An internal disagreement in Russia is casting doubt over whether OPEC’s plan to curb global oil production will come to fruition.
Early this week, Russian President Vladimir Putin said he was ready to join the Organization of the Petroleum Exporting Countries’ efforts to limit oil production. But Igor Sechin, head of state-owned oil company Rosneft, which accounts for 40% of the country’s output, told Reuters he wasn’t.
“Why should we do it?” Sechin replied in Istanbul late Monday when asked if Rosneft would cap its production.
“Sechin’s comments certainly send mixed signals and raise further suspicion that Russia won’t cut output and is only using production cut talks to push prices higher, while operating at maximum output,” said Troy Vincent, oil analyst at Clipper Data.
Indeed, the contradictory statements were part of the reason oil prices declined on Wednesday.
Market participants may view the comments as Russia “just playing their cards like all of the other major producing nations” to move prices, said Vincent.
But there is much more to it than that.
For one, Putin and Sechin have much different interests.
Russia taxes revenue rather than profits, so the 50% drop in oil prices CLX6, +1.01% LCOZ6, +0.60% over the past two years hurt the Russian government, which Putin heads, “a hundred times more than it hurt Russian companies,” said Edward Chow, senior fellow for the energy and national security program at the Center for Strategic and International Studies in Washington.
He pointed out that a drop in oil prices doesn’t really affect Rosneft that much, so the company has no incentive to give up volume and profits.
Sechin has also been “very dismissive of OPEC for a few years now,” so his refusal to cap production is “consistent with his past statements, if he’s looking at it strictly from Rosneft’s point of view” and not the government’s, Chow told MarketWatch.
Mark McNamee, senior analyst, Europe, at Frontier Strategy Group, said it’s important to note that Putin said he’d only be open to an OPEC deal as long as OPEC itself abides by it.
That is something “Sechin correctly, publicly doubted,” he said. “Feeling assured of OPEC’s inability to enforce cuts, Sechin reaffirmed his commitment to keep pumping.”
OPEC is known for its history of consistently overproducing oil in defiance of its own member quotas. And that’s what it all boils down to.
“Despite whatever internal political machinations are occurring within the Kremlin at this time, Russia’s compliance with the proposed OPEC deal is important but only relevant if—and only if—OPEC can prove itself as seriously abiding by production cuts as a group, which is a tough task to begin with,” said McNamee.
Waiting for the real deal
Chow went a step further to point out that despite the overall gains in oil prices since OPEC members met on the sidelines of the energy conference in Algiers, there is no real agreement on production.
OPEC reached a preliminary deal to target out of between 32.5 million and 33 million barrels a day, but said it won’t complete details until Nov. 30, when members next hold a formal meeting in Vienna.
OPEC said it plans to hold a technical meeting on Oct. 28-29 and has invited Russia and other major non-OPEC producers to attend, news service AFP reported on Wednesday.
The “more parties your bring [to the discussions], the harder it is to reach an agreement,” said Chow. “This whole quota-setting exercise on Nov. 30 is just about next to impossible.”
But if there is an actual OPEC agreement reached next month, Russia may make “some sort of token contribution,” possibly on the order of plus-or-minus 100,000 barrels a day, he said.
That may be just a “notional cut,” not an actual one, Chow said, noting that the market is “very skeptical” that Russia would follow through. “Russia is a price taker, not a price setter,” he said.
It wouldn’t be a surprise if Brent crude fell below $50 a barrel in the next few days, Chow said.
“If it drops below $50, that would’t shock me,” as prices would just be going back to where they were before the Algiers meeting, he said. “Algiers didn’t really change much in my mind.”
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