MOSCOW – The Organization of the Petroleum Exporting Countries and other major oil producers led by Russia plan to meet on 1-2 July in Vienna to decide if the group known as OPEC+ extends its current production cuts into the second half of the year.
Russia is still holding consultations with local oil producers regarding the position on further implementation of the OPEC+ deal, TASS quoted Russia’s Energy Minister Alexander Novak as saying on June 27, adding that decisions made on the sidelines of the G20 summit on 27-30 June would be critical for Moscow’s position.
Chris Weafer, a partner at Macro-Advisory, a Moscow-based consultancy, said Russia has benefited from the deal with OPEC both politically and economically. The higher average oil price has boosted oil tax revenue, and helped the budget end a six-year run of deficit to record a surplus of $44 billion in 2018, he told New Europe. Moreover, Russia’s relationship with Saudi Arabia, and with the other Gulf states, Weafer said, has noticeably improved since the 2016 production deal.
“This has helped improve Moscow’s position in the region and helped secure investment deals from Saudi and the Emirates,” Waefer said.
Russian oil companies, however, and in particular state oil giant Rosneft are pressuring Russian President Vladimir Putin to lift the cuts. “The CEO, Igor Sechin, has expressed unhappiness with the deal because it mostly benefits the American producers and is allowing them to gain global market share and to boost oil exports, Weafer said.
US producers have benefitted from the decline in production from countries such as Iran, Libya and Venezuela and filled the gap, according to Weafer. The US share of global oil production has risen from 8.7% in 2008 to an estimated 17% this year. Russia has been able to maintain its market share at 11.6% with production growth from 10 million barrels per day average per day to 11.6 million barrels this year.
“So far, the surge in US oil exports has not hurt the oil price or Russia’s market share but there is a real concern that if there is a drop in global demand, for example, if there were to be a slowdown in China or Asian economic growth as a result of escalating trade wards, then this rapid rise in US production could crash the oil price again,” said Weafer.
The big question mark for OPEC+ confab is whether the oil production cuts will be extended and for how long.
Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, argued that Russia is losing its market share mostly to American producers. “There is certainly a way of thinking that says, ‘We should stop this and we should ask for an increase and, at the very least, increase our quota.’ This is particularly convincing if production from some of the OPEC members – like the usual suspects, Iran, Venezuela, potentially Libya – declines. Then Russia could step in,” he said. He opined that Moscow might agree to extend the OPEC+ deal but only for three months. “Russia is not willing to commit for a long enough time,” he said.
Kokin noted that Russia has gained quite a lot in terms of total revenue coming into the country by actually committing to a relatively small cut and foregoing an increased production that was forthcoming.
Weafer said the Russian economy does no need higher oil prices. “The Fiscal Rule and the weak ruble policy means that the budget breakeven price has been cut from $115 per barrel in 2013 to just over $50 this year and with a target breakeven of $44 per barrel in 2022. With a price average of $60 per barrel, which is the price President Putin said he is satisfied with, and also assuming a ruble – dollar exchange rate of 65, then the surplus would remain over $20 billion per annum assuming current spending plans,” Weafer said.
He argued that the Kremlin is very wary of any events that create oil price volatility and also they are fearful of a price spike, i.e. because the higher price would accelerate supply growth and create conditions for the next oil price crash. “The actions that Russia was forced to take since 2014, because of sanctions and the oil price collapse, has positioned the Russian Budget and the oil producers much better than their OPEC counterparts,” he said.
Regarding Iran, Weafer argued, “It is ironic that the US Congress is debating possible new sanctions against Russia that, amongst other factors, would prohibit US investors and others because of the secondary sanctions threat from purchasing any new Russian sovereign debt and, at the same time, the US actions against Iran and Venezuela means that the Finance Ministry does not have to worry about raising any new external debt … and for a very long time in the future.”
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