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Crude Economics
Production Freeze Talk Pushes Oil Above $40

It’s been a great day for oil markets and, by extension, for crude producers. Brent crude is up more than 5 percent on the day, cracking $40 per barrel for the first time since the first week of December, and America’s WTI benchmark is only a couple of dollars behind. As the FT reports, prices are rebounding as petrostates prepare to meet later this month to hammer out an agreement to freeze production at current levels, building on a previous provisional deal between Russia, Saudi Arabia, Venezuela, and Qatar:

Sentiment in the oil market has improved as major Opec and non-Opec oil-producing countries prepare to meet to discuss a possible output freeze. […]

“It’s logical for everyone to freeze their production,” UAE energy minister Suhail Al Mazrouei told reporters in Abu Dhabi on Monday, according to wire services. “It doesn’t make sense for anyone to increase production at the current prices.”

It’s notable that markets have changed their tune without producers actually doing anything to cut down on the glut that led to this collapse in the first place. Instead, by mere dint of Russia talking about coordinating production with OPEC, we’re seeing hedge funds going long on oil—never mind the daily price fluctuations. That’s savvy work from Moscow: even without a deal in hand, the psychology of the markets appears to have shifted.

Higher oil prices are a win for the Kremlin. They take the budgetary pressure off the regime at home, where a shrinking economy has put the pinch on both average Russians and avaricious oligarchs squabbling over spoils. They let Russia shrug off Western sanctions with more ease, thus giving Putin an even freer hand to make mischief in Ukraine. If they go high enough, they might begin to really rattle fragile southern European economies, hurt Germany, and increase the strains on an increasingly fractious EU. The way Putin sees it, $40 a barrel isn’t $120 a barrel, but it’s certainly better than $20.

The White House still seems to struggle to comprehend that Putin is not only a bad guy, he’s a cunning bad guy who has a knack for targeting and exploiting our blind spots. As we move away from Saudi Arabia in the Middle East, Putin spots the opening. As we have our eyes focused on long term problem of climate change, expending massive diplomatic energy in the effort to cobble together a paper strategy for dealing with it, Putin is looking at how to use oil as a geopolitical weapon in the next few years. We underestimate Putin at our own peril.

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  • Andrew Allison

    Still no discussion of how freezing production at current levels increases demand, and hence price? Also notable is the neglect of the fact that the US, now the swing producer, is not and will not be a party to the proposed and impossible to enforce production freeze. Get real.

    • Kevin

      They would if prices were based on the assumption of rising future production.

      The marginal amount of shale production at $40/barrel might be too little to offset the lost increases in foreign production…

      Or not, we’ll see.

  • CaliforniaStark

    So your an American oil producer. Your suffering economically because of a glut of oil. Your competitors unilaterally decide to cut production, to reduce the glut. Is there is a reason you shouldn’t be smiling now?

  • Jacksonian_Libertarian

    Please, this is how markets work, they are in constant movement, testing floors and ceilings. With Iran set to increase production (not going to happen fast, as they are incompetent), and no reductions only “talk” of a freeze for OPEC and Russia (not including Iran), what do you think the ceiling will be? I think it’s the price where American Shale Oil Developers start adding back lost production. And remember oil storage is getting close to capacity, and it costs money to store oil, so that is hanging over the market holding the price down as well. Another thing keeping a cap on oil prices is the improving fracking technology that is constantly lowering the breakeven point for developing tight oil.
    As far as I can tell the American Shale Oil Developers have become the swing producers. And since this is a recent occurrence, no one really knows what price will turn these new producers on, although a price of $30 a barrel seems to turn them off, for now.

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