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The new drastic cut in oil production benefits Russia

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The surprise announcement made on Sunday by several major oil-exporting countries of a reduction in production from May is presented as a “precautionary measure” to stabilize the market. According to several analysts, the decision benefits Russia and is further proof of the closeness between Moscow and Riyadh.

The surprise decision on Sunday by certain members of OPEC+ to drastically reduce their oil production, which caused a surge in prices on Monday, April 3, is a boon for Moscow and further proof of the solidity of the Russian-Saudi couple.

Why such a decision ?

The measurement was taken by eight members of the Organization of the Petroleum Exporting Countries and its allies (OPEC+), for more than a million barrels per day in total. Unlike the cuts implemented in the face of the Covid-19 pandemic, they preferred to act without going through the formal framework of the alliance which requires the agreement of everyone, namely the 13 OPEC countries and their 10 partners.

“We are witnessing the emergence of an agile OPEC+ group, capable and willing to take the lead,” said Bjarne Schieldrop, analyst at Banque SEB.

OPEC, created in 1960 and based in Vienna, aims to “coordinate the oil policies” of its members to ensure “fair and stable prices for producers”. In 2016, it formed OPEC+ by including new allies, including Russia and Oman.

It is precisely this argument of “stability” which was invoked by the alliance on Monday, when oil prices suffered greatly from the recent banking crisis in the United States and Europe. Fears of a global recession resurfaced and investors moved away from risky assets, such as commodities, in favor of safe havens.

For Stephen Innes, analyst at SPI Asset Management, “OPEC+ has decided to draw a red line at $80 a barrel of Brent (North Sea oil, editor’s note)”.

How does it comfort Moscow?

The prospect of sharp cuts immediately pushed prices up, especially since it is part of a context of strong demand with the economic reopening of China, the world’s largest importer of crude oil. This revival particularly benefits Russia, which “needs oil to finance its costly war in Ukraine”, recalls Bjarne Schieldrop.

Moscow has, in fact, been the target of numerous Western sanctions in reaction to its invasion of Ukraine, the aim of which was precisely to reduce the financial manna of black gold. For the SEB expert, the decision thus confirms that “Russia is still an integral and important part” of the OPEC+ group. And it further strengthens the Russian-Saudi couple, which the war has not shaken. On the contrary, note the experts, who observe this solid common front in the face of the turbulence of recent months.

Especially since now the two heavyweights of the alliance are on an equal footing: by significantly lowering its production, Saudi Arabia is approaching the lower volume sold by Russia under the effect of sanctions.

Why is this a setback for Washington?

The United States had already taken the previous reduction announced in October badly. This is “a new provocation for consumer countries, which are struggling because of high interest rates and high inflation”, note analysts from DNB.

The American authorities reacted Monday to the surprise cuts of production by judging them “not opportune”, by the voice of John Kirby, a spokesperson for the White House. He noted, however, that oil prices had fallen since the fall. “We focus on prices, not barrel counts,” he added.

If OPEC+ was born in response to the challenges posed by American competition, it is no longer afraid of shale oil produced in the United States, whose growth is running out of steam. The organization, which dominates the market with 60% of black gold exports to its counter, “has significant power to set prices” compared to the situation a few years ago, according to Stephen Innes.

On the diplomatic level too, “Saudi Arabia does not fear the United States”, which maintains complex relations with Riyadh and has lost its influence in the region, notes Neil Wilson, analyst at Finalto. “We are witnessing the dawning of a new era,” he says, as evidenced by the recent rapprochement between Iran and Saudi Arabia under the auspices of China. “The Saudis are doing what they have to do and the White House obviously has no say in it,” he sums up.

With AFP

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