As oil crashes, Saudi-Russia oil powerhouse faces test of unity

Crude has collapsed by more than 30% and Saudi Arabia is urging Russia to collaborate

The most powerful partnership in the global oil market, which rescued the industry from a deep slump, faces its toughest test yet.

Crude has collapsed by more than 30 per cent and Saudi Arabia is urging Russia to collaborate in cutting production again. Their alliance successfully revived markets two years ago, but it’s unclear if Moscow — now less dependent than the kingdom on high prices — is on board this time. “Whether or not Russia has the appetite to cut back oil production, we have to wait and see,” said Rainer Seele, chief executive officer of OMV AG, an Austrian company with significant investments in Russia.

At stake is not just the price of oil, but the political bond between President Vladimir Putin and Saudi Crown Prince Mohammad Bin Salman. Moscow will have to weigh bread and butter economic issues against the desire to keep expanding its influence in the Middle East.

Successful partnership

It’s two years since Saudi Arabia and Russia first set aside decades of commercial rivalry and ideological differences to forge a 25-nation alliance of oil producers, now commonly called Opec+. Through 18 months of joint production cuts starting in January 2017, the group cleared an oil glut and boosted prices, ending the industry’s worst downturn in a generation.

In June, with the cuts having done their job and US sanctions threatening to remove a big chunk of Iranian oil from the market, they changed course. Saudi Energy Minister Khalid Al Falih and his Russian counterpart Alexander Novak guided their allies to an agreement for a sizeable production increase.

Their partnership is under strain today because that decision backfired. As Moscow and Riyadh opened the taps, US shale drillers also pushed their production to unprecedented levels. Meanwhile, Trump’s threat to send Iran’s exports to zero proved to be bluster and his administration unexpectedly granted sanctions waivers to buyers.

Since October, Brent crude futures have plunged $26 (Dh95) from a four-year high. The international benchmark is now trading at about $60 a barrel, below the level required to balance the budgets of most members of the Organisation of Petroleum Exporting Countries.

Trump remains a wild card for the Opec+ alliance. He’s still putting pressure on the Saudis to help consumers by pushing prices even lower.

For now at least, the Saudis do seem to favour higher prices. Opec+ needs to cut supplies by at least 1 million barrels a day, Al Falih said in Abu Dhabi on November 12. The kingdom’s output has reached a record 11.2 million barrels a day this month, according to people familiar with the matter, but in December daily shipments will drop by about 500,000 barrels, the minister said.