OPEC+ cooperation is facing a possible breakdown following Russia’s military invasion of Ukraine. Russia’s aggressive military moves towards Ukraine will negatively impact oil market cooperation between OPEC and Russian-led non-OPEC members. The Riyadh-Moscow-Abu Dhabi formula for success is in serious trouble as Western powers will put Saudi Arabia, Abu Dhabi and others under severe pressure to sever their strategic cooperation with Moscow.

The growing economic, financial and strategic military cooperation that has developed over the past two years between major Arab powers, particularly Riyadh, Abu Dhabi and non-OPEC Egypt, with Moscow is now under threat. Officially, Arab countries are not invited to protest against Putin’s invasion of Ukraine, but behind closed doors the subject will be on the table for sure. Washington, Brussels, London and Paris will not want a major bloc of energy producers to continue working with Putin. The next few days could be crucial for the future of OPEC+, especially if Putin continues his war against Ukraine.

Right now, the statements coming out of the Arab world are very diplomatic, calling for major de-escalation or diplomatic moves. Looking at the still difficult Western response to Putin’s invasion of Ukraine, Arab countries still have some leeway. However, if Washington, Brussels and London pull themselves together politically and militarily, choices will have to be made. Western governments will be willing to adopt a long-term strategy towards the MENA region, based on their vast ties in energy, investment and geopolitical assets, but there will be less room for Moscow to find support from key Western allies in MENA.

For the two main leaders of OPEC, Riyadh and Abu Dhabi, it will be a very tight rope to walk. Part of their strategic control of oil and gas markets in recent years has relied on cooperation with Russia. Moscow’s influence on other FSU countries to respect the production pact played a central role. With the Ukraine crisis partly a major financial boon to Arab oil and gas producers due to rising crude prices, OPEC strategists must now assess the ups and downs of the continuation of this partnership.

Already, OPEC+ needs to tackle a number of issues. A major problem is the lack of spare production capacity in general, as some OPEC producers are already unable to meet their own quotas. While OPEC+ is sticking to its known monthly production increases, actual production levels are lagging, reflecting a quota shortfall of 600,000 bpd. In the coming months, this number is expected to increase further. The lack of investment, the drop in production on the ground and the delay in oil infrastructure are the main causes.

Russia, as one of the main powers in OPEC+, is also facing production problems. Some analysts have already indicated that Russia’s spare capacity is now below 300,000 bpd. Moscow currently produces about 10.8 million bpd, but is expected to produce nearly 12 million bpd under OPEC+ agreements. If he fails to hit those numbers, Moscow’s influence is under pressure in the alliance.

Given the production quota, while world crude prices are high, a potential breakup won’t be very difficult. Especially if Saudi Arabia and Abu Dhabi will be the only ones with additional unused production capacity.

Geopolitically, the integrity of OPEC+ is very important. Unlike the 20th century or the first part of the 21st Century, there’s more at stake lately. Riyadh, Abu Dhabi, but also Egypt, have grown weary of Washington’s lack of commitment as a military and economic partner. Moscow and Beijing have filled in the gaps. Arab sovereign wealth funds are increasingly investing in Russia, China and Asia, while Russian investments in ports and industrial areas, such as along the Suez Canal, also have a political impact. Currently, no Arab country is willing to make a clear choice between West and East.

Choosing to support the West in the Ukraine crisis, or to support economic and military sanctions against Russia and its cohorts, however, is a bridge too far. Other Arab and non-Arab members of OPEC+ are also not yet willing to sanction Moscow. Putin’s strategic moves over the past decade have severely eroded Western influence in the region, and Moscow is now reaping the benefits.

At the same time, Arab powers are also keeping tabs on Iran’s JCPOA talks and the stance China is taking vis-à-vis Moscow. For most Arab oil producers, the Dragon-Bear developments are more important, at least on the surface. A breakup of OPEC+ is currently a risk-free option for the Arabs. A possible regime of energy sanctions against Russia is not completely excluded. Riyadh and Abu Dhabi will for sure coordinate all movements with Washington, London or Brussels, but will also have a direct line to Beijing. China’s stealth moves right now won’t influence geopolitical decisions over the next few months, but could also impact the future of OPEC+. Some might argue that a weaker OPEC+ is to Beijing’s advantage, as Moscow will be more willing to increase flows to China.

Analysts are not expected to focus on crude oil prices or official statements from OPEC+ officials in the coming days. The focus should be on the body language displayed on March 2, when OPEC meets again. The same scenario as during the third summit of heads of state and government of OPEC in Riyadh in 2007 could happen again. A break in the OPEC+ bromance is an underestimated possibility.

By Cyril Widdershoven for Oilprice.com

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