Russia dashes plans to make its oil market alliance with OPEC permanent

Key Points
  • Russian Energy Minister Alexander Novak says his country and other oil producers will probably not make their alliance with OPEC permanent.
  • The oil producers have been coordinating output for two years and have long discussed institutionalizing the partnership.
  • Novak cites burdensome bureaucracy and U.S. legislation that targets OPEC as reasons to abandon the plan.
Russian Energy Minister Alexander Novak.
Leonhard Foeger | Reuters

The marriage between Russia and OPEC is off.

Russian Energy Minister Alexander Novak on Friday poured cold water on long-simmering plans to make Moscow's alliance with OPEC and other oil producers permanent. The group of roughly two dozen producers has been managing global petroleum supply for the last two years in order to rebalance the market after a prolonged and punishing oil price downturn.

The effort succeeded in shrinking global crude stockpiles and boosting prices to four-year highs — until the market suddenly crashed again in early October. The group has agreed to a fresh round of output cuts that begin Jan. 1.

For at least a year, OPEC Secretary General Mohammed Barkindo has discussed "institutionalizing" the arrangement. That would essentially form a supergroup of oil producers comprised of the 14-nation OPEC, Russia and nine other oil-exporting nations, which would be able to more quickly respond to problems in the market.

OPEC is facing forces beyond its control: CEO
OPEC is facing forces beyond its control: CEO

Energy ministers had been talking up progress toward the permanent arrangement as recently as their meeting in Vienna earlier this month.

But on Friday, Novak said the prospects for that plan now look dim, Reuters reported. He said it would create too much red tape and expose the non-OPEC members of the alliance to potential sanctions from the U.S. government.

"There is a consensus that there will be no such organization. That's because it requires additional bureaucratic brouhaha in relation to financing, cartel, with the U.S. side," Novak told reporters, according to Reuters.

The U.S. penalties in question are spelled out in legislation known as NOPEC, or the No Oil Producing and Exporting Cartels Act. The bill would authorize the Justice Department to sue groups like OPEC that are deemed cartels for price fixing and antitrust violations, stripping countries of sovereign immunity protections currently built into U.S. law.

The legislation was first introduced in 2007, during a time of rising crude prices and concerns that the world's oil reserves would run dry. It was revived earlier this year in both chambers of Congress by bipartisan groups of lawmakers.

RBC's Croft:  What does an OPEC cut really look like?
RBC's Croft: What does an OPEC cut really look like?

The White House has historically opposed the legislation, but President Donald Trump's attacks on OPEC this year have raised concerns that he could back the measure.

However, like past presidents, Trump has shown he is willing to work with OPEC when it suits his needs.

His administration lobbied top OPEC producer Saudi Arabia to reverse the alliance's policy of capping production in order to prevent oil prices from spiking as the U.S. prepared to sanction Iran, OPEC's third-biggest producer. The alliance agreed to hike output in June, a decision that ultimately contributed to the current oil price slump.

Russia and Saudi Arabia were the world's top two oil producers until this year, when U.S. output surpassed production from both countries.