Even as Saudi Arabia has scrambled to prevent a bust in the oil market, so far failing to head off a dramatic price slide, Russia seems just fine with prices where they are.
Russia is a key piece of the oil price puzzle. OPEC, once a coalition of oil-producing members that made joint decisions to maintain market stability, has morphed into a Saudi-led cartel that desperately needs Russian cooperation to strengthen the group’s efforts. Many OPEC members are either at maximum capacity, are suffering from production declines at aging fields, or are characterized by instability, making any promises to boost or cut production hollow. that leaves Saudi Arabia and its new strategic partner, Russia.
But Russia is not as desperate for higher oil
prices as is Saudi Arabia. there are a few reasons for this. One of the key
reasons is that the Russian currency is flexible, so it weakens when oil
prices fall. that cushions the blow during a downturn, allowing Russian oil
companies to pay expenses in weaker rubles while still taking in U.S. dollars
for oil sales. Second, tax payments for Russian oil companies are structured
in such a way that their tax burden is lighter with lower oil prices.
Saudi Arabia needs oil prices at roughly $84 per
barrel for its budget to breakeven. the international outrage over the
murder of Saudi journalist Jamal Khashoggi has also left Riyadh isolated. the
hyped-up economic reform plans from crown prince Mohammed bin
Salman are in tatters, and Saudi Arabia is back at the drawing board, in
desperate need of higher oil prices.
Russia is more stoic in the face of an oil price
meltdown. “the drop in oil prices hardly bother us because our budget is
based on $42 a barrel,” First Deputy Prime Minister Anton Siluanov told
reporters in Moscow on December 26. “the price can stay around $40-$50 for a
time -- six months or a year,” Siluanov said, before adding: “We think this
won’t last long.” But even if the price downturn does persist, Russia
won’t be in trouble because of its ample foreign exchange reserves, he said.
Igor Sechin, the head of Russia’s state-owned
Rosneft, said that oil prices “should have stabilized, because everyone was
supposed to be scared” by the enormous OPEC+ production cuts. “But nobody
was scared,” he said, according to Bloomberg. He blamed the Federal Reserve’s
rate tightening for injecting volatility into the oil market, because traders
have sold off speculative positions in the face of higher interest rates.
the bottom line is that Russia does not feel the
same urgency as Saudi Arabia. It was only a matter of days after Russia
agreed to the OPEC+ agreement – which called for production cuts of 1.2
million barrels per day (mb/d) beginning in January – that Russian officials
suggested that their output would only decline slightly at the start
of the New Year.
Russia’s oil minister Alexander Novak said in
mid-December that output could dip by a modest 50,000 to 60,000 bpd in
January, far short of the roughly 230,000 bpd of cuts Russia is supposed to
take on. that would put Russian output at about 11.35 mb/d, not far
from the post-Soviet high of 11.41 mb/d hit in October. “Everything will
depend on technological and climate possibilities. We will get proposals
from the companies,” Novak said, according to Reuters. “We will see how the
situation would evolve.”
At the same time, Novak offered the market some
assurances that the OPEC+ coalition would step in to stabilize the
market if the situation deteriorates, suggesting that OPEC+ has the
ability to call an extraordinary meeting. He told reporters on thursday that
the market still faces a lot of unknowns. “All these uncertainties,
which are now on the market: how China will behave, how India will behave... trade
wars and unpredictability on the part of the U.S. administration... those
are defining factors for price volatility,” Novak said.
Nevertheless, Novak predicted the 1.2 mb/d cuts
announced in Vienna would be sufficient.