10th December saw the end of a meeting in Vienna of OPEC ministers with oil exporters that are not part of the cartel. As a result, an agreement was concluded to reduce oil production, with 11 countries, including Russia, signing it. Now Russia has to cut down its oil production by 300,000 barrels of oil per day. Is this going to help maintain balance in the global oil production and how is it going to affect the Russian economy? The chief advisor to the Head of the Analytical Center Leonid Grigoiev commented on the OPEC’s role in setting the global oil prices at a round table titled “Oil: Oil Price Projections and Prospects of the Oil and Natural Gas Market.”
Russia Is for the First Time Ready to Participate in Stabilizing the Global Oil Market
“The significance of the meeting goes far beyond the oil scope,” Mr. Grigoriev said. According to him, the OPEC always tried to avoid impacting the price too much except for when extreme circumstances called for that. The last time that happened was in the fall of 2008, when the oil price was balanced at USD 70-80 a barrel. And it was only the events at Fukushima and in Libya that drove the price up above USD 100 a barrel in 2011. In that period, the really high price allowed low margin oil producers to flourish. This effect was especially noticeable in the shale oil production in the US. Inevitably, as the global economy began to grow, there was a glut of oil and the prices collapsed. After that, starting in 2014 everybody was waiting to see whether the OPEC was going to do something about it or not. However, the past two years, some extremely complex and hard negotiations have been underway within the cartel, having to do with the lifting of sanctions from Iran, which wanted to get back its market share and its quote in the OPEC. In January this year we saw a breakthrough. “I think that the statement that Novak made in January about the possibility of oil production cut down had a powerful stabilizing effect on the market and put a stop to betting on low oil on the futures market and the price has remained at USD 40-50 a barrel since then, which means that the market is more or less stable at the moment.” Mr. Grigoriev summed up.
The expert also explained that Russia had never took part in any OPEC agreements directly before. “We are a classic free rider in the sense that we got a good price thanks to the situation that had emerged in the market without us having any hand in it.” During the previous crises Russia never changed its oil output, it always remained neutral. Participating in this OPEC agreement is the first case in out history when Russia really is ready to take an active part in stabilizing the global oil market. The OPEC cannot take this role upon itself on its own at this moment, and seeing how the cartel is being torn apart by internal conflict about the distribution of quotas within the cartel, primarily between Iran and Saudi Arabia, it would be impossible at this point to get the OPEC to cut down production if other oil producing countries were to keep expanding it, Mr. Grigoriev explained. “So, signing this agreement is the first attempt to regulate the market beyond the OPEC and Russia has joined it for the first time in history. It is a kind of a revolution, and it may have a lot of unpleasant side effects, but this is a fait accompli now, it is our new reality,” the analyst explained.