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Saudi Arabia and Russia’s marriage of convenience

There have been some bumps in the road, but oil price continues to bind the countries together

Russian President Vladimir Putin, left, with Saudi Arabia's Crown Prince Mohammed bin Salman Reuters/Pavel Golovkin
Russian President Vladimir Putin, left, met with Saudi Arabia's then deputy Crown Prince Mohammed bin Salman in 2016 to agree to cooperate on global oil markets

The alliance between Saudi Arabia and Russia in the global oil industry may have begun as a marriage of convenience, but it has endured long beyond its origins in 2016.

It has survived some scares and mutual suspicions, and must be credited with the recent recovery and current surge in crude prices.

When the two countries signed the Declaration of Co-operation in Vienna in December of that year, it was the most visible sign of a new relationship between the two countries that had been bedevilled by decades of suspicion between “godless” Soviet communism and the Islamic kingdom, Saudi support for the Muslim resistance in Afghanistan, and disdain in Riyadh for the chaos and instability of the first post-Soviet decade.

Most important of all was the fact that Russia – despite its status as a leading crude producer – had remained outside the Opec organisation, in which Saudi Arabia was the biggest and most influential member.

Saudi Arabia’s role as a swing producer aiming to balance global oil output, with the unstated ambition to ensure optimal crude prices, was at risk from Russia’s desire to maximise revenue through high output at the best price possible.

What brought the two together in 2016 was the threat from the US shale industry.

For most of the previous decade the shale producers had been deploying vast financial resources and clever new technology which led to a boom in US oil production.

America had become virtually self-reliant in energy and reduced demand for oil from the next two biggest producers – Saudi Arabia and Russia.

By early 2016, Brent crude – having been above $100 a barrel for most of the preceding five years – was trading at $25 in a world suddenly awash with American oil.

The inclusion of Russia in Opec+, and Moscow’s agreement to production cuts along with the other members, immediately led to a price improvement. By October 2018, Brent was back above $80 a barrel.

It stayed in a $70-$80 band for the next couple of years, but by March 2020 – when the ravages of Covid were becoming apparent – the oil price was falling fast, and Saudi Arabia decided drastic action was needed.

It suggested big cuts, which the Russians initially resisted, precipitating a price war between the two.

Saudi Arabia massively increased production and cut its official selling prices in a demonstration of shock and awe.

By April that year Moscow had had enough, and took part in a globally orchestrated round of cuts claimed as a victory by US President Trump, who had used his good relations with both countries to help achieve the biggest oil cut in history – 10 million barrels a day – from Opec+ producers.

The short-lived battle left a nasty taste in Moscow. One Russian oil executive compared the deal which ended the price war to the treaty of Brest-Litovsk, the humiliating pact forced on the young Bolshevik regime by Germany in 1918.

The new relationship within Opec+ survived this potential flashpoint largely thanks to the increasingly close alliance between the Saudi government and President Putin.

Prince Abdulaziz Bin Salman, the Saudi energy minister from September 2019, and Alexander Novak, the Russian deputy prime minister with responsibility for Opec+ policy, enjoy a good working relationship.

The proof of the pragmatic efficacy of the Saudi-Russia alliance lay in the oil price, which recovered from the depths of April 2020 to jump back above $100 a barrel when Russia invaded Ukraine in February 2022.

Riyadh’s self-declared stance of “neutrality” in the war has been a big factor in the ability of the Opec+ group to steer output and prices in the right direction.

Saudi Arabia condemned the US-led price caps and sanctions on Russian oil almost as loudly as the Russians did, claiming that they would distort global crude markets.

There were some signs of impatience in Riyadh earlier this year, when it seemed as though Russia was lagging on promised cuts, as Saudi Arabia reduced its output to 9 million barrels a day – the lowest level for many years, inflicting some pain on the Saudi economy.

Now that appears to have been smoothed over, as Moscow cuts materialise – even though some traders believe they have more to do with lack of refinery capacity than to adherence to Opec+ policy – and the oil price looks set to test the $90 a barrel level in the near future. Some analysts are looking at $100 a barrel by the year end.

Saudi Arabia will decide this week whether to roll its own cuts over into the month of October, possibly in sync with Russia, at a meeting of Opec+ officials.

The oil price war of early 2020 seems a long way off.

Marriage of convenience it may be, but the Saudi-Russia oil alliance shows that such arrangements may prove to be long-lasting and effective – as long as both parties find them convenient.

Frank Kane is Editor-at-Large of AGBI and an award-winning business journalist. He also acts as a consultant to the Ministry of Energy of Saudi Arabia