Cutting Words
Can Putin Afford to Cooperate with OPEC?

Brent crude climbed above $50 per barrel for the first time in a year after Vladimir Putin indicated that Russia would coordinate its production with OPEC in an attempt to reduce the glut of oil that has depressed prices over the past two years. “Russia is ready to join the joint measures to cap production and is calling for other oil exporters to join,” Putin said at an energy conference in Istanbul yesterday, explaining that a “freeze or even an oil production cut is likely to be the only right decision to maintain the stability of the global energy sector.”

These comments come after Russian energy secretary Alexander Novak repeatedly poured cold water on the notion that Moscow might constrain its own production. And, even after Putin’s pronouncement yesterday, it doesn’t look like everyone is on board with limiting the country’s oil production. Igor Sechin, the head of the state-owned oil company Rosneft, just said that his firm—responsible for two-fifths of Russian oil production—wouldn’t be capping its output. Reuters reports:

“Why should we do it?” Sechin, known for his anti-OPEC position, told Reuters in Istanbul on Monday evening, when asked if Rosneft, which accounts for 40 percent of Russia’s crude oil output, might cap its production.

Earlier on Monday, Sechin told reporters that Rosneft planned this year to raise its oil production, already the world’s largest among listed producers, above the 203 million tonnes (4.1 million barrels per day) it produced in 2015.

Sechin does not have anything approaching the last word on this matter, but his dissent nicely illustrates the central tension underlying petrostates’ decisions to constrict supply. Like OPEC’s members, Russia wants to see a return to $100+ per barrel oil prices. But like any of those other oil-soaked regimes, it has no interest in ceding its share of what has become in recent years a very crowded market. That’s precisely why OPEC took so long to even consider cutting production—the Saudis wanted to keep a firm grip on their market share—and it helps explain why not everyone in Russia is on the same page with a production freeze.

Lurking in the background of all of this are America’s hungry shale producers, which have endured a bearish market by slightly curtailing production and innovating new ways to keep oil flowing at lower prices. (For his part, Sechin isn’t blind to the danger, though. “The Americans want [$50 per barrel oil] most as the shale oil projects become profitable with such a price. And $60 will result in more shale oil projects,” he told Reuters.)

OPEC could be walking towards its worst-case scenario, wherein it cuts output and reduces its market share only to see nimble U.S. shale firms jump at new opportunities afforded by higher prices (and in the process increase global oil production, leading once again to an oversupply). Putin seems open to working with the cartel, but it looks like he’ll have some domestic opposition to quash first.

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