(bne IntelliNews) – Russia and the Organisation of the Petroleum Exporting Countries (Opec) decided to prolong their coordinated oil supply cuts to the end of 2018 at a meeting in Vienna on November 30, Opec said in a statement.
The Opec+ (Russia is not a member of the cartel) deal that has been in place since late 2016 and is credited with lifting the crude price to above $50-$60 per barrel, was widely expected to be prolonged, although it was not clear to what extent Russia would support it until the last moment.
The Opec+ deal helped Russia to maintain its fiscal reserves even accumulate more as well as cover the budget deficits, gaining an additional RUB0.7-1 trillion (€10-14bn) in revenues due to higher oil prices. The readiness and the discipline of the largest oil producers of the world to control supply of the crude will continue stabilising the market and discourage speculative investors.
“The launch and successful implementation of the rebalancing process became possible thanks to our joint efforts. The responsible approach of the member countries of the Vienna agreements, many of which not only demonstrate high performance, but also go far beyond the commitments undertaken, makes it possible to keep output at record high levels,” Russian Foreign Minister Alexander Novak noted, the ministry said on November 30.
The deal will continue through to December 2018, though Opec’s statement added that “In view of the uncertainties associated mainly with supply and, to some extent,demand growth it is intended that in June 2018, the opportunity of further adjustment actions will be considered based on prevailing market conditions and the progress achieved towards re-balancing of the oil market at that time.”
Noval noted at Opec has raised its global growth forecast, which in turn has led to a raising of forecasts for oil demand. “It is encouraging and a good indicator for the growth in demand in 2018,” the minister said.
Six observer countries are now joining the deal on stand-by, while Libya and Nigeria, which previously opted out from the cuts due to difficult political situations at home, will now also comply, according to Novak, as quoted by Vedemosti.
The price-smoothing deal is seen as particularly important for the stability of both Russia and Saudi Arabia, both key crude producers participating, as the former will hold presidential elections early next year and the latter planes to IPO its oil operating company. However, the deal is an uncomfortable one for Russia, as Kremlin is facing growing opposition to oil output cuts from domestic oil majors and even the government that recently blamed underperforming GDP numbers on the Opec+ deal.
Moscow is also concerned that supporting oil prices above $60 a barrel will help US shale oil extraction rivals, who will restart production. Fiscally Russia has more room to manoeuvre as recent budget tightening will see the break-even oil price decline from $70 per barrel currently to $40 by 2020, and an analysis by Chris Weafer for bne IntelliNews discussed half a dozen reasons why Russia wants to bring the oil price below $60 per barrel.
As he argued in bne IntelliNews on October 20, seen from this perspective the support from Russia for the maximum proposed extension of the Opec+ deal until the end of 2018 is part of a rapid process of moving closer to Riyadh, a key US ally in the Middle East, that needs the extension of the oil cut much more. Russia’s cooperating in the cuts extension is as much a political calculation as it is commercial and designed to further undermine Washington’s influence in the Middle East.
Kazakhstan and Azerbaijan also signed up for output cuts in 2016. Kazakhstan agreed to cut 20,000 barrels per day (or freeze production at 1.68mn bpd) but has so far failed to adhere to its agreement as it ramps up output at the Kashagan field.