01.02 Review

OPEC minus: Against the backdrop of rising oil production, OPEC+ has lost its leverage on the market, which threatens to break up the alliance between Russia and Saudi Arabia and to significantly reduce Russian oil revenues

The oil production cuts, which Saudi Arabia and Russia hoped would maintain their incomes amid natural declines in global prices, have not yielded the expected results. Confident production growth in non-OPEC+ countries, primarily in the US, has prevented prices from surging, even in the midst of the war in the Middle East, which has complicated shipments through the Suez Canal. As a result, Saudi Arabia's GDP contracted by 1.1% in 2023. The Kingdom has been forced to shift to an alternative strategy — increasing revenues by regaining market share lost during the days of voluntary cut of oil production. Now Saudi Arabia is increasing its supplies to China and India, taking advantage of the fact that already 'toxic' Russian oil has become more expensive to transport to Asia due to the Palestine-Israel conflict. The intensifying competition between the allies raises doubts about the unity of OPEC+. As a result, Russia, whose budget is based on the price of a barrel of Brent being $85, may face not only a decrease in actual oil prices, but also a simultaneous reduction in sales volumes.

Oil export revenues are a key factor in the Putin regime's ability to finance its war with Ukraine while maintaining domestic political stability. However, the OPEC+ strategy, primarily led by Russia and Saudi Arabia (which account for approximately 20% of global oil production), aimed at sustaining high oil prices through voluntary production cuts, is collapsing. Two months ago, Re:Russia highlighted the likelihood of such a development, given the slowing of global economic growth and, consequently, a reduction in oil demand amid increasing production by independent producers. 

The reduction of oil production in Saudi Arabia by 1 million barrels per day (approximately 10% of the current production of the state-owned company Saudi Aramco) over the past year has led the country into an economic downturn. In 2023, Saudi Arabia's GDP, nearly 40% of which is fuelled by oil sales, contracted by 1.1% (according to IMF data as of January 2024). This is the worst annual result among the world's 20 largest economies. In 2022, thanks to the sharp increase in global energy prices after the Russian invasion of Ukraine, Saudi Arabia was the leader in growth among developed and developing countries (+8.7%). Thus, the production cuts, which Saudi Arabia and Russia hoped would preserve income amid a natural decline in prices, did not yield the expected effect. Russia's income from exports also significantly decreased in 2023, according to the estimates of the Russian Ministry of Finance, which said that oil and gas revenues had fallen by almost a quarter, and assessments of the balance of payments published by the Central Bank (export revenues amounted to $423 billion in 2023, significantly lower than the $592 billion in 2022, but in line with the average annual export revenues of the decade before the war).

As of the end of the third quarter of last year, the price of a barrel of Brent was close to $100. It seemed that Saudi Arabia and Russia were achieving their goal. OPEC+ predicted that in the fourth quarter the oil market could face the most acute deficit in more than a decade. However this did not happen. The reduction in production in Saudi Arabia and Russia was offset by the increase in production in non-OPEC+ countries. The United States made the largest contribution (an increase of 1.5 million barrels per day in 2023, reaching 13.5 million), becoming the main beneficiary of the unsuccessful OPEC+ strategy and firmly securing the top spot among global oil producers. Iran also contributed (+0.9 million), along with Brazil, Guyana, and other Latin American countries (+0.6 million), according to January reports from OPEC+ and the International Energy Agency. As a result, oil has remained relatively cheap even despite the military conflict in the Middle East, which has complicated shipments through the Red Sea. The current price of a barrel of Brent is around $82. This is the same as the level at the beginning of 2022. Moreover, according to Bloomberg calculations, in order for Saudi Arabia to finance its government spending, it needs a barrel of Brent to cost $108.

At the next meeting of OPEC +, which is to be held in February, the production cut volumes agreed at the end of last year are not planned to be revised, according to Reuters, citing sources within the organisation. In addition, in late January, it became known that the state-owned company Saudi Aramco is scaling back an investment programme worth several tens of billions of dollars, through which it planned to increase its production capacity from the current 12 million barrels per day to 13 million. Currently, Saudi Aramco's production volume is only 9 million barrels per day. Essentially, Saudi Arabia is acknowledging that it will not be able to regain the market share it lost to American producers, as reported by Bloomberg.

The new configuration of the global market makes recent allies, Saudi Arabia and Russia, direct competitors in Asia. Due to the US and UK strikes on Houthi targets in Yemen (and the threat of retaliatory from their side), the cost of transporting oil through the Suez Canal and the Red Sea has risen sharply. At the same time, Russia accounted for two-thirds of all oil shipments through the Suez Canal in 2023, Reuters notes. Most of that oil was destined for India and China. According to experts interviewed by Reuters, transport costs for Russian companies have risen by more than $4 per barrel. For Saudi Arabia, which does not need to use the Suez Canal, this creates opportunities to increase its supplies to Asia.

And it is taking advantage of this opportunity, as indicated by data from the Vortexa service cited by Reuters. Over the past two months, Russia's share in supplies to China and India has fallen from 20% to 18%, while Saudi Arabia's share has risen from 15% to 16%. Additional challenges for Russian supplies arise from the intensification of pressure from sanctions. According to Kommersant, in December, not a single tanker carrying Russian oil was unloaded in Indian ports. The country's authorities explained this by the need to comply with the price 'cap' of $60. As a result, Iraq became the main supplier of oil to India, according to Kpler data.

The competition between Saudi Arabia and Russia in Asia raises questions about the unity of OPEC+. The last time a disagreement between the two countries occurred was in 2020 when, at the beginning of the COVID-19 pandemic, Russia refused to cut production. The ensuing price war contributed to the collapse of global prices from $65 to $42 per barrel. After that, the actions of the two countries took on a coordinated nature. Last year, OPEC+, while agreeing on production cuts, kept prices fairly high. Today, Saudi Arabia faces the opposite task — to increase revenues by regaining the market share lost during the period of voluntary cuts. This can be achieved primarily through the sale of 'toxic' and sanctioned Russian oil. In this case, unless new events shake the oil market, Russia, burdened by military expenses, whose budget is based on a Brent barrel price of $85, may not only face a decrease in actual prices for its oil to the 'cap' level and below, but may also face a simultaneous reduction in sales volumes.