Why Russia could ease the Gulf’s oil headache

The Opec+ countries have said that they will conduct “a gradual and flexible return” of 2.2 million barrels a day in production through until the end of next year. Saudi Arabia in particular has been gritting its teeth in holding back over 3 million bpd in spare capacity as it has watched while others – that’s you Kazakhstan – have flouted quotas.

In the meantime, the portents for easing more oil into the market have not been great: Brent is at only a little over $70/barrel and Chinese demand is lacklustre.

But help may be at hand – in the form of an unintentional contribution by one of the leading members of the Opec+ group. Russia may have difficulty in adding barrels, gradually or otherwise, into the market and in fact is likely to be able to export less crude.

Three years after the Ukraine invasion, Russia produces around 9 million barrels of oil a day, according to Reuters – but that is down from a high of around 11 million bpd in 2019.

Moscow has stopped publicising export numbers but Opec gives the call on Russian crude at 3.98 million bpd last year and 4.02 million bpd in the first quarter of this. India and China take the bulk of these exports.

But Russia’s refining capacity – the country has relatively few refineries and limited storage – has been curtailed by Ukrainian air strikes and its export capacity – it needs ships to get the oil eastwards – has been diminished.

How so? Russia has after all been allowed to keep selling oil at a price cap of $60/barrel in order not to drive up prices. And over the past three years the decline or demise of the Russian economy has been predicted but has not come to pass.

Analysts at The Bell, an independent economics newsletter, looked at the state of the Russian National Welfare Fund, a critical economic cushion, earlier this week. In an analysis is entitled: “No, Russia is not about to run out of money”, The Bell said that NWF’s liquid resources in yuan, gold and rubles were worth a healthy 3.39 trillion rubles ($39 billion) on March 1. Moreover, the authors point to an injection of $16 billion in – you guessed it – oil and gas revenues due to arrive in the summer.

In the meantime, the new administration in Washington is trying to coax a ceasefire commitment in Ukraine out of Vladimir Putin.

As part of the blandishments there is talk, as our columnist Frank Kane wrote this week, of the formation of a bloc of three: Saudi Arabia, Russia and the US as a kind of bigger, uglier Opec.

Frank cited a presentation by Jim Burkhard, S&P’s oil supremo, who told a panel at CERAWeek that Saudi Arabia, the US and Russia, which between them hold 40 percent of world crude markets, may be privately thinking of “an alliance” to control output and exports.

The thinking behind the alliance is at “an early stage” we are told.

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Back on planet earth, the Trump administration has been portrayed in some quarters as an uncritical supporter of the Russian regime. But this is not the case.

Last week the White House let lapse an exemption allowing Russian banks to use US payment systems for energy transactions. Moscow is thus cut off from dollar settlement. How, one wonders, will that $16 billion get to the NWF?

Previously, the new administration moved to sanction 180 vessels which are the main means of sending Russian oil to China and India. Hence the more limited export capacity. As our correspondent William Sellars noted in a piece on the possible re-opening of the Ceyhan pipeline, Tupras, the leading Turkish refiner, last month stopped buying Russian crude after the US announced new sanctions. This hurts.

So Russia’s critical oil sector is vulnerable and its economy is in trouble, if not on its knees.

If you believe that Putin has not yet achieved his war aims in Ukraine and will therefore not agree to a ceasefire or, if he does, it will be shortlived, then the Trump administration is likely to move to tighten measures against Russia. Soon.

And that will be good news for Saudi Arabia and other Gulf oil producers.