The world oil market remained balanced thanks to the alliance between Russia and OPEC

Russia and OPEC countries have been in the same boat since 2017. Then the participants in the deal to reduce production were the countries of the oil cartel plus another 10 exporting states, led by Russia. The new alliance became known as OPEC+. Such an alliance was necessary to gain the necessary weight in the world oil market.

“When OPEC was created, its members accounted for more than 50 percent of world oil production. When they reduced or increased production, this immediately affected world prices. But by 2015-2016, their total production was only within 40 percent of the global one,” said “RG” leading analyst of the National Energy Security Fund Igor Yushkov.

Therefore, OPEC + was born, which accounts for about 60 percent of world production. The addition of Russia played an important role here, because we produce about the same amount of oil as the informal OPEC leader Saudi Arabia. Together we have the opportunity to influence the global market, the expert continued.

There are three main stages in the short history of OPEC+. The first is from 2017 to 2019, when we managed to overcome the consequences of the 2014-2015 crisis. The second stage began in the spring of 2020, when the pandemic led to a collapse in demand in the oil market, and the OPEC + countries reduced production by 9.7 million barrels per day. The third stage is connected with the events of 2022 and the new reduction.

And if the first two times the oil-importing countries generally agreed with the decisions of OPEC +, now the situation is completely different, said Aleksey Belogoriev, Deputy Director for Energy at the Institute of Energy and Finance. “After the production cut in November 2022, we can say that political overtones appeared in the actions of OPEC +. Thus, exporting countries oppose attempts at non-market regulation by the United States and other states,” he told RG.

Recall that in early December 2022, the G7 countries, the European Union and Australia set a price ceiling for the purchase of Russian oil transported by sea at $60 per barrel.

It should be taken into account that Russia is the second largest supplier of oil to the world market. Therefore, when Western states began to think last year about limiting exports from Russia, they began to call on other oil-producing countries to increase the supply of energy resources. OPEC played a key role in this.

OPEC countries oppose attempts at non-market regulation by the US and other states

However, hydrocarbon exporters pursued their own policy. After boosting production in July, the OPEC+ alliance went for a much bigger cut from November, by 2 million bpd. This decision was, among other things, a step towards reducing the effectiveness of introducing a price ceiling for Russian oil, Alexei Belogoriev believes. According to him, the OPEC+ countries did not support the US and European restrictions on Russia, because they themselves are afraid of such sanctions.

“Many of them have rather tense relations with the United States, including Saudi Arabia. And everyone understands that if the sanctions mechanism is successful, then it can be applied to other countries at any time,” the expert explained to RG.

However, in addition to the political, there is also an economic aspect, he notes. Since 2014, the oil industry has been severely underfunded. Approximately a third of investment in exploration and production is missing. As a result, there are virtually no producers on the market that could replace Russian oil and oil products.

Of the 2 million bpd cut since November, Russia accounted for 526,000. However, since March, our country has gone to an additional reduction in production by another 500,000 barrels per day. According to Deputy Prime Minister Alexander Novak, this should contribute to the restoration of market relations.

This was a unilateral step by Russia that did not impose any obligations on OPEC+ partners. However, they did not stand aside – in early April, some members of the alliance announced that they would also further reduce their production from May. By the same amount as our country (500 thousand barrels per day), Saudi Arabia reduces production, by 211 thousand – Iraq, by 144 thousand – the United Arab Emirates, by 128 thousand – Kuwait, etc. In total, OPEC+ production is reduced by 1.66 million barrels per day.

“The interests of Russia and other countries – oil exporters at the moment coincide, because the reduction in production in November last year and now meets the economic interests of the OPEC + countries themselves,” Igor Yushkov noted. generally leads to lower world oil prices.

Russia produces about as much oil as OPEC leader Saudi Arabia

There were other objective reasons as well. “According to the results of the first quarter of 2023, the demand for oil turned out to be lower than world supply. Therefore, the reduction of OPEC + production since May is an objective necessity and will help” clear “the world market of excess supply,” Associate Professor of the Faculty of Marketing and International Cooperation of the Institute of Management told RG and Regional Development of the RANEPA under the President of the Russian Federation Tamara Safonova.

The reduction in OPEC + oil production has already adjusted forecasts for 2023 by about 0.4-0.5 million barrels per day towards a deficit, Igor Galaktionov, an expert on the stock market at BCS World of Investments, told RG.

Meanwhile, Western sanctions, although they did not reduce the volume of Russian oil supplies, caused a noticeable change in export routes. For many years, Europe has been the main destination for hydrocarbon supplies from our country. But due to the restrictions imposed, exports began to actively reorient towards the East last year.

This year, Russia will redirect 140 million tons of oil and oil products from Europe to Asia, Alexander Novak said. As a result, approximately 80-90 million will remain in the western direction. Last year, our country has already redirected 40 million tons of oil and oil products from the West to the East.

The main buyers of Russian hydrocarbons today are China, India and Türkiye. It follows from the April OPEC report that in February our country became the largest supplier of oil to China and India. Russia provided 19 percent of China’s total oil imports, more than Saudi Arabia (14 percent) and Iraq (12 percent). The share of our raw materials in India’s oil imports is even higher – 38 percent.

The share of Russian oil in the energy balance of China and India will grow, especially in China, with which Russia shares a common infrastructure, said Natalya Milchakova, a leading analyst at Freedom Finance Global.

“It is cheaper for China to buy oil from Russia than in the Middle East, and even more so in the United States. In addition, both China and India are attracted by the opportunity, as BRICS partners, to pay for deliveries in national currencies instead of the dollar,” the expert said. Turkey is also a major buyer of Russian oil; recently, the first deliveries were made to Pakistan.”

The advantage of this reorientation to the East is that we were able to maintain export volumes. “Most of what Europe bought from us, we now send to India – about 1.6 million barrels per day, and exported to Europe 2-2.3 million barrels,” said Igor Yushkov.

However, according to him, such cooperation has its price. It was possible to quickly change direction due to the fact that they began to give a big discount on Russian oil. At its peak, it reached $34 per barrel. And in order to reduce the size of this discount, you need to diversify supplies, find new customers and increase competition.

Photo: Infographics “RG” / Alexander Chistov / Mikhail Kalmatsky

Source: Российская газета by

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