The New Deal for Oil Markets: implications for Russia’s short-term tactics and long-term strategy
Russia and Saudi Arabia have approved a production cut of 2.5 mb/d each from an agreed level of 11mb/d. However, there is some uncertainty about what this means exactly for Russia. Recent production of total liquids has been 11.3 mb/d, implying that the cut could actually be 2.8mb/d. However, this includes a significant amount of gas condensate, which was specifically excluded from Russian quotas in an agreement with OPEC in December 2019. Russia’s recent crude oil production has been around 10.5 mb/d, meaning that the reduction could be only 2mb/d if it applies to crude oil only.
The agreement is something of a surprise given previous Russian arguments for a more considered response to the current collapse in demand caused by the Covid-19 epidemic. However, it may well reflect three facts: firstly, that a production cut may have been inevitable as soon as oil storage reached its limit, secondly that responsible action was required to alleviate a global crisis and thirdly that political gains may also be anticipated given the involvement of the US and G20. In addition, the cut may be easier to implement now that we are approaching the summer months when operating (and shutting in) West Siberian wells becomes easier.
In addition, it is clear that the Kremlin and Russian oil companies have been surprised by the rapidity and depth of the recent oil price fall, which may have been another catalyst for the latest agreement. Nevertheless, it would appear that if low oil prices are here for an extended period then Russia can survive the crisis thanks to the flexible exchange rate, large financial reserves, low levels of debt and a low cost of oil production. As such, although Russia may have taken a tactical decision to cut oil production in the short-term for both oil market and geo-political reasons, its long-term strategy of attempting to enhance its competitive position as a robust low cost producer is likely to remain intact.