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Julianne Geiger

Julianne Geiger

Julianne Geiger is a veteran editor, writer and researcher for Oilprice.com, and a member of the Creative Professionals Networking Group.

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Did Russia Just Call The End of The OPEC Deal?

OPEC and heavyweight Russia may fight America for its share of the oil market, Russia’s Finance Minister Anton Siluanov told TASS on Saturday, even if it means quitting the OPEC deal and lowered oil prices.

OPEC and Russia have tapered oil production according to the agreed upon production cut deal, but the United States continues to increase its production and is picking up market share in the process—market share formerly held by OPEC members and the other non-OPEC signatories to the deal including Russia.

Any failure in the production cut deal, however, will have a negative impact on prices, and could theoretically plunge prices into the $40 per barrel territory. This, in turn, would squeeze US oil producers and hurt new investments, Siluanov said.

“(If the deal is abandoned) the oil prices will go down, then the new investments will shrink, American output will be lower, because the production cost for shale oil is higher than for traditional output.”

Siluanov’s comments came in tandem with warnings of a looming global economic recession. “The risks of an upcoming global recession are very high,” the Finance Minister said. “We are ready for a change in global energy prices – we have prepared the budget, the reserves, the balance of payments. We have created this kind of system.”

Russia has been the wildcard in the OPEC+ production cut deal, and has long sent mixed messages regarding their all-in-ness of the deal. And as US production increases and its market share expanding, OPEC’s clout is waning, highlighting the importance of its relationship with Russia. Related: Environmentalists’ “Bomb Train” Concerns Are Overblown

OPEC’s production has fallen to levels below its commitment. The United States, however, continues to increase production, and currently sits at an all-time-high of 12.2 million bpd, according to the EIA. Before the original production cut deal was established in December 2016, US oil production sat at 8.77 million bpd—a significant increase that undoubtably puts pressure on any of the countries who have tapered production.

President Vladimir Putin on Tuesday, however, assured markets that Russia would continue its cooperation with OPEC. “We will closely monitor the market, but we will continue cooperation with OPEC,” Putin told TASS, following it up with a more ambiguous chaser.

“If the market situation develops in such a way that reserves increase dramatically, or the US seizes Venezuelan oil and quickly increases its accessibility on the world markets, or something positive happens in Libya in terms of the political situation, and Libya enters the global market, or someone thinks that it is necessary to stop putting pressure on Iran and Iran enters the market with additional volumes, then we will have to take all this into account and make the appropriate decision."

Under the terms of the production cut deal forged with OPEC, Russia agreed to shave 230,000 bpd to reach 11.191 million bpd.

By Julianne Geiger for Oilprice.com

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  • Mamdouh Salameh on April 15 2019 said:
    Russia played a pivotal role in negotiating both OPEC+ production cut agreements in 2017 and 2018. Moreover, Russia will never withdraw from its commitments. However, if I am to be brutally honest, Russia’s contribution is more moral than actual. Russia has yet to fulfil its full share of this year’s OPEC + cuts amounting to 230,000 barrels a day (b/d).

    The suggestion by Russia’s Finance Minister Anton Siluanov that OPEC and Russia should compete with US shale oil production for market share is an already discredited strategy having been tried by Saudi-led OPEC and found wanting during 2014-2016 in the aftermath of the 2014 oil price crash. Even when oil prices crashed to $30 a barrel, it only slowed US shale oil production but failed to deal a knockout blow.

    And while Russia’s economy could live with an oil price of $40 or less, the overwhelming majority of OPEC members need an oil price higher than $80 to balance their budgets.

    Still, I doubt Russia will abandon the OPEC+ production cut deals because in its assessment of the global oil market, it looks beyond the oil price and takes into consideration geopolitical factors particularly its growing relationship with Saudi Arabia and the great influence it has gained over the global oil market from its cooperation with OPEC.

    Saudi Arabia is determined to continue with the OPEC+ cuts with or without Russia until the global oil market has irrevocably re-balanced and oil prices hit $80 or higher.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Mitch Farney on April 15 2019 said:
    Sounds a little bit like Russia wants to throw OPEC nations into a whirl as well, since their budgets need similar prices as US shale(outside of the big shale operations in prime area). Seems kinda silly to sell 5-10% more oil at a 25-50% lower price, and costs remain the same just to "protect" market share. It's not like Russia can ramp up a million barrels in a few months like KSA.
  • Norm Dill on April 16 2019 said:
    I am constantly surprised how commentators on oil do not seem to understand pricing mechanisms in competitive and somewhat competitive markets. They seem to only understand cartel pricing and battles within cartels. US shale gas more or less or a permanent cap on prices. Anytime the prices rises too high or generates more shale production and the is just enough competition that eventual the cartel losses control, more production ensues from the cartel and prices fall. The cartel then tries to set the price higher with production cuts, shale ramps up because the higher price supports more shale production and... Rinse and repeat.

    Not only that, but eventually renewables will start displacing oil and the cartel will be further weakened. Oil prices in the medium to long term have no where to go but down with increasingly brief short term surges upward.
  • E.M. Shalev on April 19 2019 said:
    There is a logic to selling sub-terrestrial and sub-marine resources that will soon (in years of course, not months) become increasingly unsellable. There is an optimal (though non-stationary) price which allows shale production to continue without allowing it to expand its market share. Calculating, or rather estimating, this dynamic pricing is not easy but it is doable. When global EV vehicle production hits its critical mass (and given China's lead this will happen sooner than anticipated) global demand for oil will rapidly plummet. Good advice: sell it while you can at reduced profit because fire-sale pricing is on the horizon. This is of course knowledge which is well known to the oil sector, but being psychologically unbearable it is routinely rejected by wishful thinking oil executives.

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