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Russia’s Oil Production Cuts To Take Months To Implement

oil

After Russia agreed on Friday to cut its oil production as part of the non-OPEC group tasked with cutting 400,000 bpd of oil production, Energy Minister Alexander Novak said it would take Russia “months” to get down to its requested level.

While there were no specific figures or targets released to the public for each individual member of the OPEC and non-OPEC groups to hit, non-OPEC was saddled with a 400,000 bpd burden, while OPEC itself agreed to cut 800,000 bpd. Unofficial sources, according to Tass, has Russia’s portion of the cuts pegged at 228,000 bpd, which is 2% of its October levels.

Shortly after the meeting concluded on Friday, Alexander Novak dampened high spirits among the oil bulls. “The oil production will be reduced, just as two years ago, as quickly as possible in terms of technology. I think it will take several months,” Novak said at the after-meeting press conference.

Russia, together with Iran, had been a critical unknown factor leading up to the production cut meeting. Russia’s cooperation with the long-standing, largely Middle Eastern oil cartel was certainly not a given, nor is it officially affiliated with the cartel, although there have been rumors about making its relationship with OPEC official.

Prices fell a day earlier on Thursday after the OPEC + Russia meeting ended without resolution. Novak had left the meeting to return to Russia to discuss the matter with President Vladimir Putin, who returned to the negotiating table early on Friday. Saudi’s Energy Minister Khalid Al-Falih dutifully managed expectations on Thursday, saying that he was “not confident of an agreement” and that Russia was “not ready for a substantial cut.”

After floating the possibility that a deal would not be reached at all, what looked like a modest 1.2 million bpd a week ago now looks pretty attractive.

Oil prices responded in kind on Tuesday on the news of the deal, with both the WTI and Brent benchmarks climbing nearly 5% on the day.

By Julianne Geiger for Oilprice.com

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  • Mamdouh G Salameh on December 08 2018 said:
    I agree with you that it will take months before Russia cut its oil production. The reason is that the bulk of Russian oil production is carried out by private Russian companies with a small State stake. These companies have invested heavily in the last few years to bring Russia’s oil production to 11.45 million barrels a day (mbd), the highest in the post-Soviet era. They have never been keen on cutting production particularly in Winter as they want to recoup their investments quickly.

    The Russian economy can live with an oil price of $40 a barrel or less. Still, Russia agreed a cut as a show of solidarity with Saudi Arabia and OPEC

    One more thing, Ms Geiger. It is wrong to call OPEC a cartel because OPEC has never been a cartel.

    A cartel is defined as an association of manufacturers and suppliers whose goal is to increase their collective profits by means of price fixing, limiting supply, preventing competition or other restrictive practices.

    OPEC is not a cartel. How could it be a cartel when it was founded as a counterweight against the previous “Seven Sisters” cartel which dominated every aspect of global oil through price fixing, limiting supplies and suppressing competition for the sole purpose of maximizing its profits.The main purpose behind the founding of OPEC was to give producers more control over their own oil.

    One would expect a cartel to curb production in order to raise the price of its product as well as to share market among its members. However, OPEC has never once tried to fix a specific price nor has ever been able to achieve this goal. The fundamentals of the global oil market are the ones that determine the oil price helped occasionally by geopolitics. OPEC has no control on these fundamentals. For instance, OPEC was not able to prevent prices from falling in the 1980s even after it adopted the production quota system in 1982. Moreover, OPEC was neither able to temper oil prices in 2008 when prices rocketed to $147 a barrel nor was it able to stop the 2014 oil price crash.

    When it comes to limiting oil supply, a true cartel like the “Seven Sisters” was able to do exactly that because it was virtually in control of global oil resources. OPEC has never been in such a situation. It only accounts for 42.6% of the global oil market with the rest of the oil-producing nations of the world accounting for 57.4%.

    Furthermore, OPEC has never been involved in any disputes related to the competition rules of the WTO.

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

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