Russia, the world's second-biggest oil exporter, sparked a bout of furious trading in crude markets and a corresponding spike in prices this week after the country's top energy official declared that the country is ready to meet with OPEC to discuss cutting output.
If such coordination actually happens, it would mark a fundamental shift in the global politics of oil, bringing Russia into unfamiliar alignment with the 13-member Organization of Petroleum Exporting Countries in a bid to support prices, which have plummeted since mid-2014. Russia is not a member of the oil cartel.
But energy analysts and Kremlin-watchers were quick to cast doubt on the odds of a new global alliance to revive oil markets. Russia and OPEC member Saudi Arabia face huge barriers to joint action, despite the severe damage low oil prices are dealing to their economies.
After sinking to 12-year lows earlier this month, falling below $30 per barrel from roughly $115 in June 2014, crude prices jumped 8 percent on Thursday amid frantic buying in the hours after Russian Energy Minster Alexander Novak was quoted by the Interfax news agency as saying that the nations had discussed a production cut of up to 5 percent.
The energy minister later clarified that no decision has been made.
"We're ready to discuss the issue of cutting oil output volumes," Novak said in an interview on Bloomberg Television. "We're ready to consider the possibility."
'I just don't think it's real.'
Novak said that Venezuela had approached Russia about scheduling an emergency meeting between OPEC nations and non-OPEC oil exporters, and that Russia had agreed to join in any talks. No date has yet been set.
Novak remarked that Russia would want all oil-exporting countries to reach agreement before it would join in a reduction.
"This should be a consensus," he said. "If there's a consensus, it makes sense."
As the lack of specifics became apparent, oil prices receded from Thursday's highs. But buzz about a potential deal to reduce global oil supply continued to encourage speculators. On Friday, March futures for Brent crude rose 2.5 percent to close at $34.74 per barrel.
"I just don't think it's real," said Chris Weafer, senior partner at consultancy Macro-Advisory in Moscow. "So far, Russia's history of engagement with OPEC has never amounted to anything."
Photo via Wikimedia Commons
Novak's comments sparked a flurry of mixed signals from other officials in Moscow.
Russian Deputy Prime Minister Arkady Dvorkovich denied that Russia would take state-led action to reduce output, although he allowed that low prices might force output to fall.
"If prices are at a low level for an extended period of time, a correction in investment will become inevitable and that will lead to a certain reduction in output, but that will not be a deliberate act by the state," Dvorkovich said Friday, according to Reuters.
Meanwhile, Russian Foreign Minister Sergei Lavrov announced a trip in early February to the United Arab Emirates and Oman. Lavrov plans to discuss "the urgent task of reducing volatility and ensuring fair prices for hydrocarbons, and achieving a sustainable balance between supply and demand," Foreign Ministry spokesperson Maria Zakharova told a briefing in Moscow on Friday.
The sense of urgency is widespread, as the impact of cheap oil pummels petro-states around the world, particularly the unstable economies of countries like Venezuela, Iraq, and Libya.
Russia's currency, the ruble, has collapsed to less than half its value against the dollar as the country battles a grim recession. Venezuela risks defaulting on its debts and sliding into hyperinflation as its economy teeters on the brink of collapse. Saudi Arabia has been drawing down its vast foreign currency reserves while running up colossal budget deficits.
The decline is partly the result of a ruthless oil price war being waged by Saudi Arabia, the world's biggest oil exporter, against rising energy players like the United States, whose fracking revolution allowed it to surge past the Saudi kingdom in terms of production in 2014, according to the BP Statistical Review of World Energy.
The US has seen a historic increase in output in recent years as advanced hydraulic fracturing technology has unlocked shale oil reserves once thought to be too costly and difficult to access. As a result, American output has skyrocketed. Rather than cut output to support prices and lose market share, Saudi Arabia has pushed production skywards in a bid to temporarily lower prices and flush higher-cost producers out of the market. But that has taken longer than officials in Riyadh had hoped.
A slowdown in China's economy has also hurt demand. In the meantime, as prices plunge, oil-exporting countries around the world are wondering how much pain they can stand.
'I don't see why the Saudis would want to go for that.'
Despite the practical difficulties of coordinated action, Novak's comments suggest that serious talks are indeed underway behind the scenes toward a broad-based oil production cut to relieve pressure on exporters, said Olivier Jakob, an analyst at Petromatrix in Zug, Switzerland.
"I think there are some discussions. Saudi Arabia won't want to talk officially. They will want to have an agreement before there is any public mention of discussions," Jakob said. "Today, I think there is a higher level of discussions than a few months ago, and that increases the odds of coming to an agreement. But it's too early to have strong confidence that we'll see a breakthrough in negotiations."
Analysts at the US investment bank Jefferies noted that the figure of a 5 percent cut attributed to Novak in the initial Interfax report would go a long way towards realigning global supply and demand.
"While we view this outcome as unlikely, a 5 percent production cut by just Saudi Arabia and Russia would be sufficient to bring the market close to balance," Jeferries analysts wrote in a research note to investors.
But even if Moscow decided to cut Russian oil output, officials would face huge obstacles in doing so, as well as potential blowback from the private shareholders of Russian oil companies.
One key difference between the Russian and Saudi oil industries is that Russia's oil patch features multiple large companies with publicly traded stock. Saudi Arabia's oil sector is dominated by one massive national champion: Saudi Aramco. Complete state control of the colossal firm means Saudi leaders have no private shareholders to answer to.
"It's very difficult for Russia to tell the companies to cut when they're listed on the London Stock Exchange," said Weafer of Macro-Advisory. "Russia's reputation in terms of investor rights isn't ideal... but that would be damaging in terms of the investment story."
Alex Fak, senior oil and gas analyst at Moscow's Sberbank CIB, said Saudi Arabia is unlikely to give up its attempt to flush US shale oil producers out of the market anytime soon.
"I don't see why the Saudis would want to go for that," he remarked. "Their strategy has been very clear: to drive a big part of US production out of business. This is a long slog. If prices were to rebound too soon, it would breathe life into the near-bankrupt marginal shale producers."
Russia, which gets most of its oil from frigid Siberian fields, would also face difficulties in shutting down production in the middle of winter. Russian oil wells pump significant amounts of water along with the crude.
"Shutting these water pumps down in permafrost conditions would cause casing to burst, permanently damaging the well," Fak said.
Iran's reemergence onto global oil markets following an agreement to remove international sanctions over its nuclear program would also present challenges to a multilateral agreement. Iranian officials have signaled that their next move will be to ramp up the country's oil exports as quickly as possible.
On Friday, a top Iranian oil official was quoted anonymously in the Wall Street Journal as saying that the country would "not consider a cut" in coordination with OPEC to reduce output, since sanctions led its production to fall by a third.
"No one can really expect Iran to cut from sanctions levels," Weafer said.
In that case, talk of coordination may amount to little more than hot air.
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