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Home World International

Putin’s war in Ukraine could break the OPEC+ Alliance

February 28, 2022
in International, World
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Putin’s war in Ukraine could break the OPEC+ Alliance
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The OPEC+ cooperation is facing a possible breakdown following Russia’s military invasion of Ukraine.

Russia’s aggressive military moves towards Ukraine will have a negative impact on the oil market cooperation between OPEC and Russian-led non-OPEC members. The success formula of Riyadh-Moscow-Abu Dhabi is in serious trouble as Western powers will be putting Saudi Arabia, Abu Dhabi, and others, under severe pressure to break up their strategic cooperation with Moscow.

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The growing economic, financial and strategic military cooperation that has been built up the last couple of years between mainstream Arab power players, especially Riyadh, Abu Dhabi, and non-OPEC member Egypt, with Moscow is now in jeopardy. Officially, Arab countries are not being asked to protest against Putin’s Ukraine invasion, but behind closed doors, the topic will be put on the table for sure. Washington, Brussels, London, and Paris will not be willing to have a major block of energy producers continue to work with Putin. The next couple of days could be crucial for OPEC+’s future, especially if Putin is continuing his war with Ukraine.

At present, statements coming from the Arab world are very diplomatic, calling for a major de-escalation or diplomatic moves. Looking at the still struggling Western response to Putin’s invasion of Ukraine, Arab countries still have some room to maneuver. However, if Washington, Brussels, and London are getting their act together, politically and militarily, choices will have to be made. Western governments will be willing to take a long-term strategy towards the MENA region, based on their vast links in energy, investments, and geopolitical assets, but there will be less room to allow Moscow to find support in key-Western allies in the MENA.

For the two main OPEC leaders, Riyadh and Abu Dhabi, it will be a very tight rope to walk. Part of their strategic control of oil and gas markets during the last few years was based on cooperation with Russia. Moscow’s influence in other FSU countries to stick to the production pact has been playing a pivotal role. While the Ukraine crisis is partly a major financial boon for Arab oil and gas producers due to rising crude prices, OPEC strategists now need to assess the ups and downs of continuing this partnership.

Already, OPEC+ needs to tackle a number of problems. One major issue is the lack of spare production capacity in general, as some OPEC producers are already unable to keep up with their own quotas. While OPEC+ has stuck to their known monthly production hikes, real output levels are lagging behind, reflecting a 600,000 bpd quota shortfall. In the next few months, this number is expected to increase further. A lack of investment, declining field production, and lagging oil infrastructure are the main causes.

Russia, as one of the main OPEC+ powers, is also facing some production issues. Some analysts already have indicated that Russia’s spare capacity is now below 300,000 bpd. Moscow is currently producing around 10.8 million bpd, but should be producing close to 12 million bpd according to the OPEC+ agreements. If it fails to reach these numbers, Moscow’s influence is under pressure in the alliance.

Taking the production quota into account, while global crude prices are high, a potential breakup is not going to be very hard. Especially if Saudi Arabia and Abu Dhabi will be the only ones with extra spare production capacity.

Geopolitically, the integrity of OPEC+ is very important. In contrast to the 20th Century or the first part of the 21st Century, there is more at stake lately. Riyadh, Abu Dhabi and also Egypt, have become weary of the lack of commitment of Washington as a military and economic partner. Moscow and Beijing have been filling up the gaps. Arab sovereign wealth funds are increasingly investing in Russia, China and Asia, while Russian investments in ports and industrial zones, such as along the Suez Canal, have a political impact too. At present, no Arab country is willing to make a clear choice between the West and the East.

Choosing to back the West in the Ukraine crisis, or supporting economic and military sanctions on Russia and its cohorts, is however a bridge too far. Other Arab and non-Arab members of OPEC+ are also not yet willing to sanction Moscow. Putin’s strategic moves during the last decade have severely eroded Western influence in the region, and Moscow is now reaping the benefits.

At the same time, Arab powers are also still keeping an eye on the Iran JCPOA discussions, and the position that China is taking towards Moscow. For most Arab oil producers, the Dragon-Bear developments are more important, at least on the surface. A breakup of OPEC+ is currently an option without a real risk for the Arabs. A potential energy sanctions regime on Russia isn’t completely out of the question.  Riyadh and Abu Dhabi will for sure be coordinating any moves with Washington, London or Brussels, but will have a direct line to Beijing too. China’s stealth moves at present will not influence geopolitical decisions during the coming months, but could also have an impact on the future of OPEC+. Some could argue a weaker OPEC+ is to the advantage of Beijing, as Moscow will be more willing to increase flows to China.

Analysts should be not looking the next couple of days at crude oil prices or official statements made by OPEC+ officials. The main focus should be on the body language shown on March 2, when OPEC will be meeting again. The same scenario as at the Third Summit of OPEC Heads of State and Government in Riyadh 2007 could play out. A breakup of the OPEC+ bromance is an underestimated possibility.

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Source: Oilprice
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