Oil deal with Russia: No slam dunk

January 29, 2016 09:47 AM

Back to Russia, will they in fact actually decrease production even if they agree to a cut? The last time a major OPEC/non-OPEC deal was done was after the Asian financial crisis led oil price collapse in the late 1990’s. In June of 1998 OPEC and Russian, Norway, Oman and Mexico agreed to significant cuts in production to bolster the price of oil. Russia then agreed to cut production by about 7% instead Russian production actually increased by 1999. Will this happen again? How much confidence should OPEC and the market have on any agreement to cut production by Russia?

If there is an agreement and prices start to stage a recovery how high will they have to go before U.S. shale oil production once again starts to move from its current no growth pattern back into a strong growth pattern and potentially offsetting part of any OPEC/non-OPEC cut? If that were the case there would be a price ceiling formed and possibly at a level that would not be economically attractive to many OPEC producing countries like Venezuela. A modest recovery in price would also give many US producers a chance to reset hedges at price levels that guarantee they will be profitable and thus continue to grow production going forward.

Finally if there is a deal how will OPEC view Saudi Arabia’s master strategy of attacking market share in an effort to throttle back higher cost producers? If a deal were to occur it would likely only involve a select few non-OPEC countries. Producing regions like the U.S., UK, Canada, Brazil and others would not agree to voluntarily cut production to raise prices as they are also consuming countries. Higher prices from a deal would open a window for the aforementioned countries to actually raise production. Any deal would look like a failed strategy on Saudi Arabia/OPEC’s part in my view and one that would likely limit Saudi Arabia’s credibility within OPEC going forward.  

It is very hard to predict what various countries will ultimately agree to do during a time when many of the countries in question are suffering tremendous financial difficultly like Venezuela who could be on the cusp of a default of their debt and are also reportedly running out of cash. That said I would place the likelihood of a production cutting deal at less than 50/50 at this time. However, this idea is now on the top of the market’s radar and any further discussions or news snippets circulating around the media airwaves will have a short term impact on the direction of prices much as seen this week. Prices are still higher for the week after yet another bearish weekly inventory snapshot in the US.

Global equities rebounded as the trading week moves toward a close. The EMI Global Equity Index increased by 1.38 % with all ten bourses in the Index added value over the last twenty four hours. The year to date loss narrowed to 9 % and is currently heading for the first weekly gain of the year… barring a reversal in European and U.S. trading today. Global equities are a slightly positive price directional driver for oil today.

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