Energy

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

There's nothing like a crisis to create unlikely friends and, goodness knows, there are enough crises in the Persian Gulf to create the unlikeliest of alliances. The visit by King Salman of Saudi Arabia to President Putin of Russia may not reflect a complete about-face by the desert kingdom, but it sends a very clear message that the U.S. is no longer the only great power calling the shots in the Gulf.

Big Beasts
Saudi Arabia and Russia, the world's biggest oil exporters, are drawing closer together
Source: Joint Organisations Data Initiative
Note: Data for June 2017

The relationship between the world's two largest oil exporters has been growing closer ever since King Salman came to the throne and Mohammad bin Salman began his rise towards assuming the crown.

The deal to cut oil production, which has helped stabilize prices and is beginning to drain excess stock, was only achieved through the collaboration of the two countries. Even though OPEC countries have made much deeper cuts than their partners, action by OPEC alone wouldn't have been nearly so effective. Cooperation between Saudi and Russia has “breathed life back into OPEC," according to the kingdom's oil minister Khalid Al-Falih, and the Russian president has indicated he is willing to extend cooperation beyond March 2018 if necessary.

Stockdraws Begin
U.S. oil inventories began to fall in June after Saudi cut flows across the Atlantic
Source: Energy Information Administration
Note: Total U.S. stockpile of crude and refined products (including the Strategic Petroleum Reserve)

There's no real chance Russia will seek to join OPEC, nor that it would be welcomed. President Putin ruled out such a move on Wednesday. But he'll continue to work with the group when their interests coincide.

Russia's help on the oil price hasn't gone unnoticed and Salman's visit -- plus the deals that go with it -- are part of the reward. They'd have been unthinkable five years ago. Now, they reflect Russia's importance in the Gulf; in particular, its dominant role in Syria.

Spending $3 billion on Russia's S400 air defense missile system is tiny compared with May's $110-billion deal with the U.S., but that it happened at all shows alliances are shifting. Securing Gulf oil may seem less vital to the U.S. in the age of shale, but the region's ability to influence oil prices -- deliberately or accidentally -- is undiminished.

Cutting the Ties
U.S. shale oil has reduced U.S. purchases of Persian Gulf oil by as much as 50 percent
Source: Energy Information Administration
Note: U.S. imports from Saudi Arabia, Iraq and Kuwait

The Putin-Salman great pals act comes despite Moscow's deep bond with Iran. That relationship isn't about to change. Until the Soviet Union's 1991 breakup, governments in Moscow and Tehran shared a common border of close to 1,200 miles, parts of which date to the 16th century. The Saudis clearly hope Russia can help keep Iran in check.

Could a Russian entity even become a cornerstone investor in the Saudi Aramco IPO, scheduled for next year? Both parties deny any discussions, but access to cheap-to-extract Middle Eastern crude could be attractive to Rosneft Oil Co PJSC, much of whose future development portfolio consists of expensive Arctic oil that may be uneconomic in a $50 world.

Russian oil companies have built a string of upstream assets in Iraq and are among early bidders for Iranian projects. Taking an Aramco stake isn't unimaginable.

In a barely disguised dig at the U.S., Putin explained Russia's new-found attractiveness to Middle Eastern countries, saying (while keeping a straight face): "The most significant advantage we have is that we never double-deal. We are always honest with our partners."

That Moscow can speak directly with Saudi Arabia and Iran -- something the U.S. hasn't been able to do since the '70s -- gives it a real chance to reduce tensions between the two, should it so choose.

We're a long way from seeing a Russian fleet based in the Gulf, but Moscow is showing itself as the emergent regional power and Riyadh seems to be playing along despite Iran. Don't expect Putin to leave his new friend in the lurch by abandoning the OPEC output deal. Russia's playing the long game.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Julian Lee in London at jlee1627@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net