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Russia has become a de facto member of OPEC in all but name

It is something of an unholy alliance, but Russia and Saudi Arabia are becoming ever closer allies in a graphic example of realpolitik.

Russia has become a de facto member of OPEC in all but name


It is something of an unholy alliance, but Russia and Saudi Arabia are becoming ever closer allies in a graphic example of realpolitik.

The 2 would probably be implacable enemies if their contrarian positions in Syria were any gauge - Russia is closely aligned with Iran in their support of Bashar al Assad, yet Iran is Saudi Arabia's public enemy No. 1 and only major rival in the Middle East.

But economics trumps almost all, and the 2's interests are certainly aligned in trying to reverse the damage done by Saudi Arabia's failed bid to squeeze U.S. shale drillers out of the market, as well as the corresponding glut of supply forcing prices to painfully low levels - painful at least for oil producers.

As the Financial Times observed in quoting RBC as saying, «Saudi Arabia and Russia are essentially now co-pilots of this operation (of restricting output to boost prices) and they've made it clear there will be no going back to chasing market share. ... It's a huge change from two years ago when Russia would not co-operate with OPEC and even questioned its relevance in the age of shale.»

The 2 agreed last week to not only extend but deepen production cuts for a further 9 months into 2018.

But not all agree with the International Energy Agency's prediction that the cuts will be enough to balance supply and demand later this year.

A resurgent U.S. shale market is adding rigs - 35 just last month for a total of 722 operational rigs by the end of May, according to the FT.

Although the rate of growth is slowing from a peak in November of last year, suggesting gradually falling prices are affecting decisions to open or re-open more marginal fields.

Ultimately, OPEC, Russia and U.S. shale producers will find an equilibrium.

U.S. shale producers are too disparate a group to act in a coordinated manner and will increase or reduce production purely on the economics of whether they can make money or not.

So regulating global supply and supporting prices falls to OPEC members and Russia.



Author: Stuart Burns


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