OPEC Has a New Best Friend: Russia

Putin has helped resolve conflicts within the cartel, giving the country considerable influence over oil markets

When the Organization of the Petroleum Exporting Countries met in Vienna in December, it was in danger of imploding.

Oil prices had plunged. Member states Iran, Venezuela and Libya were refusing to cut production. Qatar had quit. And U.S. President Donald Trump was pressuring Saudi Arabia to keep prices low.

With negotiations teetering on the brink of failure, rescue came from an unlikely place—Russia, which isn’t even an OPEC member. President Vladimir Putin agreed to cut Russian oil production in league with OPEC, provided that Iran was allowed to keep pumping.

The degree of acrimony that pervaded that critical meeting, and the critical role Russia played in resolving the crisis, hasn’t previously been reported. What happened behind closed doors in December was a pivotal moment in Russia’s transformation from a nation that didn’t cooperate with OPEC at all to one that has become an indispensable partner.

Saudi energy minister Khalid al-Falih recently joked that he talks more with his Russian counterpart Alexander Novak than with some of his colleagues in the Saudi cabinet. “We met 12 times in 2018,” he said of Mr. Novak at a news conference in March.

At the next OPEC meeting, scheduled for May, Russia and Saudi officials will discuss whether to formalize what has been until now an temporary alliance.

For decades, the U.S. has embraced Saudi Arabia as one of its close geopolitical allies, selling it arms and encouraging its role as a stabilizing force in the Middle East. In exchange, Washington has come to expect a stable supply of oil to global markets to help damp price spikes and to prevent harm to the U.S. economy.

With its new ally in Russia, Saudi Arabia is no longer beholden only to Washington.

Under Mr. Trump, the U.S. has altered its longstanding, hands-off approach to the cartel. Mr. Trump has repeatedly tweeted for OPEC to boost output to drive oil prices down, and he has phoned the Saudi government directly asking the kingdom to open the taps.

“The United States-Saudi Arabia relationship plays a critical role in ensuring Middle East stability and maintaining maximum pressure against Iran,” said a senior Trump administration official. “The U.S.-Saudi relationship remains strong.”

The murder of dissident journalist Jamal Khashoggi at the Saudi consulate in Turkey last October created a fresh rift between the Saudi kingdom and the U.S.—and provided an opening for Russia to insert itself further into OPEC.

.. Oil prices had cratered in 2016 and didn’t look likely to rebound. The three men needed to orchestrate a deal to reduce crude output to lift global prices. Russia and OPEC agreed to cut production.

By the middle of last year, crude was soaring again, thanks to lower output from OPEC and Russia and renewed prospects for global economic growth. By the end of the year, however, amid a U.S.-China trade battle, the world’s economic outlook was dimming.

As the December OPEC meeting loomed, oil prices had plunged some 30% in six weeks. The Saudis needed unanimous agreement on proposed production cuts to shore up prices. Iran, already hobbled by U.S. sanctions that began in November, was reluctant to curb its output. Libya and Venezuela, with domestic troubles of their own, also were holdouts.

With the cartel about to meet in Vienna, Qatar, Saudi Arabia’s neighbor in the Persian Gulf, shocked global oil markets by announcing it was leaving OPEC. It was among a small group of member countries that felt overshadowed as the Saudi-Russia alliance grew stronger. OPEC has become “basically all about what [Prince Mohammed] and his buddy Putin want,” says a Qatari official.

.. When Mr. Falih asked Iran to join the collective production cut, Iranian oil minister Bijan Zanganeh rejected the demand and blamed Persian Gulf countries for replacing Iran’s sanctioned oil. According to the people familiar with the conversation, he pointed his finger at Mr. Mazrouei, the Emirati minister in charge of the meeting, and said: “You are the enemy of my country.” Mr. Zanganeh then threatened to suspend Iran’s membership in OPEC, these people said. Spokesmen for the UAE and Saudi Arabia’s energy ministries couldn’t be reached for comment.

 .. Mr. Novak acknowledged that Russia would benefit from the cartel’s cuts. “We need $60 a barrel and we are under sanctions” from the U.S., OPEC officials recall him saying.When Mr. Falih re-entered the OPEC meeting room, he was beaming.

The coalition began curbing output in January. Oil prices have risen 30% since the beginning of the year, their best annual start since the early 1980s.

Saudi Arabia says it has trimmed more than it promised. Russia had pledged to curb production by 230,000 barrels a day, but in March it had slashed daily output by just 120,000 daily barrels, according to OPEC and Russian officials.

Saudi officials say Riyadh is willing to overlook Russia’s shortcomings because it needs support on the international stage. “We cannot afford to lose them,” says one Saudi official.

The Flaw in Trump’s National Security Tariffs Logic

Levies don’t go far enough to eliminate reliance on foreign steel and aluminum, suggesting what’s really at work is plain old trade protectionism

.. You can’t make aluminum without bauxite, yet the U.S. is completely dependent on imports for bauxite; the last domestic mine closed nearly 30 years ago.

the U.S. has less than half the iron ore reserves of Russia and China “since we have been using up our iron ore at a substantial rate for more than 100 years” and U.S. ore has a much lower iron content than theirs. Stimulating domestic production via import tariffs, he said, will speed up the depletion of those reserves.

.. In fact, punishing trading partners can increase national security risk, which Mr. Horlick considers another lesson of the oil saga. After Eisenhower exempted Canada and Mexico from the quotas, Venezuela asked for the same, noting it had been a reliable supplier during World War II and hadn’t nationalized its industry, as Mexico had.

.. Venezuela’s oil minister went to Washington to propose a Western Hemisphere system under which Venezuela would be guaranteed a share of the U.S. market.

When he got nowhere, he traveled to the Middle East and helped found OPEC, which embargoed the U.S. in 1973.

How Trump Can Harness the U.S. Energy Boom

The embrace of new technologies to extract oil and natural gas at an unprecedented rate has transformed one of America’s enduring vulnerabilities into a strategic asset. Thanks largely to fracking — hydraulic fracturing of rock — the United States is now the largest producer of oil and gas combined in the world. America consumes large quantities of energy, so this expanded production has not yet made the country energy independent. But it has greatly decreased its dependence on foreign energy: About a decade ago, the United States imported nearly two-thirds of the oil it consumed; that percentage is now closer to one-fifth.

..  an improved trade balance and a stronger economy. The boom has also improved the country’s sources of soft power, in part by underscoring America’s enduring edge in innovation and ingenuity.

.. American producers of oil from shale rock have introduced a new business model to the scene: Small investments in exploration and production can bring oil to the market quickly. This weakens OPEC, by making it more difficult for its production cuts to result in sustained increases in oil prices. For the first time in more than a century, the market determines the price of oil with much less influence from any cartel, commission or band of big oil companies.

.. The energy boom has also weakened many of America’s competitors, particularly Russia, by both decreasing its revenues and reducing its ability to use its energy resources as a political cudgel.

.. The boom also expands opportunities for the United States to forge new partnerships. For instance, given China’s growing dependence, and America’s waning reliance, on Middle Eastern oil, Beijing may be more likely to work with the United States to stabilize that part of the world. Such changes put America in a stronger position to reinforce the international order.

.. Many non-energy policies of the Trump administration undermine the energy boom and all its potential advantages.

.. On climate, Mr. Trump’s pledge to withdraw the United States from the Paris agreement could also hurt the American energy boom. Natural gas stands to gain as the world takes strides to tackle climate change: As countries transition to more sustainable energy, they often move away from coal to natural gas. American natural gas exports could benefit from this transition — but not if countries like China and India also weaken their commitment to tackling climate change and drag their heels in curbing coal consumption.

.. Mr. Trump’s talk of retrenchment overseas has made friends and foes nervous about America’s willingness to continue to use its vast sea power to maintain open shipping lanes. Over half of the world’s oil supply and a growing percentage of the natural gas it consumes is transported through these waterways.

.. Mexico is by far the largest foreign consumer of American natural gas — a trend that will increase with recent Mexican electricity reforms. Yet President Trump’s talk about a border wall has spurred a revival in the presidential candidacy of Mexico’s own populist, Andrés Manuel López Obrador, who is committed to reversing these and other energy reforms. That would not only shrink the largest market for American natural gas but would also dull prospects of the United States, Canada and Mexico of reaching North American energy independence.

Oil-Price Rebound Gives Banks New Reason to Cheer

The higher oil prices stemming from OPEC’s agreement to cut crude production should give some banks a boost.

.. In particular, higher oil prices could mean that banks will release some of the reserves they set aside earlier this year to protect themselves against soured energy loans. Such releases would increase banks’ earnings.

.. Bank of America Corp. rose more than 4% on the day, Wells Fargo—2%, J.P. Morgan Chase & Co.—1.6% and Citigroup Inc.—1.6%.

.. Fifteen of the largest U.S. banks amassed a combined $6 billion in reserves for energy loans, according to a Barclays analysis.