Oil-related Developments - March 2019

Oil prices: Oil prices rose on 4 March, buoyed by output cuts by producer cartel OPEC and reports that the United States and China are close to a deal to end a bitter tariff row that has slowed global economic growth. Brent futures were at $65.25 a barrel.

US West Texas Intermediate (WTI) crude futures were at $55.94 per barrel, up 14 cents, or 0.3 per cent.

Saudi-Russian cooperation to shape OPEC+: In February, the Saudis tried to create a new structure to regulate the oil market. The institution is expected to be formed on the basis of the 2016 Vienna agreement — a deal between OPEC and 10 non-OPEC countries (the so-called OPEC+) to temporarily limit their oil output to stabilize the oil market and ensure the growth of oil prices. Since 2016, this agreement has been extended several times and has partly managed to achieve its goals. However, the experience of the past two years clearly shows that, to impact the oil market, temporary measures are not enough.

Instead, there is a need for a more formal structure that would monitor the situation in the market and, when necessary, take practical steps to regulate the volume of oil production by its members to ensure the balance between supply and demand. In these circumstances, it was natural for Saudi Arabia and Russia, as informal leaders of OPEC+, to suggest the creation of such a new structure.

This idea was not well received by Iran and some other members of OPEC+. Tehran has since voiced its concerns that Moscow and Riyadh will dominate the new organization and ignore the interests of other players.

The Iranian leadership has reasons for being cautious about the new structure. The ongoing political and ideological confrontation with the kingdom makes Iran suspicious about organizations where Riyadh will have greater influence. In the past, Iran and Saudi Arabia represented the two different camps of OPEC and had differing views on the strategies the oil cartel should pursue.

During the late 1980s and until the mid-2010s, Saudi Arabia supported the idea that OPEC should secure its oil market share through affordable prices and extensive output. Iran, on the contrary, struggled to maximize profits by supporting decreased output. During the last 25 years, Tehran has only rarely agreed with Riyadh at OPEC, while the Saudi delegation has been much more effective at imposing its views on the other members of the cartel. As a result, the Iranian leadership has come to see OPEC as a Saudi-controlled entity.

Tehran also does not trust Moscow, another leader of OPEC+. As a result, Tehran sees the intensification of Russian-Saudi contacts in OPEC+ as the creation of a new unholy alliance against Tehran. Iran has already accused Russia and Saudi Arabia of attempting to use the opportunities created by sanctions to squeeze Iran’s oil out of the market.

According to Russian commentator Nikolay Kozhanov, currently, neither Russia nor Saudi Arabia are interested in taking steps that could harm Iran's interests. Previously, Moscow and Riyadh did not earn additional dividends from Tehran’s limited abilities to export its oil. Moreover, the Russian side has repeatedly said that it would try to help Tehran to promote its access to the oil market. Saudi Arabia too has in the past tried to avoid excessive politicization of OPEC, and has attempted to limit the impact of political conflicts between its members on the cartel's policies.

 

March 6, 2019

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About the Author

Ambassador Talmiz Ahmad joined the Indian Foreign Service in 1974. Early in his career, he was posted in a number of West Asian countries such as Kuwait, Iraq and Yemen and later, between 1987 and 1990, he was Consul General in Jeddah. He also held positions in the Indian missions in New York, London and Pretoria. He served as Indian Ambassador to Saudi Arabia (2000-03; 2010-11); Oman (2003-04), and the UAE (2007-10). He was also Additional Secretary for International Cooperation in the Ministry of Petroleum and Natural Gas in 2004-06. In July 2011, the Saudi Government conferred on him the King Abdul Aziz Medal First Class for his contribution to the promotion of Indo – Saudi relations. After retirement from the Foreign Service in 2011, he worked in the corporate sector in Dubai for three years. He is now a full-time academic and holds the Ram Sathe Chair for International Studies, Symbiosis International University. He has published three books: Reform in the Arab World: External Influences and Regional Debates (2005), Children of Abraham at War: the Clash of Messianic Militarisms (2010), and The Islamist Challenge in West Asia: Doctrinal and Political Competitions after the Arab Spring (2013). He writes and lectures frequently on Political Islam, the politics and economics of West Asia and the Indian Ocean and energy security issues.