Unwinding the Opec+ deal will be difficult

It has taken 60 years for Opec linchpin Saudi Arabia to find a non-Opec partner that it could see itself settling down with. The original Opec+ agreement led by Riyadh and Moscow in 2016 was very much a marriage of convenience, and the commitment from the producer group's leaders was decidedly one-sided. Saudi Arabia was prepared to overlook Russia's cheating, as long as it kept up the appearance of commitment to the relationship. But it took the Covid-19 pandemic to convince both partners how much they needed each other.

The world's biggest ever oil demand slump was too much for Opec to deal with by itself. Renewing and strengthening its vows in the Opec+ partnership has put Russia's commitment on an equal footing with Saudi Arabia's. But as Opec marks the 60th anniversary of its formation, a niggling question remains: how can it ever go back from Opec+ to just Opec without losing credibility and influence?

The group has relied on non-Opec allies before, when supply surpluses have become too big for it to manage alone. These marriages never lasted. Under the Riyadh pact of 1998-99, six non-Opec countries initially agreed to cut output alongside Opec. The seventh, Russia, talked of cutting but, notably, did not.

The Riyadh pact re-established Opec's credibility in the market. But the agreement proved temporary as prices recovered. And the main lesson of Opec's production policy has been that it is not possible to control both prices and supply. Its price-setting in the 1970s encouraged the growth of North Sea production, and its success in reviving prices post-2009 facilitated the US shale oil boom. Post-2000, Russia also enjoyed the benefits of Opec's Riyadh pact price support and the steady recovery of its own production and market share.

The future presence of non-Opec members looks vital for Opec to continue to manage supply in the medium term. But it is unlikely that Russia will stay in the Opec+ alliance any longer than it deems necessary. Moscow was ready to abandon Opec+ to defend Russia's market share, before the drastic collapse in demand convinced it of the need to return to the agreement's framework.

The old tensions have not gone away. Russian oil firms have scarcely slowed developments in the downturn. Russia is building up its flexibility as a swing producer, but its eye is on recovery. "When demand begins to return to pre-crisis levels, it will be important for Russia, as well as for other oil-producing countries, to regain market share and, perhaps, even to increase it in the face of reduced competition between producers," Russian energy minister Alexander Novak says.

But this view of the future assumes a return to traditional demand growth patterns post-Covid. The oil industry has not had to deal with a period of sustained demand destruction since the early 1980s. Oil's consumption growth trajectory was already slowing before the pandemic gave the world a preview of peak oil demand. Beyond the current crisis, uncertainty is compounded by the pace of global economic recovery and the potential for permanent shifts in consumption patterns, especially if climate change concerns accelerate policy shifts to alter the world's energy mix more rapidly. The eternal trade-off between controlling price and controlling supply may become harder yet to manage.

By Richard Child