prices have recovered to around $70 per barrel, which is way above the $30 per barrel at the beginning of 2016, no real deal breaker is insight. Further curtailing of supply is now an option, but most probably not even needed as US shale oil and other production increases are not even able to counter still growing demand worldwide.

Are there threats on the horizon? When only looking at the normal OPEC and ROPEC approach, no real market fundamentals could be threatening the new deal. As long as demand is healthy, and due to lack of investments supply is still struggling, oversupply is not going to be a threat.

However, the demand side could be one major issue that ROPEC will need to reassess or change its overall strategy for. The current continuing growth in demand in China and India, supported by other emerging markets, could be hitting a ceiling if energy transition strategies collide with high oil and gas prices. Even that energy intensity of most products worldwide have gone down substantially, consumers are still watching the price of gasoline as a benchmark for behavior. Too high prices in the gas station could be a potential threat, as it could tilt consumer behavior further or sooner. A 20-year strategy at present needs to be considered to be extremely long. No real forecasts or foresights are able to predict demand around 2040. ROPEC will need not only to control or manage the supply side, but increasingly cooperate between members on how to lock demand in emerging markets. Continuing competition or outright price wars between OPEC members in China, Japan or India will maybe lead to market-share changes but not to a stable or growing demand for the long-term.

At the same time, supply and demand can be managed or dealt with if necessary. Cohesion within ROPEC is a big question. Saudi Arabia, Russia, UAE and Kuwait, can be considered to be on the same track. Iran, Iraq, Nigeria and Algeria, are free-riders able to tear apart ROPEC based on economic or geopolitical considerations. Tehran or Venezuela will be keeping a wary eye on the growing energy and economic cooperation between Riyadh and Moscow. Any potential threat to Moscow’s current pro-Tehran position by Saudi Arabia could lead to a direct crisis within ROPEC too. MBS-MBZ and Putin will still need to keep the Mullahs in Tehran at bay as they play still a crucial role. But sometimes, ROPEC could be getting support from unexpected corners too.
Trump’s upcoming decision on the JCPOA agreement with Iran will most probably take part of Iran’s oil market powers out of the connotation. Renewed sanctions, unilaterally done by Washington, on Iran’s oil-gas and investment sectors, will be a bone for Saudi Arabia and Moscow. A constrained upstream future for Tehran will reduce a supply threat for ROPEC’s leaders. After the Venezuela implosion, Trump’s Tehran decision could be the last brick needed to bring ROPEC to bloom for the next years.

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