The OPEC+ coalition, spearheaded by Saudi Arabia, is set to enhance oil supply to the market starting in December. This decision comes despite indications that oil demand growth for this year is expected to fall short of OPEC’s earlier forecasts.
For the third consecutive month, OPEC has lowered its projections for global oil demand growth, particularly citing continued underperformance in Chinese consumption.
Despite these revisions, OPEC+ aims to inject an additional 180,000 barrels per day (bpd) into the market in December and plans to gradually reverse current production cuts of approximately 2.2 million bpd throughout 2025.
Reports indicate that Saudi Arabia, the leading producer within the OPEC+ alliance, has abandoned its unofficial objective of pushing oil prices to $100 per barrel. Instead, the Kingdom may be shifting its focus towards “disciplining” non-OPEC+ producers by reclaiming market share.
Should Saudi Arabia pursue this strategy, it could lead to a drop in oil prices, significantly affecting Russian revenues, which are heavily reliant on oil income. Analysts suggest that oil and gas revenues contribute approximately 30% to Russia’s budget. Low oil prices could severely impact Moscow’s fiscal capacity to sustain its military efforts in Ukraine.
Russian Oil Revenues at Risk
Experts assert that a decline in oil prices could pose an even greater threat to Russian budget revenues than existing Western sanctions, which the country is actively seeking to evade.
Moscow has been employing various strategies to circumvent sanctions, including defying recent measures that blacklisted numerous oil tankers transporting Russian oil. Approximately one-third of these vessels have been returned to service, according to tracking data from Bloomberg. So far, the U.S., EU, and UK have designated 72 tankers for violating sanctions or price caps, with at least 21 having loaded Russian oil since their blacklisting.
If oil prices were to drop significantly amid rising supply, the financial consequences for Russia could be substantial.
Luke Cooper, an Associate Professorial Research Fellow in International Relations at the London School of Economics, noted in the IPS journal, “With Russia already selling its oil at discounted rates and facing higher production costs, a low-price environment may hinder its ability to finance its aggression in Ukraine.” He emphasizes that while oil is a critical revenue source for the Russian state, it also presents a vulnerability, given its sensitivity to fluctuations in global market prices.
Shifting Saudi Oil Policy
This vulnerability may worsen if Saudi Arabia, a key ally of Russia within OPEC+, opts to reclaim lost market share from the past two years. The Financial Times reported last month that the Kingdom might be willing to endure short-term pain in oil prices and revenues to regain market share, thereby abandoning its previous goal of maintaining a $100 oil price target.
The last significant price war initiated by Saudi Arabia occurred during the early months of the pandemic in 2020, when the Kingdom and Russia competed for market share amid dwindling demand.
For over a year, Saudi Arabia has taken measures to restrict market supply, adhering to OPEC+ cuts and voluntarily withholding an additional 1 million bpd. The Kingdom has consistently aimed to produce around 9 million bpd, aligning its output with set targets.
Given the current situation, Saudi frustrations over losing market share while oil prices remain below $80 per barrel—despite heightened geopolitical tensions—are understandable.
If OPEC+ increases supply while demand continues to lag, as acknowledged by OPEC itself, revenue streams for all oil-producing nations, including Russia, are likely to diminish alongside oil prices.
Russia’s Economic Vulnerability
Unlike the United States, Russia has an oil-dependent economy, benefiting from the influence of OPEC+. However, Cooper points out that Russia’s oil extraction is not cost-effective compared to Saudi Arabia’s, leaving it less prepared for low-price conditions.
Despite Russia reporting a 3.6% economic growth last year—surpassing the global average—analysts caution that this figure masks a troubling reality. Stefan Hedlund, director of research at the Centre for Russian and Eurasian Studies, noted that significant funds are directed toward military efforts, including compensation for soldiers and the production of military equipment, much of which is destroyed in combat.
Neither of these expenditures is sustainable long-term, according to Hedlund.
To mitigate the financial impact of fluctuating oil and gas prices on its budget, Russia is signaling intentions to decrease its reliance on oil revenues. Finance Minister Anton Siluanov recently indicated that while oil and gas revenues previously constituted 35-40% of the budget, this figure is projected to fall to 27% next year and further to 23% by 2027.
With oil revenues being a critical cash flow for the federal budget, Russia is poised to face significant economic challenges should an increase in market competition drive oil prices down.
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