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Russian Oil Firms More Eager To Extend Than To Deepen Output Cuts

The majority of Russian oil companies are on board with extending the agreement to cut oil production through the end of Q2, but most did not support deepening those cuts, according to Ravil Maganov, first executive vice president of Lukoil cited by S&P Global Platts.

Oil prices have fallen more than 20% since the start of the year as the coronavirus has stifled demand for crude oil, causing OPEC to rethink its production cut strategy.

The comment was made after Russian Energy Minister Alexander Novak met on Wednesday with Kazakh energy minister Nurlan Nogayev and then representatives from Russian oil companies to discuss OPEC’s recommendations.

Last week, OPEC+’s joint technical committee recommended extending the current production cuts to the end of the year, and deeper cuts—another 600,000 bpd—through the end of Q2. But Russian oil companies, unsurprisingly, aren’t scrambling for a chance to cut more production.

Gazprom Neft’s CEO Alexander Dyukov said that “Given the current situation on the market, it makes sense to extend the agreement through the second quarter and then monitor.”

Nogayev, on the other hand, seemed more receptive to the idea of different cuts, saying that Kazakhstan would work out “a joint position” with Russia where Kazakhstan would cut another 20,000 bpd, cautioning that no final decision had yet been made.

In reality, the final decision lies with the government, not the individual oil companies. 

OPEC+ has discussed the possibility of moving up its March 5-6 meeting in order to discuss how best to address the current state of the oil market. Whatever decision is eventually made, Russia will need to be on board, as OPEC no longer has enough clout on its own to manipulate the oil markets like it used to.

OPEC on Wednesday slashed global oil demand growth to 990,000 bpd in 2020, down by 230,000 bpd, as the virus takes its toll.

By Julianne Geiger for Oilprice.com

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  • Mamdouh Salameh on February 13 2020 said:
    There is a huge difference between extending an already existing production cuts regime to the end of the second quarter and deepening the cuts or adding new ones.

    With China virtually in quarantine and therefore closed to business and unable to receive crude oil shipments, OPEC's considering adding new cuts or deepening old ones will be a total waste and futile with no effect whatsoever on oil prices and will only lead to a loss of market share.

    Even if OPEC’s production plunges by 2.0 million barrels a day (mbd) on top of Libya’s virtual loss of its production amounting to 1.0 mbd, it will not stop the continued decline in global oil demand and prices as long as the coronavirus outbreak is still raging.

    Russia is yet to be persuaded by the need for new cuts. Russia’s economy could live with oil prices at $40 or even less. There is another major reason why Russia is hesitant about new production cuts. Russian oil companies have long balked at continued production cuts, arguing that the cuts hinder their production expansion plans, while leading to a wasteful loss of market share. Still, the final decision rests with President Putin.

    Once the outbreak has been contained, global oil demand and prices will recoup all their recent losses in no time.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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