No petrostate is excited about voluntarily constraining their production, but those limits can often be useful if they help push oil prices up. OPEC and a collection of eleven other oil producing nations agreed last November to collectively reduce their output through the first six months of this year, and Russia played a big role by agreeing to join those cuts. However, as the end of that first cut looms large and its participants begin to discuss extending that strategy through the end of the year, Moscow’s ability—or maybe more accurately its willingness—to play ball is going to be tested. That’s because, as Bloomberg reports, the seasonal vagaries of Russian oil production make it easier to cut supplies in the first half of the year than in the second:
Cuts so far this year came alongside the traditional seasonal stagnation in Russian production, meaning the country made relatively few sacrifices in exchange for an increase in crude prices of more than 10 percent. For the powerful Russian oil bosses who plan to discuss the OPEC accord with Energy Minister Alexander Novak this week, a decision by the government to extend the cuts beyond June would stymie plans to boost output, creating many more headaches than the initial agreement.
In other words, Russian output is going to surge in the second half of this year, which means any supply limitations it agrees to will bite harder.
The Saudis remain the lynchpin of this agreement, but Riyadh knows how important Moscow is to the plan, whose intent is to reduce the global glut of crude. Saudi energy minister Khalid Al-Falih told Bloomberg that petrostates are working towards a consensus, but acknowledged that “we still need to talk to all countries…a very important country to talk to, of course, is Russia, the biggest non-OPEC exporter.”
The stakes are high for these producers—if they don’t agree to continue their production cuts, analysts believe the price of oil could drop back down to $40 or below. No oil producer wants that, but it may be asking too much of Russia to put a cap on its seasonally surging production to join in on round two of these cuts.