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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Oil Price Drop Imminent If Moscow Says “No” To Extension

OPEC

As the November 30 meeting in Vienna of OPEC and its partners in the oil production cut deal nears, worry has returned among traders: one of the brokers of the deal might decide to walk out on the deal instead of participating in another extension.

We’re talking about Russia, the world’s top producer and exporter, who many believe played OPEC and specifically its leader, Saudi Arabia, by agreeing to a relatively minor production cut from its nearly record-high rate of production.

Reports emerged last week that Russia is considering a delay on the decision to extend the cut. That’s after Energy Minister Alexander Novak hinted more than once that from Moscow’s perspective, this decision is far from urgent. With a budget based on Brent at US$40, Russia is indeed in a sweet spot compared with its partners in the deal: it can remain in the black at any price above US$40.

But there may be another reason for Moscow deciding to opt out of the extension. Lower oil prices could actually be more beneficial for the Russian economy. Macro-Advisory analyst Chris Weafer lists six ways in which lower oil prices would be better for Russia, and all of these make sense, counterintuitive as this line of argument might seem at first glance.

Related: Is This The New Sweet Spot For Shale?

For starters, the higher the price of oil, the greater the risk of another collapse down the road. The more oil costs, the more producers will invest in new production, possibly leading to a repeat of the 2014 collapse. Or prices could simply take a dive once the OPEC deal ends, which it must at some point.

A higher oil price would also likely compromise a budget reform currently in the works, which aims to rein in spending. More importantly, Russia’s economic diversification efforts may well be compromised if oil prices remain higher—a point we’ve made repeatedly on Oilprice, not just with respect to Russia but to all oil-dependent economies.

According to Weafer, however, renewable energy does not play a large part in this diversification. He says that stifling investments in renewable energy is one more reason for Moscow to want oil prices to fall: the higher oil prices are, the more attractive renewable energy becomes.

Related: Musk’s “Hardcore Smack-Down” To Gasoline Vehicles

Yet another reason is that Moscow prefers to keep the ruble cheaper as this stimulates exports, curbs imports, and boosts competitiveness. Traditionally, the Russian currency has followed Brent’s moves closely, but this link has now been severed thanks to a fiscal rule mechanism employed by the Russian Finance Ministry that involves converting more rubles into forex as tax on the oil industry rises, pressuring the local currency. If, however, Brent goes high enough, there may be a spike in speculative interest in rubles, which will cause the currency to rise, too.

All of these reasons make perfect sense for Russia. They are unlikely to be praised by its partners in the deal, however. Right now, according to analysts, OPEC’s meeting on November 30 and the deal extension expected to result from it is the single most important tailwind for oil prices, as the effect of tensions in the Middle East begins to subside in the absence of any escalation. In this context, the consequences of Russia pulling out of an extension beyond March 2018 are all too easy to guess.

By Irina Slav for Oilprice.com

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  • Silva Silverstein on November 20 2017 said:
    Russia's 300k bbls per day cut is not that much in the big picture. They would be wise to increase their cut to 400k - 500k bbls per day. The uptick in price that will follow will pay for itself in a long term. They will also be glad not to let Mother Russia's precious resources given away like some cheap whore.
  • Firstsight on November 21 2017 said:
    With elections in March 2018 and a Syrian war to pay for, Russia needs the extra money to pay off its stakeholders and win. An extra $10 a barrel translates into an extra $50Mill+ every day. There's no reason why Russia would want the price down in 2018. Russia has never tried to supress alternative energy and shale by killing the oil price, that's the Saudis who wanted to kill US shale. Chris Weafer's reasons sound like a bunch of unbelievable conspiracy theories like Trump colluding with Putin. Diversify away from oil? By supressing the oil price? To diversify u need money $$$ to invest elsewhere, n u get that from a high oil price.
  • L on November 23 2017 said:
    Or. You know. They could make more money by exporting more.

    The oil industry seems to think that the only way something can be profitable is to not make any of it. There is the Rolex watch model. But there is also the McDonalds model.

    All this cartel, conniving stuff is simply prohibiting a true free market and probably always hurts the economy of these nations anyway because they get used to thinking that way rather than actually try to grow. Not to mention that high fuel prices hurt all the rest of the economy as well (and the average Russian feels that a lot more than the average American).

    Good thing there isn't as much of a farming cartel. We'd be having people praising the wheat cuts and how good they are for the economy.

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