Because tomorrow (proverbially) it’s committed to actually cutting production. The Kremlin made waves this week when it announced that it would be joining OPEC in cutting back its oil production to help ease a global glut, promising to reduce its output by up to 300,000 barrels per day (bpd) over the next seven months. This strategy is already having its intended effect, as oil prices have rebounded nearly $7 per barrel over the past three days. But on further inspection, Russia’s commitments look a lot less impressive. Reuters reports:
Russia plans to use its November oil production, which was its highest in almost 30 years, as its baseline when it cuts output under this week’s deal with OPEC, Deputy Energy Minister Kirill Molodtsov said on Friday. […]
Its daily oil production rose to an average of 11.21 million bpd in November, Russia’s highest since the Soviet era, energy ministry data showed on Friday. That was 500,000 bpd higher than in August, the month before Russia and OPEC reached a preliminary agreement in Algiers to cap production.
In other words, just before promising to roll back its production by 300,000 bpd, Moscow increased that output by 500,000 bpd. For those of you at home doing the math, that’s a net increase of 200,000 bpd.
Much of the ups and downs of the oil market can be put down to psychology, so Russia’s adherence to some sort of collaborative plan to constrain output alongside OPEC’s petrostates can be expected to have a significant (if not exactly transformative) effect on prices. But if you look closely, its promises start to look quite hollow.
And let’s not forget the wild card waiting in the wings: American shale. U.S. frackers have been aching for a chance to once again power up projects that have been shuttered over the past two years in the face of falling prices, and this rebound, small as it yet is proving to be, could be just the thing to restart the industry’s momentum. Remember, while Venezuela was bellyaching about bargain crude prices these past two and a half years, the shale industry was working hard to bring down operating costs. New innovations and more efficient drilling processes have American shale looking leaner and meaner than ever before, and this latest price hike will open the door for these producers to capture market share from the petrostates that are now ceding it.