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Crude Economics
Oil Stays Cheap over Doubts about Russia-OPEC Cooperation

Venezuela’s oil minister has started a round-the-world trip to some of the planet’s biggest petrostates, most recently stopping in Russia to try to drum up support for coordinated production cuts. Caracas is reeling from bargain crude prices, and has long agitated for OPEC to decrease production in an attempt to chip away at the glut that’s responsible for today’s bearish market. The Venezuelan minister’s visit comes at an interesting time, as the media (and the oil market) picked up reports last week that Moscow was open to the idea of working with OPEC to decrease the global supply of crude. That note was stuck again during the trip, Bloomberg reports:

Igor Sechin, chief executive officer of the largest publicly-traded producer Rosneft OJSC, discussed “possible coordination of efforts to normalize the situation on global oil markets” with [Venezuelan Oil Minister Eulogio Del Pino] in Moscow, the company said Tuesday. Russian Energy Minister Alexander Novak responded similarly to the Venezuelan minister Monday, saying he would be willing to attend a meeting with the Organization of Petroleum Exporting Countries and non-OPEC producers, should such a gathering occur.

As Bloomberg continues, analysts aren’t impressed by this rhetoric:

“Nothing serious here,” Alexander Kornilov, an oil analyst at Aton in Moscow, said of the meetings. “It would make no sense to collaborate with only Venezuela, with no support from other OPEC members, more powerful Arabic countries.”

From OPEC’s perspective, there’s little reason to trust that the Kremlin will follow through on any proposed production cuts. Russia has in the past fiercely defended its market share, and just this week announced that it produced a post-Soviet record of 10.88 million barrels of oil per day in January. There’s plenty of mistrust within OPEC, as well, and the cartel’s largest producer—Saudi Arabia—has pursued a strategy of inaction over the past year and a half, choosing to protect its own market share rather than make the necessary production cuts to induce a price rebound. Without Riyadh’s support, OPEC lacks the capacity to make a significant impact on prices, which naturally raises the question: Is the cartel obsolete?

On the one hand, Russia’s public—if still tentative—endorsement of further discussions of coordinating production is an illustration of just how bad things have gotten for the petrostate in today’s bearish crude market. All the talk over the past week provided a brief boost in prices, though they’ve dropped again this week as traders no longer have confidence that cuts are in the offing (they were down over 4 percent in trading today). There’s too much oil sloshing around the market, and with Iran already working to boost its own output following the lifting of Western sanctions, that doesn’t look likely to change.

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  • Andrew Allison

    “Saudi Arabia—has pursued a strategy of inaction over the past year and a half, choosing to protect its own market share rather than make the necessary production cuts to induce a price rebound.” reflects a misunderstanding of the situation.In the past, the Saudis have been willing to act as swing producer, reducing production unilaterally. Since the beginning of the present situation, they have insisted that they intend to maintain market share, and will cut production only in concert with the other major producers. Russia (and Venezuela) are signoalling to OPEC that they would be willing to go along with a world-wide reduction, but as suggested in the post, they have a trust issue. Any such agreement would require monitoring because the other members of OPEC have been known to cheat too. The solution for the Saudis would be to say: fine, we’ll cut production in concert with the major producers but will maintain our market share. It could be that Russia is pumping like mad to establish a high baseline from which to cut.

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