Kremlinology, oil traders and the future of OPEC+

By Javier Blas

It was unsurprising that Saudi Crown Prince Mohammed bin Salman was among the first foreign leaders to telephone Vladimir Putin this week to check on him after the mutiny that failed. The Saudi royal expressed his “relief at the successful de-escalation” and his “wishes of further security and stability.”

We don’t know how the drama that weakened Putin will play out in the coming days, weeks and months — but I’m certain of one thing: The Russian leader made OPEC stronger than ever. Remove him, and Saudi Arabia and the rest of the cartel would have a problem. And what the chaos showed Russians, and the oil market, is that they ought to start contemplating a Russia without Putin.

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Back in 2016, OPEC was a wounded animal. The shale revolution, which turned the US into the world's largest oil producer, had dented the market power of Saudi Arabia and its allies. Other non-OPEC nations, from Brazil to Russia, were free riding on the cartel’s efforts to keep oil prices higher than a free market would have dictated. Pundits rushed to write OPEC obituaries.

But in a meeting on the sidelines of the G-20 summit in Hangzhou, China, Putin and Prince Mohammed struck a deal that transformed the oil market. Overnight, Russia dropped decades of opposition to the cartel, joining in a new loosely defined alliance called OPEC+. It would take a couple of months for the deal to become public, but when it did, what emerged was a cartel rivaling its peak influence of the 1970s. The new combination directly controlled 50 per cent of the global oil market, up from about one-third before the deal.

It was a win-win pact cemented on money: Prince Mohammed needed higher oil revenue for his modernisation plans, and Putin needed petrodollars to finance his imperialist vision and overcome Western sanctions imposed after his invasion of Crimea two years earlier.

But joining OPEC was hardly celebrated in Moscow. Igor Sechin, head of state-controlled oil giant Rosneft PJSC, wanted a free hand to continue free riding on OPEC, rather than helping the cartel. Others in the petroleum industry were also skeptical, so were many in the ministry of finance and the central bank.

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Russia, in any case, didn’t join OPEC, as Saudi Arabia would have preferred, but signed a so-called “Declaration of Cooperation,” in December 2016 in Vienna. The declaration showed that the membership was more a handshake rather than a state project.

But nothing is forever — not even this bromance.

Regime change has historically triggered the biggest shakeups in OPEC. The fall of the Shah of Iran in 1979 and the arrival of Hugo Chavez in Venezuela in 1999 made it stronger. Putin’s departure would probably push it in the opposite direction.

If Putin were to go, it could mean the end of the OPEC+ coalition, not just triggering the exit of Russia, but also of the other nine countries that went along it. Together, the 10 non-OPEC members of the OPEC+ alliance pumped nearly 15 per cent of the world’s crude oil last month — not an insignificant amount.

What would follow is unclear, but Saudi Arabia showed the world in early 2020 that it’s prepared to start a price war, flooding the market and crashing prices, to force Moscow to remain onside. In that scenario, the fall of Putin would be extremely bearish, and the oil market chaos would spread to energy stocks, petrocurrencies such as the Canadian dollar and emerging sovereign bonds like those of, say, Nigeria.

But there’s another – bullish – scenario to consider. If Putin’s fall results in violence, a worst-case scenario could shut down — or seriously interfere with — production of as much as 10 per cent of the world’s oil supply. Worse, the outcome could be different warlords – or, say, oligarchs – controlling various parts of the country’s oil industry. That, it goes without saying, would be very bullish for oil prices.

Much like for spies during the Cold War, the savvy oil trader will need to master the art of Kremlinology.