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How Russia trumps the OPEC deal

by Tom Rogan

President Vladimir Putin of Russia scored a big win on Sunday when the OPEC-plus arrangement of oil-producing nations agreed to cap global oil market output.

The top line: Putin was able to show Saudi Arabia and the world that he is the oil kingmaker, while also earning American gratitude at the same time.

As outlined, the deal will reduce oil supply by nearly 10 million daily barrels from the start of May. The hope is that this will stabilize oil prices and move them upward, away from their current lows of $23/barrel (WTI) and $32 (Brent Crude). Russia and Saudi Arabia want that price increase because they need to maximize their oil revenues to support their respective government-spending programs. The United States seeks the price increase to consolidate shale-energy producers, which have a higher break-even price point than their foreign and mostly conventional oil competitors.

On paper, the deal makes it look as if everyone benefits fairly here. But that’s not the case. Putin is the big winner here. For a start, Russia almost certainly won’t abide by the output caps. Putin has too much to gain and too little to lose from exceeding his agreed output levels. Each new dollar Russia can acquire through sales is another dollar it can invest in Russia’s creaking social services infrastructure and its military. Considering the great global clamor for lower oil prices, Putin will gamble that the world will turn a blind eye to any minor rule-breaking — note that this is exactly what Russia did last year.

Moscow’s geopolitical victory goes beyond this. Putin’s power and his influence globally rest in significant part on his ability to dominate the global oil export market — if not by supply, then by control. Putin is always determined to ensure that it is he, not the Saudis and not the U.S., that gets to set market conditions. Putin’s political advantage in this new deal is its implication that he is the global oil boss. As Putin seeks to expand his influence over Riyadh, this deal will strengthen his ability to corral Crown Prince Mohammed bin Salman into oil strategies that meet Russian favor. Putin will also be smiling at the two separate thank you tweets he has received from President Trump in the past 24 hours. He’ll also be smiling at Trump’s not-so-America-first agreement with Mexico to cut U.S. oil output to offset some of Mexico’s cuts.

But the Russian leader has something else to be thankful for as well: that the coronavirus related collapse in oil demand is expected to continue for months still.

Trump says this deal will salvage American energy jobs, but this is doubtful. It won’t do much to reduce the pressure on the U.S. shale industry — an industry Putin fears for its ability to cap prices on conventional energy extraction. But even with this deal, oil prices would need to nearly double for the shale industry to hit its break-even point.

In short, Trump’s gratitude toward Putin might be a bit misplaced.

https://www.washingtonexaminer.com/opinion/how-russia-trumps-the-opec-deal

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