Putin has Opec over a barrel on oil price

Opec is learning the dangers of doing deals with the Kremlin. The cartel depends on extending its alliance with Russia to keep restricting oil supplies if it stands any chance of engineering a quick rebound in prices. But President Vladimir Putin now has its Middle East kingpin Saudi Arabia over a barrel and can name his own terms.

Brent crude has collapsed by almost 15pc since April, briefly falling below $60 a barrel this week. Good news for consumers, but bad for Opec’s petrodollar economies led by Saudi Arabia, which wants the group and its allies to extend production cuts at least until the end of the year.

“On the Opec side a rollover is almost in the bag,” said Saudi oil minister Khalid al-falih, trying to reassure the market ahead of meeting his Russian counterpart. “The question is to calibrate with nonopec.” This primarily means Russia. Moscow can drive a hard bargain if it wants. Its diverse economy and flexible currency can better absorb the blow of a tepid oil market and can handle a low of $40 a barrel if required. A bigger concern for Moscow and its major producer Rosneft is the potential loss of market share to the US, which has leapfrogged Russia to become the biggest producer of crude.

“We have certain disagreements, linked to a different understanding of the fair price,” warned Putin.

Without the constraints of Opec, Russia could easily exceed its current output of 11.1m barrels per day. In return for continuing his co-operation

with Opec and Saudi Arabia, Putin may insist Russia has more leeway to increase output. This could ease pressure from powerful figures such as Rosneft’s chief executive, Igor Sechin.

However, Russia also has a strong diplomatic incentive to maintain the alliance. The Kremlin has built a substantial political and military presence in the Middle East since its intervention in Syria. Partnering with Opec has added economic clout to its formidable influence in a region which provides a quarter of world crude.

Russia could also ask for more investment from Opec’s Arab members. This could include Saudi Arabia investing in a liquefied natural gas project in the Arctic and committing to buying Russian LNG. The UAE has also cranked up its presence in Russia, buying into oil fields and a fitness chain.

“Russian corporates for their part are once again expressing displeasure about being forced to rein in output,” said RBC Capital Markets’ research team led by Helima Croft. “However, given that Vladimir Putin has the final word on the Opec decision – and he has derived significant soft power benefits from being in the deal – we believe that Russia will ultimately sign on for an extension.”

For Saudi Arabia, keeping Russia onside is vital. With the UAE, it is effectively fighting a proxy war with Iran in Yemen – Russia’s help in isolating the Islamic Republic is vital. Iran is also acutely aware of Russia’s growing influence and Tehran has opposed a Russian request to delay Opec’s next meeting until early July. If Saudi Arabia wants a deal this will probably mean it will have to continue shouldering the majority of the 1.2m barrels per day of cuts already in place.

Russia could also argue there is no need to panic about prices: America’s trade disputes with China and Mexico have weighed on the market, counterbalancing significant concerns over geopolitical tensions with Iran. Sanctions blocking Iran’s oil exports failed to generate a feared spike in the market and there are signs US shale producers are feeling the pain of lower prices. Oil prices are expected to rebound towards $80 per barrel by the end of the year as tougher fuel rules imposed by the International Maritime Organization outweigh concerns over rising stockpiles.

“Oil markets should soon hit a new stride,” said Chris Midgley, global director at S&P Global Platts Analytics. “We see major crude stock draws starting in June on the back of a strong recovery in refinery activity.”

Given the strategic benefits of his Opec alliance, Putin will probably continue to play along with its production cuts. However, the price of keeping Russia at the table keeps rising.

‘The Kremlin has built a substantial political and military presence in the region’