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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