With Russian forces stuck in a stalemate on the frontlines in Ukraine, Vladimir Putin is facing a drain on the Kremlin coffers that threaten to sink his war machine.
Russia’s oil and gas revenues have plummeted by 37pc in just one year, according to a new report from the International Energy Agency (IEA).
A combination of falling prices and Western sanctions are driving Putin’s revenues steadily down even though he is pumping more oil, the report says.
“Russian oil exports rose by 500,000 barrels a day (kb/d) in December… but estimated export revenues slumped to a six-month low of $14.4bn (£11.3bn), as Russian oil price discounts increased and benchmark oil prices declined,” the IEA concludes.
“Putin’s revenues have gone down massively,” says Ashley Kelty, director of oil and gas research at Panmure Gordon.
“Global prices have gone down overall and he is having to sell oil at a big discount to that reduced price.
“He’s been selling bigger volumes of oil mainly to refineries in China and India but at discounts of as much as $35 a barrel, so the increased volume does not compensate for the reduced price.”
The same IEA report also suggests that the decades-long control of global oil markets exercised by Opec and its allies, which include Russia, may finally be coming to an end.
A surge in oil exports from Guyana, Canada, Brazil and, above all, the US, means Opec’s overall market share is steadily reducing. There may be no way back, say analysts.
“The Opec+ cartel is fracturing,” says Kelty. “They have been caught out by the rise in production from the US and other countries which means they are losing their historic control over prices.”
If sustained, it could herald a seismic shift in a global oil market that has long been dominated by producers in the Middle East and Russia.
It could also, say analysts, spell big trouble not just for Putin, who relies on energy revenues to fund 45pc of Russia’s federal and defence budgets, but also for countries like Saudi Arabia.
The Gulf state also relies on oil revenues to keep its population happy.
Opec, the Organisation of the Petroleum Exporting Countries, was founded in 1960 by Saudi Arabia, Iran, Iraq, Kuwait and Venezuela to strip control of global oil production from the UK and the British companies that then dominated.
It now has 12 members and formed a wider network called Opec+ in 2016 that involved another 10 oil-producing states, including Russia.
The group’s key weapon is their control over the supply of oil. Almost 80pc of the world’s proven supplies are in Opec countries.
Turning off the taps and restricting supply has always driven prices up and forced Western leaders to come begging. The ability to control price has showered huge wealth on Opec members, particularly in the Middle East.
The power that goes with controlling fuel supplies helped to embolden Putin in Ukraine. He assumed Europe would have to give way once Russia invaded because he controlled their gas and a large amount of their oil.
What has happened instead is that the free market has begun to take over.
Flows of oil into Europe from Russia have reduced but they have been quickly replaced by oil from the US, Norway and newer sources like Guyana and Brazil.
“The loss of Russian product imports to European and US markets saw the re-routing of global trade flows, under the pressure of the EU embargo and G7 sanctions,” the IEA says in its report.
As a result, Opec+’s share of the market is shrinking. The control it has exercised for decades is slipping away in the process. That change is happening even though global demand for oil is expected to reach a record high this year at more than 102m barrels a day. “Record-breaking output” from the United States, Brazil, Guyana and Canada will more than meet demand, the IEA says.
“These four non-Opec+ producers, all from the Americas, are expected to add a combined 1.3 mb/d [million barrels per day], with the United States contributing more than half the gains to once again lead the world’s supply expansion.”
Last month, weekly US oil production hit 13.2m barrels per day, according to the US Energy Information Administration. That’s above the Donald Trump-era record of 13.1m set in early 2020 just before the pandemic sent prices and production crashing.
The recent surge in US output has been the key factor in keeping a lid on the prices of petrol, diesel, jet fuel and all the other products derived from oil and gas. Those products range from road surfacings (bitumen) to carpets and clothes (polyester) and all kinds of plastic.
In fact, US output – led by shale drillers in Texas and New Mexico’s Permian Basin – is so strong that America is exporting the same amount of crude oil, refined products and natural gas liquids as Saudi Arabia or Russia produces.
With their power diminishing, Opec+ has been riven with infighting. A November meeting was delayed at the last minute amid reports that African members, who heavily rely on oil revenues day-to-day, were reluctant to agree to Saudi plans to cut their output.
Shortly after, Angola, which had been an Opec member since 2007, quit.
“We realised Angola does not gain anything by keeping in the organisation,” the country’s resources minister Diamantino de Azevedo said at the time.
Callum Macpherson, head of commodities at Investec, says the expansion to Opec+ was an attempt to regain control of global markets as it was slipping by broadening the group’s influence. However, members’ competing interests have made it harder to agree on tactics.
At recent meetings, for example, the Saudis wanted a cut in production but other members were unwilling to lose oil revenues.
Mr MacPherson says: “Russia, Iran and Venezuela are subject to sanctions… Other producers face challenges due to local instability like Iraq, Libya and Nigeria. So most members are unable or unwilling to join the Saudis in efforts to support the market.”
Meanwhile, the US is tightening the screws on Russia. Last month President Biden issued an executive order authorising the use of sanctions against foreign financial institutions that help Russia’s military industrial complex.
A key aim is to block Russia’s remaining export markets in India and China. This month deputy secretary of the US Treasury Wally Adeyemo will travel to Italy, Germany, Japan and other G7 partners to build support for “holding Russia accountable for its war against Ukraine”.
Greg Newman, chief executive of Onyx Capital Group, a leading London trader in oil derivatives, said Opec and Russia had overplayed their hand and would struggle to regain their former control of the markets.
“Non-Opec supply is growing at such a pace that it is not clear there will ever again be a good time for Opec to increase production.”
It means the only tool its members have is to cut production even further. They are already close to the limit – further cuts would hit coffers too hard.
“To me, it looks like non-Opec supply will eventually overwhelm the market,” says Newman. “If this was to happen, Opec and Russia would finally have to cede control to a free market.”