Russia may still be reluctant to go along with a Saudi-led cut in oil output

Citing two industry sources, Reuters reported that Russia is becoming more convinced that it needs to reduce oil output along with OPEC

One of the big uncertainties of the upcoming meeting of major oil producers next week is whether Russia will cooperate with any decision by the Organization of the Petroleum Exporting Countries to reduce production. A lot is at stake at the Dec. 6 meeting in Vienna of OPEC and non-OPEC oil producers following a more than 30% drop in oil prices since early October. That hefty decline may not be enough of an incentive for Russia to cooperate because it can produce a barrel of oil at a much cheaper rate than OPEC member Saudi Arabia. Still, on Thursday, citing two industry sources, Reuters reported that Russia is becoming more convinced that it needs to reduce oil output along with OPEC, but that it is “still bargaining” with Saudi Arabia, the group’s biggest oil producer, over when and by how much to cut. The news agency had reported just two weeks earlier that two high-ranking Russian sources said Russia wants to be left out of any OPEC-led oil production cuts. Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman are expected to meet on the sidelines of the Group of 20 summit in Buenos Aires that gets under way on Friday. “Major oil exporters…need to address their own respective economic interests,” said Peter Kiernan, lead energy analyst at the Economist Intelligence Unit, pointing out that Saudi Arabia’s break-even point for oil prices is at $70 and the “vast majority of Middle East exporters need a price of at least $50, as does Russia.” “OPEC also needs to keep the market in balance and avoid stocks building too quickly as this will depress prices,” he said. That’s why OPEC launched its output-cutting strategy in the first place, he said, reaching an agreement in 2016 that was implemented in 2017. By the middle of this year, that “approach was shown to be successful.” From the end of 2016 to the beginning of June this year, front-month contract prices for global benchmark Brent crude LCOF9, -1.39%  had climbed by more than 30%. In late June, however, Saudi Arabia and Russia agreed to raise production, which “pleased” U.S. President Donald Trump, who had been calling for an increase, said Kiernan. “Back then, the surplus in stocks had been soaked up and with the expectations that Iran’s exports would be cut severely at the end of the year, both Saudi Arabia and Russia thought that an increase in supply was warranted to avoid too much market tightening,” he said. “They therefore had their own reasons for increasing supply at the time.” Oil futures climbed to their highest settlement in nearly four years in early October, with Brent crude topping $85 a barrel and U.S. benchmark West Texas Intermediate oil settling above $76 a barrel, in large part to due to expectations that U.S. sanctions on Iran’s energy sector would tightening global supplies. Those sanctions took full effect on Nov. 5 but at the same time, Trump granted eight countries, including China, temporary waivers to continue buying Iranian oil, effectively erasing that threat to global supplies. Prices then saw a more than 30% plunge to their lowest levels in more than a year, from the October peaks. On Wednesday, Brent settled at $58.76, while WTI finished at $50.29. On Thursday, WTI briefly dipped below $50 a barrel for the first time since October 2017 before rebounding in the wake of the Reuters report. With the lower break-even oil price, however, Russia is in “much better shape,” then Saudi Arabia, said Phil Flynn, senior market analyst at Price Futures Group. Russia is using “the Saudi’s pain, not to mention its problems with the [murder of journalist Jamal Khashoggi], to their political advantage,” he said. “Yet despite the drama, [OPEC] will have to cut and it’s clear that the Russians just want to watch the Saudis squirm a bit.”