Russian Oil-Output Cuts to Support OPEC Seen as Unlikely

Oil Well file photo

(Bloomberg – bloomberg.com – Stephen Bierman, Elena Mazneva – November 26, 2014) Each time oil takes a dive, the idea of Russia allying with OPEC to shore up prices gets an airing.

It happened in the months after 9/11 and again during the 2008 financial crisis. Now it’s back on the agenda. Russia’s top two oil officials are in Vienna today to meet OPEC nations before this week’s meeting maps out the group’s response to this year’s tumble in prices.

In many ways it’s a natural alliance. Like the countries that make up the producer group, Russia depends on energy exports for the bulk of state revenue, and at 10 million barrels a day, or more than 10 percent of global output, it has the scale to make a difference in the world oil market.

Little ever results from the talk though — even a 2002 agreement for Russia to hold back exports unraveled after a few months. This time probably won’t be any different for several reasons: a lot of oil in Russia is pumped by private sector companies beyond the reach of state edicts, and the extreme cold of Siberia’s winter makes it difficult to turn wells off and back on quickly. In addition, cutting supply would be financially painful for a Russian economy battered by sanctions and a crash in the ruble.

“We are not Saudi Arabia, which has the ability to reduce production quickly, ramp up quickly,” Russian Energy Minister Alexander Novak said in a TV interview yesterday.

Brent crude oil futures rose as much as 0.8 percent to $80.30 a barrel in London trading today.

Cutting Production

Moscow daily Kommersant reported this week that Russia was considering cutting production, which has run at just above 10 million barrels a day since 2012, by 300,000 barrels if OPEC decided to cut production at a meeting in Vienna this week.

While a small decline is possible as lower prices make some marginal wells uneconomic, a deliberate cut of that scale isn’t likely, said Alexander Kornilov, an Alfa Bank energy analyst in Moscow.

“Russia will produce as much oil as it can,” Kornilov said. “Any cuts are possible only because of natural reasons, not on purpose to influence the market. Any statement beyond this is bravado.”

OAO Lukoil (LKOD), Russia’s second-largest oil producer, sees its Russian output falling by about 30,000 barrels to 1.71 million barrels a day next year at $80 a barrel prices, Chief Executive Vagit Alekperov said on Nov. 21. Lukoil will cut spending next year on drilling on some of its older fields.

Slight Decline

The press service at OAO Rosneft (ROSN), Russia’s largest oil producer, didn’t give an output forecast for next year. Its production declined slightly in the first nine months of the year, to 3.84 million barrels a day in October from 3.9 million barrels a day in December, according to the Energy Ministry.

Russia’s potential offering of a reduction to OPEC may be an attempt at “making a virtue of necessity,” said Julian Lee, an oil strategist at Bloomberg First Word.

Novak and Igor Sechin, the former deputy prime minister who now runs state oil producer Rosneft, travel to Vienna today for meetings with OPEC minsters before the group meets to set production targets on Nov. 27.

It’s the continuation of several Russia-OPEC diplomatic meetings in recent days.

Iranian President Hassan Rouhani and Russia’s Vladimir Putin agreed to cooperate together in the oil market, the Iranian oil ministry’s news service Shana said today. Similar statements were made last week after Russian officials held talks with Saudi and Venezuelan delegations.

Market Stability

In his interview yesterday, Novak appeared to distance himself from supply cuts, saying Russia was helping market stability be keeping output stable.

The problem for Russia’s allies within OPEC, led by Venezuela, traditionally among the most aggressively minded oil producers, is that it’s going to be hard enough to get a deal within OPEC, let along bring people in from outside.

“Trying to broker a large OPEC output cut is complicated by the speed of the price fall, the big changes to OPEC countries’ output levels since the last quota was agreed in 2011 and more difficult relationships between OPEC members,” Barclays Plc analysts said in a report yesterday.

OPEC is considering exempting Iraq, Iran and Libya from any proposed production cuts because they are already producing under their potential, two people with knowledge of the proposals said.

Oil Reserve

In Russia, meanwhile, a familiar chorus has started on creating its own reserve, so it can manage supply to intervene in world oil markets without turning off wells.

“It doesn’t make sense why there can be a grain reserve and can’t be an oil reserve,” Rosneft board Chairman Alexander Nekipelov yesterday.

Sechin and then Energy Minister Sergey Shmatko proposed storage after the 2008 price crash and nothing ever came of the idea then.

Russia’s Economy Minister Alexei Ulyukayev batted the idea down yesterday, saying it wasn’t being discussed in government and he did not support it.

Article ©2014 Bloomberg L.P. All Rights Reserved. Article also appeared at bloomberg.com/news/2014-11-25/talk-of-russian-oil-cuts-to-help-opec-likely-to-stay-just-that.html

[featured image is file photo]

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