Why Russia and Iran Will Play Nice For Oil

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The past week has been one of the better ones in recent Iranian history, with the Islamic theocracy getting the world's monkey off of their back by agreeing to limit their nuclear program in exchange for a lifting of sanctions on oil exports.  Since Iran, like so many other Middle Eastern nations, relies quite heavily on oil exports to power their economy (four out of every five export dollars come from petroleum), the deal to limit sanctions has been music to their ears.  There's more good news on the horizon for Iranian oil, furthermore, since Russia has agreed to hold talks with OPEC leaders at the end of July in order to ensure the precarious balance between output and prices.  As oil's recovery begins to slide downward, having nearly hit $70 per barrel in May but trading for less than $60 per barrel today, both nations have a vested interest in ensuring price stability.  That makes for two rather uncomfortable dance partners who have a lot of lost trust to make up for.

Unstable Connections

Both Iran and Russia represent enemies writ large of the United States, but just because two enemies share a common foe does not make them allies.  Indeed, relations between Iran and Russia have really never been strong.  During the Second World War, Stalin sent a Red Army detachment to conquer the capital city of Tehran over the fear that the Iranians would side with Nazi Germany, supplying Hitler with valuable oil for his war machine.  In the midst of the Cold War, furthermore, the Shah of Iran professed a loyalty to the US, a loyalty that proved rather disastrous when the 1977 revolution forced the Shah into exile and led to the storming of the US embassy in Tehran.  Since the newly-minted Islamic Republic had a list of qualms with the Soviet Union (that whole "religion being an opiate of the masses" schtick espoused by Marx didn't sit well with the Ayatollah), furthermore, the USSR never supported Iran with money and weapons like it did for Arab nations like Egypt and Jordan.  Since the fall of communism, relations between Russia and Iran remained rather chilly; Iran supports price controls on oil as a member state of OPEC, while Russian oil suffers from no control other than what Vladimir Putin (the most charismatic dictator on Earth) decides.  As the first and seventh largest oil producers on the planet, however, the upcoming conference will go a long way towards mending relationships and pursuing a common goal -- at least in theory.

Deal In Place

Russian Energy Minister Alexander Novak agreed to the meeting with Iran and the OPEC Secretary-General Abdullah al-Badri in order to discuss the relative situation for both gas and oil, claiming that the Russian state-owned energy concerns needed to be "taking into account the lifting of sanctions on Iran" in order to remain competitive for their main market, the EU.  The elimination of Iranian sanctions, lifted by an agreement between Iran and six other nations including the US, will set up the export of more crude to boost an ailing Iranian economy.  Iran, unlike Russia, will almost certainly not wait around for crude prices to rise before they begin to turn on the taps full bore, since the National Iranian Oil Company believes they can export 4 million barrels per day without sanctions on a competitive market.  Nor does Alexander Novak seem to believe, at least on the surface, that Iranian and Russian energy will compete with one another.  Novak voiced more concerns about the shale oil market disrupting Russian exports than Iranian crude.  Since Russia exports two and a half times as much crude as Iran, they view the elimination of sanctions less as a new competitor and more as a new customer for natural gas.  After all, Iran sits just 26th in natural gas exports (Russia takes home the gold, as they do with petroleum), making the 80-million-strong Iranian consumer market a valuable asset to have in Russia's back pocket when pipelines running through the former Soviet republics like Azerbaijan make for a convenient transfer route. 

Russia and OPEC

The Iranian topic has turned heads for Russia's willingness to play nice, but the Russian energy concerns have shown a surprising candor with OPEC over the course of 2014 and 2015 as both institutions watched while the value of their cash cow deflated further and further.  Saudi Arabian oil minister Ali al-Naimi, who famously stated that the Saudis would keep the taps running in order to squeeze competitors out of business, visited with Novak in June to discuss maintaining price certainty without crimping production.  The recovering Russian ruble fell in line with al-Naimi's views, since Russia needs every dime they can scrounge up after their currency fell by 50% in 2014, with Novak boasting after the meeting that Russian oil output would rise even further in 2016.  Although Russia will almost certainly not join OPEC outright, not when they can leverage enough control over the oil market on their own, they'll prove willing to smile and dance with one another so long as their state-owned oil interests can survive the oil bubble and watch privately-owned competition flounder.  The July 30th meeting represents just one more dance partner for Russia and just one more piece of good news for Iran now that they can turn the pipes back on.

Which Way Will Oil Go?

OPEC's decision to stand firm in the face of failing crude value has already began to pay dividends as shale oil companies lose money each day that oil trades below the $80 per barrel benchmark.  Russia benefits from this purging of the market as well, but since they won't increase production to a larger scale (and since Iran won't do so right away) oil investors get to piggyback onto the recovering value of crude and profit from the exchange.  Oil has stabilized and is set to climb further throughout the second half of 2015, thanks in no small part to the sudden friendliness of global producers like Russian and Iran.

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