HS Analysis | Saudi Arabia and Russia found each other at the oil rally

The oil producers’ decision to limit production shows how big a threat the Western oil sanctions are to the producing countries, writes HS’s financial reporter Jarno Hartikainen.

6.10. 19:22 | Updated 6.10. 19:55

Russia and western countries are fighting an energy war. Russia is blackmailing Europe by cutting off gas supplies, and Western countries are trying to stifle the money flows Russia receives from oil exports.

In December, the EU is going to ban the import of Russian crude oil, and together with the G7 countries, it is going to set a price ceiling for Russian oil. The price ceiling is meant to soften the EU’s previous decision to ban European insurance companies from insuring Russian oil supplies. It threatened to stop Russian oil supplies to the entire world. Now European companies can continue to insure deliveries if the buyer complies with the price ceiling.

No one knows yet how much Russian oil will leave the world market when the price cap comes into effect. Russia has threatened not to sell oil to entities that comply with the price ceiling.

The Western countries are therefore looking for a subtle balance, where the sanctions aim to reduce Russia’s oil income on the one hand and to ensure that Russian oil still flows to the world market on the other hand. The purpose is to curb the rise in energy prices due to sanctions.

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This is the context in which the Opec+ cartel of oil producing countries on Wednesday announced new production restrictions. Opec+ is an expanded assembly of oil-producing countries, which includes, in addition to the actual Opec countries such as Saudi Arabia, a number of partners outside the cartel, the most important of which is Russia.

If the Western countries expected a helping hand from Saudi Arabia and other oil producers, all they got was a wet rag.

Opec+ decided to reduce the oil production quota by two million barrels per day. The decision enters into force in November and is valid until the end of 2023.

Two million barrels corresponds to about two percent of global daily oil production, although the actual withdrawal from the world market is lower than this, as some oil producers, Russia above all, are already producing less than their quota. Actual production will decrease by an estimated one million barrels per day.

The decision ensures that there is less oil on the market to replace Russian crude and the price of oil remains high. In recent weeks, the price of Brent crude oil in the North Sea has fallen to the level before the start of the Russian attack, to less than 100 dollars per barrel, while in March the price was at its highest at 139 dollars. Oil is still exceptionally expensive.

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OPEC’s decision is apt to accelerate inflation, which threatens to push Europe into recession. Curbing inflation is not only an economic but also a political issue, as it may test European consumers’ support for sanctions against Ukraine and Russia.

Oil producing countries of course denied any political motives behind the decision and assured that they made the decision purely based on oil demand forecasts. According to them, economic growth is slowing down so that reducing production is justified.

Denial of political motives is natural, as Opec wants to be seen as the central bank of the oil market, which only guarantees market stability. A central bank certainly sounds better than a cartel.

However, in the middle of the energy war, the decision inevitably takes on a political tone. Until now, Saudi Arabia and other oil-producing countries have avoided taking a stand on the situation in Ukraine, but at least in the United States, Wednesday’s decision was interpreted as choosing a side.

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“Opec clearly sided with Russia,” the White House spokesperson stated immediately after the decision.

Read more: The US accuses major oil exporters of colluding with Russia

More however, the decision may have been about a threat that the oil cartel sees looming on the horizon.

The oil price ceiling planned by the G7 countries is a potential threat to other oil-producing countries as well. It portends that oil buyers will join forces against producers. If the buying cartel shows its strength against Russia, governments around the world could get the wrong ideas in their heads, which could potentially weaken the power of oil producers.

Many oil-producing countries are also authoritarian states that do not share Western countries’ understanding of human rights. Dismembered by the Saudi regime journalist and dissident Jamal Khashoggi in 2018. These countries are aware of the risk that one day they too may end up subject to Western sanctions. It is not in their interests to create the impression that sanctioning the oil trade is easy.

OPEC’s decision does not necessarily say so much about supporting Russia as defending its own interests. The interests just happen to be in the same direction.

#Analysis #Saudi #Arabia #Russia #oil #rally

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