While Russian forces are blocked on the front lines in Ukraine, Vladimir Putin faces a drain on the Kremlin’s coffers that threatens to sink its war machine.
Russia’s oil and gas revenues have fallen by 37% in just one year, according to a new report from the International Energy Agency (IEA).
Falling prices and Western sanctions are steadily reducing Putin’s income. even if it pumps more oilthe report said.
“Russian oil exports increased by 500,000 barrels per day (kb/d) in December…but estimated export earnings fell to a six-month low of $14.4 billion ($11.3 billion pounds), as discounts on Russian oil prices increased and benchmark oil prices fell. »concludes the IEA.
“Putin’s income has fallen massively,” says Ashley Kelty, director of oil and gas research at Panmure Gordon.
“World prices have generally fallen and he has to sell oil at a much reduced price compared to this reduced price.
“It sells larger volumes of oil, mainly to refineries in China and India, but at discounts of up to $35 per barrel, so the increase in volume does not offset the drop in prices.”
The same IEA report also suggests that the control of global oil markets for decades exercised by OPEC and its allies, including Russia, could finally come to an end.
An increase in oil exports from Guyana, Canada, Brazil and, above all, the United States, means that OPEC’s overall market share is in constant decline. There may be no turning back, analysts say.
“The OPEC+ cartel is fracturing,” says Kelty. “They have been surprised by the increase in production in the United States and other countries, which means they are losing their historical control over prices. »
If it holds, it could herald a seismic shift in a global oil market long dominated by producers from the Middle East and Russia.
Analysts say it could also cause big problems not only for Putin, who relies on energy revenues to finance 45 percent of Russia’s federal and defense budgets, but also for countries like Saudi Arabia.
This Gulf state also relies on oil revenues to satisfy its population.
OPEC, the Organization of the Petroleum Exporting Countries, was founded in 1960 by Saudi Arabia, Iran, Iraq, Kuwait and Venezuela to take away from the United Kingdom and the British companies that then dominated control of global oil production.
It now has 12 members and in 2016 formed a broader network called OPEC+, which involves 10 other oil-producing states, including Russia.
The group’s key weapon is it their control over the oil supply. Nearly 80% of the world’s proven supplies are in OPEC countries.
Turning off the taps and restricting supply has always raised prices and forced Western leaders to beg. The ability to control prices has brought enormous wealth to OPEC members, particularly in the Middle East.
The power that comes with controlling fuel supplies has helped embolden Putin in Ukraine. He assumed that Europe would have to give in once Russia invaded because it controlled its gas and much of its oil.
What happened was the free market started to take over.
Oil flows to Europe from Russia declined, but they were quickly replaced by oil from the United States, Norway, and newer sources like Guyana and Brazil.
“The loss of imports of Russian products to European and American markets has led to a reorientation of global trade flows, under pressure from the EU embargo and G7 sanctions,” the IEA said in its report.
As a result, OPEC+’s market share is decreasing. The control it has exercised for decades is disappearing. The shift is happening even as global oil demand is expected to hit a record high this year, at more than 102 million barrels per day. “Record production” from the United States, Brazil, Guyana and Canada will be more than enough to meet demand, according to the IEA.
“These four non-OPEC+ producers, all from the Americas, together are expected to add 1.3 mb/d (million barrels per day), with the United States contributing more than half of the gains to lead once again. plus the expansion of global supply. »
Last month, weekly U.S. oil production reached 13.2 million barrels per day, according to the U.S. Energy Information Administration. That’s above the Donald Trump-era record of 13.1 million, set in early 2020 just before the pandemic caused prices and production to collapse.
The recent rise in U.S. production has been the key factor in keeping prices of gasoline, diesel, jet fuel and all other oil and gas derivatives in check. These products range from road surfaces (bitumen) to carpets and clothing (polyester) and all kinds of plastics.
In fact, U.S. production – led by shale drillers in Texas and New Mexico’s Permian Basin – is so strong that America exports the same amount of crude oil, refined products and natural gas liquids as that produced by Saudi Arabia or Russia.
With their diminishing power, OPEC+ was torn apart by infighting. A November meeting was delayed at the last minute due to reports that African members, who depend daily on oil revenues, were reluctant to accept Saudi plans to cut their production.
Shortly after, Angola, a member of OPEC since 2007, withdrew.
“We realized that Angola gained nothing by remaining in the organization,” the country’s resources minister, Diamantino de Azevedo, said at the time.
Callum Macpherson, head of commodities at Investec, says the expansion into OPEC+ was an attempt to regain control of global markets as it was slipping as it expanded the group’s influence. However, members’ divergent interests made agreement on tactics more difficult.
For example, in recent meetings, the Saudis wanted a reduction in production, but other members did not want to lose their oil revenues.
Mr. MacPherson says: “Russia, Iran and Venezuela are subject to sanctions…Other producers face challenges due to local instability, such as Iraq, Libya and Nigeria. Thus, most members are unable or unwilling to join the Saudi efforts to support the market.
Meanwhile, the United States is tightening the screws on Russia. Last month, President Biden issued an executive order authorizing the use of sanctions against foreign financial institutions that aid the Russian military-industrial complex.
One of the main goals is to block Russia’s last export markets in India and China. This month, U.S. Deputy Treasury Secretary Wally Adeyemo will travel to Italy, Germany, Japan and other G7 partners to build support for “holding Russia accountable for its war against Ukraine.”
Greg Newman, chief executive of Onyx Capital Group, a leading London-based oil derivatives trader, said OPEC and Russia had overplayed their hand and would struggle to regain their former control over markets.
“Non-OPEC supply is increasing at such a pace that it is unclear whether there will ever be a good time again for OPEC to increase production.”
This means that the only tool its members have is to reduce production even further. They are already close to the limit: further reductions would weigh too heavily on the coffers.
“To me it looks like non-OPEC supply will eventually overwhelm the market,” Newman says. “If this were to happen, OPEC and Russia would ultimately have to cede control to the free market.”
