OPEC+ to Cut Oil Production as Russia, Saudi Arabia And Iran Make Win-Win Agreement

The idea that Iran and Saudi Arabia would agree on anything seems anathema to current trends in geopolitics, but when it comes to oil production, Iran and its fellow members of the de-facto Saudi led OPEC have just secured an important accord that allows the majority of OPEC’s members to cooperate on a production cut beginning in January which is designed to stabilise global oil prices. The new agreement in the OPEC+ format which covers all formal OPEC members as well as close non-OPEC partners including Russia, will see OPEC+ producers begin a production cut of 1.2 million barrels per day (bdp) starting at the turn of 2019. Implicit in the agreement are exemptions to the production cuts offered to Iran, Venezuela and the besieged Libya.

This new agreement helps to establish and re-affirm the following: 

There is no Russo-Saudi dispute 

Prior to the final agreement being drafted and ratified, there were mutterings in the press that the Russo-Saudi cooperation that had flourished throughout 2017 was somehow reaching a point where Moscow and Riyadh no longer saw eye-to-eye regarding production quotas. Perhaps strangely, many of these stories were written after Russian President Vladimir Putin and de-facto Saudi leader Crown Prince Mohammad bin Salman shared a visually impactful fraternal greeting at the G20 summit in Argentina.

Ultimately, as Russia and Saudi Arabia are among the world’s top energy producers with a similar interest in stabilising prices, the idea that any profound squabbles were occurring between the two energy giants always seem like a far-fetched attempt to force negative speculation against the kind of deal that the OPEC+ format has achieved. Clearly, such attempts were aimed at counter-balancing the price stabilisation mechanism just agreed in Vienna. Once again, OPEC+ has triumphed and critics of the format have failed to achieve their objective.

Saudi Arabia decides to work with Iran rather than risk calling Iran’s bluff 

Last week, Iran’s petroleum minister said that irrespective of what fellow OPEC members (along with OPEC+ partners) decide, Iran would refuse to cut production unless OPEC decided to collectively call on the US to drop its anti-Iran sanctions. While OPEC taking up the cause of defending Iran against sanctions was not ever realistically going to happen, rather than risk Iran making a dramatic exit from OPEC as Qatar just did, Riyadh instead decided to offer Iran an exemption to the new production cuts while offering a similar deal to heavily sanctioned Venezuela and the failed state that is post-2011 Libya.

This was a rare but promising move of pragmatic cooperation between Saudi Arabia and Iran that ultimately will give both rivals much of what they sought in terms of agreements on energy production. As Russia is a partner to both nations, it cannot be discounted that as the de-facto leader of the OPEC+ format, Moscow may have worked to broker this agreement behind closed doors.

All eyes on the GCC

Today marks the beginning of a new Gulf Cooperation Council (GCC) summit in Riyadh. The GCC’s unity continues to be threatened due to the fact that beginning last year, Saudi Arabia, the UAE and Bahrain (along with non-GCC member Egypt) cut all economic and diplomatic ties with fellow member Qatar. While Qatar is participating in today’s summit, its leader Sheikh Tamim bin Hamad Al Thani has prominently refused to attend.

With Qatar’s recent announcement that it will be the first Arab state to exit OPEC still ringing in Saudi ears, it remains doubtful that there will be substantial progress made between Qatar and the rest of the GCC. That being said, sustained regional diplomatic pressure on Riyadh from Qatar’s ally Turkey over the Jamal Khashoggi murder could in fact result in some early stage dialogue between Riyadh and Doha regarding some variety of detente.

The Russo-Saudi partnership is becoming more relevant to petro-politics than the Saudi-US partnership

While US President Donald Trump has made it clear that he will react negatively to any production cuts by OPEC, the close Russo-Saudi partnership means that Moscow’s geopolitical weight has become a prominent asset to Riyadh in terms of resisting pressures from Washington not to cut production. While the cost of petroleum is often a politicised issue in the United States, at this point, the most that the US can do to rectify what it considers the problem of the OPEC+ price stabilisation agreement, is to simply expand its domestic output. Notably, unlike the large non-OPEC energy giant that is Russia, the US refuses to cooperate in the OPEC+ format and even positions itself as a rival to OPEC+.

While Saudi Arabia is happy to listen to its US partner about such issues, a recent rebuke from Riyadh to Trump’s administration over the matter makes it clear that when it comes time to either cut or expand production, the Russo-Saudi partnership is increasingly more relevant than the Saudi-US partnership.

Conclusion 

While the US will not want to admit it, Russia is increasingly the gruel which holds the OPEC+ format together as Moscow has the unique ability to mediate in disputes between OPEC members. At present, it would appear that Russia’s presence helped de-escalate a would be disagreement between Iran and Saudi Arabia regarding production cuts. The result has been a manifold win-win where all parties to the recent agreement in Vienna have largely achieved their initial aim.

Now, with Saudi Arabia and Iran having put aside one of their many differences, it remains to be seen whether Qatar’s relationship with fellow GCC members will progress or continue to decline.

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