14.09.23 Review

Oil to the Rescue: Saudi Arabia is Russia's key ally in its war in Ukraine

Global oil prices have reached their highest level since the beginning of the year. Brent crude is trading above $90 per barrel, while Urals crude stands at $75 per barrel, which is noticeably above the price cap. The voluntary cuts in oil production by Saudi Arabia and Russia have created the most acute supply shortage in a decade, with experts warning that prices may increase further in the short term. Both countries have a vested interest in high oil prices: Saudi Arabia needs to cover the expenses of Crown Prince Mohammed bin Salman's futuristic cities and football star ambitions, while Russia is seeking to mitigate the impact of sanctions, finance its war effort, and import essential components for arms production in circumvention of sanctions. However, the cap on oil prices is not a guarantee and primarily benefits Russian oil at discounted prices. In 2024, the International Energy Agency predicts that the reversal of voluntary production cuts is expected to shift the supply-demand balance towards a surplus. Nonetheless, reserves will remain at uncomfortably low levels, so that market volatility will persist in the short term at the very least.

In the fourth quarter of 2023, the global oil market is set to face the most acute deficit for more than a decade, according to a September report from OPEC+. The organisation estimates the deficit at 3.3 million barrels per day (bpd), following a 1.8 million bpd deficit in the third quarter. The International Energy Agency (IEA) also noted in their September report that there will be a noticeable excess of demand over supply. While demand was estimated at 240-250 thousand bpd in the first and second quarters of this year, it surged to 300 thousand bpd in the third quarter and is projected to reach 610 thousand bpd in the fourth. The primary driver of this growth in demand is the recovery of the Chinese economy. In 2023 as a whole, demand is expected to increase by 2.2 million bpd, reaching a record-breaking 102 million bpd. This aligns with the estimate given by the IEA in its August report. Meanwhile, 2023’s global supply is anticipated to grow by only 1.5 million bpd, reaching 101.5 million bpd, which would, nonetheless, also set a new record.

Global oil market supply dynamics, 2021-2023, mln bpd

Global oil prices have soared to their highest levels this year, driven primarily by a supply shortage as a result of production cuts by Saudi Arabia and Russia, two of the world's largest oil producers after the United States. According to data from the IEA, in July, Saudi Arabia was producing 9 million barrels per day (bpd), and in August, they cut their production by 100,000 bpd. Russia produced 9.5 million bpd in August for the second month in a row. According to the IEA's forecast, Russia may retain its leadership in oil production until the end of the year. Generally speaking, oil production by OPEC+ members has decreased by 2 million bpd this year. This reduction would have been even more significant had it not been for Iran's notable increase in production by 600,000 bpd. Moreover, the United States and Brazil, non-OPEC+ members, have also boosted their oil production.

The supply deficit continues to boost oil prices, with Brent crude already surpassing the $90 per barrel mark. Bloomberg suggests that Saudi Arabia is interested in pushing prices even higher. To cover government expenses and fund the personal projects of Crown Prince Mohammed bin Salman, such as the construction of futuristic cities and the acquisition of football superstars, some experts believe that oil prices will need to reach $100 per barrel.

High oil prices will allow the Kremlin to continue its strategy of mitigating the impact of sanctions, financing its military efforts, and importing necessary components for arms production while bypassing sanctions. In August, as the IEA reported, the average price of a barrel of Russian Urals crude was around $70, which is $10 above the price cap. In the first week of September, the average price of Urals crude had already risen to $75. In August, Russia exported a total of 7.2 million bpd, generating $17.1 billion in revenues, marking the highest export levels since October 2022. Thanks to rising oil prices, the monthly dynamics of oil and gas revenues have exceeded their baseline level (8 trillion rubles per year), according to the Ministry of Finance. However, total revenues for the first eight months of this year amounted to 4.8 trillion rubles, 38% less than 2022.

Experts from the IEA predict that the reversal of voluntary production cuts in early 2024 will shift the supply-demand balance toward a surplus. However, oil reserves will remain at uncomfortably low levels, ensuring market volatility in the short term at the very least. However, the IEA's long-term forecast remains unchanged: as Re:Russia has previously noted, the agency anticipates a 'peak oil' scenario by the end of the decade, after which global consumption will plateau.