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Why Russia might actually be better off quitting the OPEC deal

CNBC/20 November 2017


The world’s largest oil exporter could be poised to back out of a widely anticipated extension to global supply cuts, Chris Weafer, senior partner at Macro-Advisory, said Friday.

OPEC members are reportedly forming a consensus with other allied crude exporters to extend their production deal by nine months. That would prolong the agreement among OPEC, Russia and other oil-producing nations to keep 1.8 million barrels a day off the market through the whole of next year.

Nonetheless, Weafer said that while at first glance Russia backing out of a production deal looking to clear a global supply overhang seemed to be a “crazy position to take,” the context of Russia’s changing industrial priorities meant it actually made “perfect sense.”

Weafer said if oil stays in the $60 to $65 a barrel range, Moscow’s support for a deal extension beyond March next year would be “very unlikely.” Weafer said that Russia still makes money with the oil price in the mid-$50s and any higher would prompt U.S. shale firms to ramp up production. He also believes that this price would incentivize the Russian economy to diversify away from oil, a major long-term benefit for the country.

‘Risk of another collapse’

“The higher the price of oil then raises the risk of more investment into, for example, U.S. shale and Canadian Sands projects, which, as was seen in 2014, risks a big increase in global supply,” Weafer said in a research note originally published in an article for The Moscow TimesThursday. He argued, therefore, that Russia’s sustained backing of the OPEC-led deal could “create a risk of another collapse” next year.

Russia’s Energy Minister Alexander Novak — a key architect of the output cut deal that was extended last May — said in October that Moscow would be in favor of extending the OPEC-led production deal into late 2018. However, Weafer said Novak’s comments had since lost relevance because they were made at a time when the oil price was drifting in the $50 to $55 range.

Brent crude traded at around $62.05 a barrel Friday afternoon, up 1.14 percent, while U.S. crude was around $56.01 a barrel, up 1.6 percent. The price of oil collapsed from near $120 a barrel in June 2014 due to weak demand, a strong dollar and booming U.S. shale production. OPEC’s reluctance to cut output was also seen as a key reason behind the fall. But, the oil cartel soon moved to curb production — along with other oil producing nations — in late 2016.

Moving away from oil dependency

Weafer argued if Russia opted out of extension cuts, it would allow the non-OPEC nation to continue with efforts to diversify its economy at a time when it was looking to move away from oil dependency.

Furthermore, Weafer said the Kremlin had been consistent in their message that a weaker ruble would be much better for its economy. And while oil prices had surged from the mid-$50 a barrel range to $64 in recent weeks, the ruble-dollar exchange rate had actually weakened.

“All of this compares a lot more favorably with the typical OPEC-country model and are powerful reasons why Moscow is today more comfortable with a sustainable price in the $50s than closer to the mid-$60s,” he concluded.

On Monday, United Arab Emirates (UAE) Minister for Energy Suhail al-Mazroui said he expected OPEC and non-OPEC countries to extend global supply cuts at a closely-watched meeting at the end of the month.

The UAE’s Al-Mazroui added that while he had not heard any OPEC members discussing the possibility of not extending the deal, the time and duration of an extension was still to be decided.

The exporters reached the current deal last December and have already extended the agreement once through March 2018.

OPEC and other non-OPEC producers are poised to meet on November 30 in Vienna to decide on oil output policy.

News Source: CNBC

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