Russia and OPEC look to discuss production cuts

Anna Timoshina -
Brent crude prices have rallied by roughly 30% in the five days to 29 January to trade at around $34.50/bl on the day. Brent futures had dropped to as low as $27.10/bl on 20 January, their lowest since 2003.

Concerns around the Chinese economy and its impact on global oil demand growth helped push prices to the new lows in early 2016 forcing some OPEC producers to call for emergency meetings to discuss possible production cuts to support prices. 

OPEC policy has been largely led by Saudi Arabia — who makes up roughly a third of the cartel’s production — and the Kingdom is currently employing a strategy of maintaining strong production to defend its market share in this oversupplied market. Higher cost OPEC producers such as Venezuela, Algeria and Nigeria however are calling for the cartel to cut production to support prices.

Russia, like Saudi Arabia, is also continuing to produce at high levels in defence of its market share. Russia combined with OPEC jointly produces roughly 40% of global supply and will therefore need to act together if a cut in production were to work.

Russia “ready” to meet with OPEC in February 

OPEC has recently discussed a 5% cut in the cartel’s production which would result in 1.5mn bpd of supply being removed from a market oversupplied by approximately 2mn bpd. But until recently Russia has shown little interest in partaking in such measures.

On 28 January Russia’s energy minister Alexander Novak announced Russia may consider such measures. Consequently the prospect of a cut in production sent prices rallying. 

OPEC is planning a meeting in February — the exact date has yet to be agreed — and Russia is “ready” to join the meeting, according to Novak.

But would a production cut work?

Unlike OPEC, where member state’s output is often controlled by a single national oil company, Russia has numerous operators in its market. A cut in Russian production would need to be enforced across all the producers operating in the market and so far not all of them have openly welcomed such tactics.

Russia’s decision will also likely be influenced by Rosneft’s view on the matter. Rosneft is owned by the Russian state and accounts for 40% of the country’s production. Rosneft’s boss Igor Sechin is also a close ally of Putin’s and is widely considered to be the second most powerful man in Russia. 

Sechin has on numerous occasions argued that a cut in Russia production would not work because of the number of private producers in the market and also the low temperatures in oil producing regions in Russia that make changing production rates problematic. 

Some OPEC members are also believed to be pessimistic about Russia’s commitment to a cut while Saudi Arabia is unlikely to consider it without Russia’s participation.

In short, the market has moved with the prospect of a possible reduction, but actually turning that possibility into a reality will be a lot more difficult.