Room for cynicism and hope in Russia’s deal with OPEC
Although relations between Russia and Saudi Arabia have improved since the debacle in Doha in April 2016, it is clear that both sides will be watching each other carefully over the next few months. The fact that both have made their own implementation of a production cut dependent on the performance of the other suggests that trust has not been fully restored. Indeed, both sides have reason to be cautious. OPEC’s record of compliance with quotas is weak, and Russia also has a poor record of fulfilling any promises to cooperate with OPEC. Having said this, some form of Russian output restraint is conceivable. It may be the case that Russia is expecting a flattening of output in the first half of 2017 in any case, having pushed very hard to maximise output by the end of 2016. It is even possible that, despite the difficulty of sharing a production cut among the various Russian oil companies, drilling could be slowed and older fields could be allowed to decline slightly more rapidly for a period of time, even as new field developments continue to progress. This could produce a result approximating to a production cut in some form. Furthermore, given Rosneft’s financial constraints after a recent spending spree, it may also be the case that the owner of more than 40% of Russia’s oil production may be keen to ease its upstream spending in the short-term. However, the speed of any decline must be uncertain, and furthermore it must be likely that debates over “technical issues”, the meaning of the phrase “gradual decline”, the need for a “government order” and the allocation of “proportional cuts” will drag the process out well into the first quarter of 2017, and perhaps even to the second quarter. Nevertheless, even if a Russian output cut or freeze only results in production of 11 mb/d for the first half of 2017, this could still provide a result that is below market expectations for the year as a whole and thus could be supportive of the oil price. Indeed, this outcome may be exactly what Russia is aiming for. Enough to suggest that oil market rebalancing is a realistic hope in 2017, but not so much as to undermine the progress of the Russian oil sector in establishing levels of average annual production at a post-Soviet high.