2 August 2022

Timing is the key to the Gulf replacing Russian oil

Nikolay Kozhanov

US president Joe Biden’s recent trip to Saudi Arabia as a part of his Middle Eastern tour was not a failure as the Russian propaganda tried to present it.

On the contrary, the US and Saudi Arabia seem to come to certain terms regarding their vision of the global oil market prospects and, most probably, steps which can be taken by Riyadh to mitigate the negative impact of high oil prices on Western economies.

While the details of US-Saudi negotiations are kept secret, the oil market expects that on 3 August – when OPEC+ members meet to discuss production quotas – Saudi Arabia may try to persuade the cartel to increase supplies.

The precedent of the OPEC+ going above initially agreed production limits already exists as OPEC+ members already decided to increase their oil output in July and August above the initially promised 432,000 barrels per day (bpd).

Therefore the cartel is already accommodating interests of Western countries, which want to see a reduction in high oil and fuel prices negatively affecting their economic growth. This would also help Europe to increase its volume of hydrocarbons and reduce oil imports from Russia.

It is also notable the June OPEC+ decision came on the same day as the European Union (EU) adopted the sixth package of sanctions against Russia, one which imposes a partial embargo on Russian oil imports into the EU and undermines Moscow’s role as an important player in the hydrocarbon market.

In theory, these sanctions could create new opportunities for the OPEC members both in Europe and beyond. The sanctions say up to three million bpd of Russian oil has to leave the European market – and although exceptions are granted to Hungary, Slovakia, and the Czech Republic, their volume of oil imports from Russia accounts for only 250,000 bpd which is easy to replace with Middle Eastern supply.

Russia’s oil future in Asia is still in doubt

The initial Russia response was to reorient its oil export to Asia, thus naturally increasing competition with the Arab monarchies of the Gulf over their traditional consumer market. Asian countries have substantially increased maritime imports of discounted Russian oil which inevitably heated up the rivalry between Moscow and the Gulf oil producers who already consider Asia as their main market. But the issue really exists only in certain countries, such as India and partially China which has now replaced Saudi Arabi as the leading oil supplier to Moscow.

And Russian gains are determined by the unique economic situation and the high discounts provided by Moscow to its hydrocarbons – neither of which can be considered sustainable in the long run. Even Beijing is trying to balance its purchase of Russian oil with greater imports of Saudi crude.

The sanctions also weaken Moscow’s capacities as a producer and Russia officially expects its output to drop by 9.3-17 per cent while other estimates claim it could be about 20-30 per cent by 2023. Even before sanctions Moscow was facing issues with maintaining the current level of output, so a combination of a decrease in demand for Russian oil with Russia’s problems accessing necessary technology will only speed up the diminishing of Russian role at international oil markets and lead to decrease in its importance for OPEC+.

Dealing with Russia

Neither OPEC+ or its Gulf leaders are in hurry to either abandon Russia or pump substantially bigger volumes of oil to Europe. The former OPEC Secretary-General Mohammad Barkindo argued the group is unable to replace Russian oil, while UAE oil minister Suhail Mohamed Al Mazrouei indirectly accused the West of rocking the oil market.

This reluctance to openly undermine Russia’s interests in the oil market is determined by pure pragmatism. Even without active assistance to Europe, Putin’s war in Ukraine presents a rare opportunity for OPEC+ countries to enrich themselves as high oil prices not only replenish the financial reserves of the Gulf countries but also have a positive impact on macroeconomic growth indicators and increase their soft power.

Moreover, some of the Gulf countries unexpectedly became the ‘loyal’ clients of the Russian hydrocarbon and petrochemical sectors: thus, Saudi Arabia found it reasonable to increase the imports of discounted Russian fuel oil to meet seasonal demand in feedstock for its powerplants. The necessary agreement was signed with Litasco, trading arm of Russia’s Lukoil and, by June 2022, the share of Russian-produced fuel oil in Saudi imports reached 86 per cent.

It also makes no sense to declare an open market war against Russia for oil markets, given the general mood of Europeans to diversify supplies – Moscow will soon have no place in Europe and the Gulf countries will gradually take its place simply by regulating their pricing policy. The economic consequences of the Russian invasion of Ukraine have not yet really affected the Arab monarchies of the Persian Gulf, which remain much more concerned about oil market fundamentals, the impact of COVID-19 on China’s economy, potential oversupply, and the low growth rate of the world economy.

All these factors have a negative effect on oil markets and require maximum coherence within OPEC+, even with Russia’s weakened role, in order to readjust the cartel production policies to face the emerging challenges.

And it is also not clear how far the OPEC+ players can go to accommodate Biden’s demands. The Saudi leadership promised to ensure the adequate supply to the market but never explained what that means. And Saudi Arabia and the UAE – the only two OPEC+ members with viable free production capacities – can hardly agree to let them all into the market.

As well as all the other reasons, the OPEC also has a long tradition of keeping the reserve of spare capacities for the emergency cases. Analysts argue that whatever move is made by Saudi Arabia in the August meeting of the cartel it will be more aimed at the psychological impact to the oil prices rather than at changing the fundamentals determining them.

This would satisfy both the US and Russia. For Biden it will prevent oil prices from the further growth while the OPEC+ move will not really affect Russia’s capacities to sell it and receive high revenues.

Ukraine’s plight carries little weight in the Gulf

The war in Ukraine is essentially beyond the vital interests of the Arab oil-producing countries of the Gulf and there are few cultural and historical bonds to prompt them to feel the need to help. The invasion of Ukraine is as far away for the Gulf elites as the Syrian, Yemeni, or Afghan wars are for most Europeans.

At the beginning of the war, Kyiv tried to play a Muslim card by sending deputy foreign minister Emine Dzhaparova, a Crimean Tatar, to the Doha Forum – a global event organized by the Qatari government to discuss current international issues – to mobilize Arab sentiments in support of Ukraine. However, she was too unpersuasive and too Westernized to speak to the Middle Eastern audience in their language and obviously failed in her mission.

Under these circumstances, the need for Arab oil is pragmatically perceived by the Gulf monarchies as a lever of influence, a bargaining chip, or an opportunity to avenge for the US previous distancing from the Saudi and Emirati security concerns. This was seen when before Biden’s tour, the Saudi leadership essentially ignored US requests to raise production volumes.

No comments: