Do you remember who first said anything about extending the oil production cut deal until the end of next year? It wasn’t Saudi Arabia or any other Gulf producer. It wasn’t even Venezuela. It was Russia, and more specifically President Putin, who suggested such an extension during Saudi King Salman’s visit to Russia in October.
At the time, most other participants in the deal were slapping each other on the backs for the high compliance rates and the increasingly evident results from the cuts, arguing that an extension may be unnecessary. No longer: now everyone seems to be convinced that an extension is in fact necessary, at least everyone in OPEC. But the country that will actually make or break the deal will be Russia.
One OPEC source that requested anonymity, told Bloomberg that Putin is “calling all the shots.” RBC Capital’s head of commodities Helima Croft called the Russian President “the world’s energy czar.” Indeed, Russia seems to have replaced Saudi Arabia as the market swinger, along with U.S. shale.
How did this happen and how did OPEC miss it? It happened gradually, just like the shale boom that OPEC also underestimated and ignored until it was too late. Russia has a lot of natural resources. It is trying to make the best possible use of these resources. It has been expanding its crude oil production for years, reaching a 30-year high last year, at over 11 million bpd, right before the original OPEC deal.
This is how Putin played Riyadh. It was clear that Russia’s participation in the cut deal would be crucial for prices to respond in the way OPEC wanted. To secure this response, OPEC’s leader cozied up to Moscow, with the first ever visit by a reigning Saudi monarch and a string of preliminary investment agreements, not to mention the purchase of the Russian S-400 missile system. All this despite the fact that Russia is a strong ally of Riyadh’s arch-enemy, Iran, and has shown no signs of willingness to reconsider its regional alliances.
So far, the interests of OPEC and Russia seemed to be aligned, but this is changing. It’s not so much about oil companies lacking the motivation to invest in new production, which, according to Russia’s Economy Minister Maxim Oreshkin, is hurting economic growth. It’s about Russia seeing more advantages in lower oil prices.
First, the lower the oil prices, the less motivated U.S. shale producers would be to expand their own production. Like OPEC, Russia sees U.S. shale boomers as the main threat to its reign in the global oil world. Second, the Russian economy benefits from a weaker ruble, and lower oil prices mean a weaker ruble. Third, the Russian economy has shown strong resilience to the oil price crash. This resilience has surprised those unfamiliar with recent history, but it is one more reason for the world’s current number-one oil producer to have second thoughts about a nine-month extension of the oil production cuts.
Russia is the producer everyone is watching ahead of the OPEC meeting. It may very well sign up for the nine-month extension but if it does, it will very likely do it on its own terms—and Saudi Arabia and the rest of OPEC might need to brace for these terms, whatever they may be, whether economic or geopolitical.
By Irina Slav for Oilprice.com