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Deal to Freeze Oil Output Signals the End of OPEC As We Know It

Russia had to negotiate with individual countries, not OPEC. Probably, an OPEC-2 is emerging right now.

This week, Russia and Saudi Arabia, along with Qatar and Venezuela, announced a plan to freeze oil production in order to halt the slide in oil prices. Iran welcomed the deal but said joining it would be “illogical” as it is now trying to recapture its market share lost as a result of the 2012 trade sanctions. In an interview with Valdaiclub.com, Konstantin Simonov, Director General of the Moscow-based National Energy Security Fund, shared his vision of what changes on the oil market can be expected if the plan is implemented.

“It is too early to draw any conclusions, but the whole plan can result in a very curious project”, Simonov said. “We come to realize that OPEC as a structure is dead. When cutting the [oil production] quotas was being discussed, they could not make a decision. Therefore this time Russia had to negotiate with individual countries, not OPEC. Probably, an OPEC-2 is emerging right now”, he added.

Simonov said he saw no problem in the fact that the output cap was set at the January 11 level, when Russia’s oil production reached a record high. “It would be strange to expect an immediate 3 percent decrease in oil production,” he stressed. “These countries need to make sure they can trust each other and put mutual monitoring in place.”

Simonov stressed that the agreement was very fragile and had a number of hidden obstacles, most of them of political nature.

“First of all, I am not sure if Russia and Saudi Arabia can really stick to any bilateral agreement. It is clear that we have tremendous political contradictions, including on Syria. And although Russia claims that it separates oil from politics, it is obvious that for the Saudis oil and politics are inseparable,” he explained.

As for Iran, Simonov said it could join the agreement if it was offered special terms, for example, a “January plus” formula, which would allow Iran to increase its oil production by 300-400,000 barrels a day. “But again, I do not believe that Iran and Saudi Arabia could ignore their political conflict for the sake of money,” he said.

“Finally, there is a problem with Iraq, which is an atomized country, where it is unclear who to negotiate with,” Simonov said. While the central government is weak, large swaths of the country are controlled by the ISIL terrorist group, which has an oil business of its own, and the volume of its trade is almost impossible to estimate, the expert concluded.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.