History not on the side of any Opec-Russia deal
Why Saudi Arabia can’t really trust the Kremlin to cut supply
History is not on the side of any potential cooperation between Russia and Opec to coordinate a cut in global oil output. Crude prices jumped in late January after Russian energy minister Alexander Novak said Opec had proposed a joint 5% cut in oil production. But rumours of any deal were soon scuppered after Saudi Arabia, the group’s lynchpin, denied the claim.
Russia’s track record on adhering to agreements with Opec to cut production suggests the Kremlin isn’t an entirely reliable partner. On prior occasions when Russia said it would consider cooperation with Opec the oil kept flowing – and sometimes even increased. Oil companies shifted their cargoes from the pipeline system to the railways or tankers where there was less oversight. “While such a deal would certainly be a huge positive for oil prices, history suggests such suggestions usually amount to just talk,” says Cole Akeson, equity strategist in Moscow at Sberbank CIB.
As prices started to slide below $70 a barrel in November 2014, contacts between Russia and Opec resumed. Russia took part in a number of meetings in Vienna with Opec and non Opec countries, and Rosneft chief executive Igor Sechin initially committing Russia to a cut.
In the crucial meeting with Saudi oil minister Ali Naimi, Sechin was over-ruled by Novak and the Russians promptly withdrew from talks. Naimi and his advisors were left bemused by the mixed signals.
In late 2008, Opec agreed to shore up oil prices by stripping supply from the market. Eventually, the group removed 4.2m barrels a day, helping markets to climb off the floor. Russia attended the Opec meeting in Oran, Algeria, in December and pledged to join in. Sechin and then energy minister Sergei Shmatko proposed storing oil, rather than exporting it. But nothing ever came of the idea, or Russia’s pledge to help Opec. Over the following months, Russian firms actually hiked production, taking advantage of higher prices and reduced output from Opec member states obliged to stick to their quotas.
In 2002, Russia actually delivered on a cut in exports after an agreement with then prime minister Mikhail Kasyanov. But that deal unravelled in a number of months. A year after President Vladimir Putin came to power in 2000, Russia also pledged to curb output when oil plummeted -- but instead increased its crude exports while Saudi Arabia cut back.
“Russia agreed they would cut output by 100,000 barrels a day but what actually happened was Russia increased output by 100,000 barrels,” says Tom Adshead, chief operating officer at Macro Advisory in Moscow. “Russia’s response was that they had been planning to increase by 200,000 barrels so it is less than it would be. Opec was less than impressed.”
The group might have known better then too. As prices tumbled to $10 a barrel in March 1999, Opec agreed an output cut of 2m b/d. Russia said it was on board, offering to cut back by 100,000 b/d. Oman and Mexico also agreed to contribute 300,000 b/d.
In spite of the agreement, Russia’s output rose that year by 50,000 b/d, although crude exports to international markets fell by 70,000 b/d, to 2.33m, as the Kremlin redirected some volumes to floating storage units.
In March 1998 just as then President Boris Yeltsin sacked his entire cabinet, Opec agreed to cut output by 2.6m b/d. Oil had fallen to $12/b that January. Russia attended the Opec meeting and consented to a 60,000 b/d cut in exports. But the reduction never materialised and the country’s output had reached its highest ever by August.
One of the main obstacles to a cosy relationship with Opec is long-standing mutual suspicion between Moscow and US-ally Riyadh. Suspicions have been exacerbated in recent years by Russia’s military support for the Syrian government of President Bashar Assad. Saudi Arabia has been a key sponsor of the rebels battling Damascus in the civil war.
Whether pure economic necessity can overcome the acrimony and lead to a supply deal looks doubtful. But as big a problem is Russia’s patchy record. “Russia has never really cut production across the board as a country,” says Alexei Kokin, senior oil and gas analyst at UralSib Capital. “The question is what would have to change for Russia to cut and I think the answer is a realisation that the price of oil isn’t going anywhere and is hanging in the $25-35/b range. If that sets in and becomes the new normal, everything is possible, including a production cut.”