Opposed on the Syrian Conflict, United on Oil – Saudi Arabia and Russia Sign Agreement

Saudi Arabia and Russia have announced the signing of a long-term agreement, the first of its kind in history between the two countries, which will enhance control over global crude oil reserves, reports Reuters. Saudi Prince Mohammed bin Salman stated that Riyadh and Moscow have decided to expand their short-term alliance, which began in January last year after crude oil prices fell.

Russia has closely collaborated with OPEC countries during periods of excessive oil supply, although it is not an official member, but the new agreement between Russia and Saudi Arabia, which could last 10 to 20 years, is unprecedented.

The strongest OPEC oil producer, Saudi Arabia, has recruited Russia and other non-member countries to help mitigate the dominance of supply over demand when the price of a barrel fell from $100 in 2014 to less than $30 in 2016. Prices subsequently recovered and rose to $70, but the rapidly growing U.S. shale market has restrained that growth.

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However, historian specializing in the oil market Daniel Yergin emphasizes that it all depends on what the main motivation for the agreement is, a market crisis or a sign of changing mutual relations in the oil world. He adds that OPEC countries want to institutionalize that relationship before it becomes one-shot deal.

Robert McNally from the consulting group Rapidan Energy stated that Riyadh wants to break the price fluctuations that are characteristic of the oil market, as well as raise prices.

He explains that the significant price volatility that has been constantly present in the market over the last 10 to 15 years is a scenario that Russia and Saudi Arabia do not want to experience again. He also believes that Russia will join Saudi Arabia in building reserve production capacity that will be used when prices rise too much.

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The long-term agreement between Moscow and Riyadh could assimilate Russia into Saudi Arabia at the head of the OPEC cartel, as well as strengthen Russia’s presence in the Middle East where the U.S. has been a dominant superpower for many years. The news of a possible oil alliance emerged simultaneously with the strengthening of economic relations between the two countries despite their opposing stance on the conflict in Syria.

Oil Policy

Riyadh supports rebels in their fight against the army of Syrian President Bashar al-Assad, while Russian and Iranian forces are sworn regional enemies of Riyadh. A meeting between the Saudi prince and the Russian president held on the sidelines of the G20 summit in China in September 2016 was crucial in creating Russian support for OPEC.

In October, King Salman became the first Saudi monarch to make an official visit to Russia, providing political and investment support to the Russian economy affected by Western sanctions.

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Given that it was the Prince who informed the public about the agreement, rather than the Minister of Oil, it is a clear sign of who has the final word on oil policy. It also marks a significant turnaround in the relations between the two countries. Saudi Arabia has been a loyal ally of the U.S. during the Cold War.

IPO of the State Oil Company

The Saudi prince predicts that demand for oil will not fall until 2040, despite advances in renewable energy technology and electric vehicles. To end his country’s dependence on oil, he aims to diversify the economy by 2030.

Riyadh plans to sell a 5% stake in the state oil company Aramco. The timing for the initial public offering expires this year, but the crown prince has announced that it could take place as early as next year, depending on market financial conditions.

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Saudi Oil Minister Khalid al-Falih stated last week that the documentation is ready, but the stock exchange where the IPO will take place has not yet been selected. The exchanges in New York, London, and Hong Kong are in the race, but Falih emphasizes the existence of risks from frivolous legal actions if Aramco is listed on the U.S. stock exchange.