What Was Russia Thinking In Refusing To Cut Oil Production?
Last week OPEC conducted meetings with a coalition of partners that have worked together to limit oil production since 2016. It was widely reported that the group hoped to come to an agreement to reduce oil production by an additional 1.5 million barrels per day (BPD).
The meetings came in the wake of reports from the IHS Markit Crude Oil Market Service that Q1 2020 world oil demand will decline by 3.8 million BPD from a year earlier. This will represent the largest quarterly demand decline ever reported.
But this time one of the key partners of the coalition, Russia, refused to participate in additional cuts. They had previously signaled their resistance to additional production cuts in February when OPEC floated the idea.
Oil prices plunged by nearly 10% following this surprise move by Russia. It had been widely expected they would go along with the plan, because the alternative seemed much worse. So what exactly are they thinking?
The meetings came in the wake of reports from the IHS Markit Crude Oil Market Service that Q1 2020 world oil demand will decline by 3.8 million BPD from a year earlier. This will represent the largest quarterly demand decline ever reported.
But this time one of the key partners of the coalition, Russia, refused to participate in additional cuts. They had previously signaled their resistance to additional production cuts in February when OPEC floated the idea.
Oil prices plunged by nearly 10% following this surprise move by Russia. It had been widely expected they would go along with the plan, because the alternative seemed much worse. So what exactly are they thinking?
The downside of this strategy for them was that, while these production cuts do help support oil prices, they also keep U.S. shale oil producers in business. So, shale production in the U.S. kept expanding. This put OPEC in the cycle of having to cut production again and again as shale production kept climbing. Many OPEC members deemed this unfair, but they had already experienced the alternative and it was worse.
From Russia’s point of view, all this strategy was doing was propping up U.S. oil producers at the expense of everyone else. The only way this strategy would ultimately work would be for OPEC and its partners to keep cutting until U.S. shale oil production began to decline. Their hope was that this happened sooner rather than later, but in the interim OPEC production fell to a 17-year low.
It’s worth noting that Russia also needs the money from its oil exports. But it is embarking on a potentially expensive gamble in refusing to cooperate with OPEC. They may sell more oil this way, but at a far lower price.
From Russia’s point of view, all this strategy was doing was propping up U.S. oil producers at the expense of everyone else. The only way this strategy would ultimately work would be for OPEC and its partners to keep cutting until U.S. shale oil production began to decline. Their hope was that this happened sooner rather than later, but in the interim OPEC production fell to a 17-year low.
It’s worth noting that Russia also needs the money from its oil exports. But it is embarking on a potentially expensive gamble in refusing to cooperate with OPEC. They may sell more oil this way, but at a far lower price.
评论
发表评论