"I Know Of No One Who Predicted This": Russian Oil Production Hits Record As Saudi Gambit Fails

Tyler Durden's picture

In late October, we noted that for the second time this year, Russia overtook Saudi Arabia as the biggest exporter of crude to China.

Russia also took the top spot in May, marking the first time in history that Moscow beat out Riyadh when it comes to crude exports to Beijing. “Moscow is wrestling with crippling Western economic sanctions and building closer ties with Beijing is key to mitigating the pain,” we said in October, on the way to explaining that closer ties between Russia and China as it relates to energy are part and parcel of a burgeoning relationship between the two countries who have voted together on the Security Council on matters of geopolitical significance. Here's a look at the longer-term trend:

You may also recall that Gazprom Neft (which is the number three oil producer in Russia) began settling all sales to China in yuan starting in January. This, we said, is yet another sign of the petrodollar’s imminent demise. 

On Monday, we learn that for the third time in 2015, Russia has once again bested the Saudis for the top spot on China’s crude suppliers list. “Russia overtook Saudi Arabia for the third time this year in November as China's largest crude oil supplier,” Reuters writes, adding that “China brought in about 949,925 barrels per day (bpd) of Russian crude in November, compared with 886,950 bpd from Saudi Arabia.”

This is an annoyance for Riyadh. China was the world's second-largest oil consumer in 2014 and closer ties between Moscow and Beijing not only represent a threat in terms of crude revenue, but also in terms of geopolitics as the last thing the Saudis need is for Xi to begin poking around militarily in the Arabian Peninsula on behalf of Moscow and Tehran. 

As we documented in "Saudis Poke The Russian Bear, Start Oil War In Eastern Europe," Riyadh has begun to encroach on Moscow's markets in Poland. Here's what Bloomberg wrote back in October:

Poland has long been a client of Russian oil companies. Last year, about three-quarters of its fuel imports came from Russia, with the rest from Kazakhstan and European countries. Poland, however, is at the center of efforts to reduce the European Union's dependence on Russian energy. 

 

A new and reliable supplier is a godsend. As for the Saudis, they need to expand outside Asia where demand is falling. 

 

This could turn into a more active shoving match between the world's two biggest oil exporters, which already are at odds over the Syrian conflict. 

Indeed, one could plausibly argue that one of the reasons the Saudis moved to artificially suppress prices last year was to sqeeze Putin and ultimately force The Kremlin to give up its support for Assad. As The New York Times put it, a dramatic decline in crude prices has certain "ancillary diplomatic benefits."

Unfortunately for Riyadh, the strategy hasn't worked. In fact, it's backfired in more ways than one.

First, Saudi Arabia is facing a fiscal crisis as Riyadh's budget deficit balloons to 20% of GDP, forcing the kingdom to tap the debt market in order to offset the SAMA burn. 

Second, Putin not only refused to give up his support for the government in Damascus, he actually doubled down by sending the Russian air force to Latakia. Meanwhile, Russia continued to pump even more oil, and as Bloomberg reports, Moscow is now producing at "the fastest pace since the collapse of the Soviet Union." 

"Russia’s unexpected oil bounty this year is the result not of a new Kremlin campaign but of dozens of modest productivity improvements across the sprawling sector. Even pressured by plunging prices, as well as U.S. and European Union sanctions that cut access to much foreign financing and technology, Russian companies have managed to squeeze more crude out of some of the country’s oldest fields," Bloomberg writes, before noting that "Bashneft and other Russian companies working fields in the Volga River basin -- some of the first to be discovered in Russia early in the last century -- are benefiting from Soviet inefficiency as [the old motto was]: 'whatever we don’t produce will be left for our children.'"

For analysts, Russia's resiliency has come as a surprise. “I know of no one who had predicted that Russian production would rise in 2015, let alone to new record levels,” Edward Morse, Citigroup’s global head of commodities research said.

As for what it would take to curtail production, Mikhail Stavskiy, head of upstream at Bashneft PJSC which has been "the biggest single contributor to increased crude output this year," says he doesn't know. “I don’t know what the oil price would have to fall to for things to change dramatically. We’ve been through $9 a barrel and production continued, so if something like that happens, we know what to do.”

Indeed, thanks to the low cost of extracting crude from Russia's oil fields in West Siberia and the devaluation of the ruble, production costs are rock bottom:

But not everyone agrees that this is sustainable. Some say efforts to improve efficiency have run their course and with financing for exploration scarce, further gains may be hard to come by. Interestingly, Bloomberg also notes that because Moscow takes "nearly everything above $30-$40 a barrel" on exports, producers won't feel the impact of low prices until crude falls substantially below those levels. 

“Russia will maintain its current oil production levels within the bandwidth of 525 million to 533 million tons next year, as the federal government’s budget is set on such production levels,” Stratfor's Lauren Goodrich says, presaging more of the same in 2016.

The takeaway here is that the Saudi gambit failed to wrench market share away from the Russians and between the conflict in Syria, Moscow's closer ties with Beijing, and Riyadh's move to antagonize The Kremlin by encroaching on Russia's eastern European market share, one shouldn't expect Putin to back down any time soon. In short, if John Kerry and Riyadh did in fact plan to bankrupt the Russians by tanking crude prices, the effort was a miserable failure that resulted not only in a 20% fiscal deficit for the Saudis, but also in the destruction of American jobs in the oil patch.

We close with a bit of humor from Deputy Energy Minister Kirill Molodtsov:

 “I will tell you when Russian companies are for sure going to decrease production -- when oil costs $0." 

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Looney's picture

Shouldn’t OPEC invite ISIS to become a member of the cartel?  ;-)

Looney

troubledasset's picture

They already are proxy members. Saudi votes on their behalf.

researchfix's picture

The Saudis don´t have that oil anymore. That´s why they want Iraq and Syria.

NoDebt's picture

"You may also recall that Gazprom Neft (which is the number three oil producer in Russia)began settling all sales to China in yuan starting in January. This, we said, is yet another sign of the petrodollar’s imminent demise."

So.... settling sales in a devaluing currency.  Got it.

I gotta tell ya, folks, I ain't buying 100% of this "death of the petro-dollar" stuff.  Sorry.  Down-vote as you see fit, but I think we already have a single world currency.  It's called the US Dollar.

 

Winston Churchill's picture

Was.

Looking at international trade data it appears no-one wants to swap real things for it anymore.

Not with a bang,but with a whimper.

tarabel's picture

 

 

Watching various world currencies tumble against the old USD, I have to question that assertion.

I would suggest that lack of demand is driving trade down, no matter what form of funny money is used to settle accounts, but I don't see a significant non-politically-engineered shift away from the dollar. That China may be twisting arms to use the yuan if you want them to invest in your infrastructure projects is not an economic decision. And it will fade as China itself fades.

All bets in an increasingly despairing world will eventually be placed on Uncle Sam and he will disappoint them-- but he will do so last, not first.

Motasaurus's picture

London forced the USA and Saudi Arabia to be inexplicably linked. As one goes down, the other is taken with it. They have no choice but to hold each other tight as the world moves once again.

The low oil price: What if it was not aimed at Russia, but at the Saudi/US conglomerate? 

Occident Mortal's picture

Erm... NEWSFLASH>>

 

The West has crashed the Rouble with sanctions, therefore Russian oil production costs are now the lowest in the world.

Meanwhile Saudi Arabia is pegged to the USD and the tightening federal reserve, their costs are rising as the dollar strengthens.

 

What has happened in Moscow is this.

 

Back in the late 1980's when the political party Solidarity seized the Gdansk shipyard, it revealled that the leadership in Moscow at the time were corrupt and feckless.

They didn't control the uprising and within months the Berlin wall fell. A year later the USSR collapsed.

 

All the active KGB agents in Berlin went back to Moscow and they found rot, the KGB had been out advancing the frontline whilst the generals back in Moscow were drunk and asleep.

When all the KGB agents returned to Moscow they formed a secret society (led by Putin), and within a decade they had once again seized control of the entire country.

 

Now the same KGB society makes up all the Russian oligarchs and the Kremlins political elite, Putin leads this group but he does not have totalitarian control of it. There are political grandfathers who are more than capable of hatching plots and swaying power.

 

But now "the Kremlin" is ascending, Putin won his latest election with the promise to form a Eurasian Economic Zone, a bit like a Super EU. As soon as he announced this Hilary Clinton et al denounced it as USSR 2.0 and swore the USA would do everything in its power to block Putins ambition (the Wolfowitz doctrine).

 

 

So far the Kremlin is winning and this time the most astute Russians wont be rushing out to the front line, they will be sitting in the Palace under their missile shield.

---------'s picture

kremlin is not winning

 

russia takes serious economic damage from usa's oil policies

lowering oil price to 30$ forces russia to reconstruct and rethink their way of economic wars

in first place this takes time - exactly what usa want

reserve is still the dollar. dont for get that

The Pope's picture

 "reserve is still the dollar. dont for get that"

 

reserve is still the counterfeitted joobuck, don't forget that (there, fixed it).

 

Now we can finally, correctly, talk about all other things & what they mean in the right context as to 'currencies', & resource & war zones, (&/or, get 'banned' from ZH for saying so).

 

Merry Festivus bitchez!

---------'s picture

counterfeitted is written with one t

The Pope's picture

who fucking cares?! except for those whose main line of defense is to redirect the point of the argument at hand.

---------'s picture

what argument? you are absolutely right with your statement

 

all i did is pointing out the grammatical mistake.

and you should not say joo but jew

 

have you seen the harry potter move with the young alcohol addict half jew daniel radcliff?

in this movie they are scared to call voldemort with his name, instead they call him "you-know-who"

its similar to many people here on zh are scard to say jew

The Pope's picture

I don't watch (or read) any Harry Potter BS... As for what people 'say' (or 'type', as the case may be)... It's fucking Russian Roulette... Unless, of course, you're talking about dirty wops, stinking Mexicans, lowlife Albanians, crazed Muslims, or any other ethnic subset that the 'media class' would prefer you to hate at any given moment.

---------'s picture

i liked the first two harry potter movies   (didnt watched the other parts)

johngaltfla's picture

I call bullshit on this story based on Blowmeburg.

The Russians produce oil based on Roubles. That's a piece of crap fantasy fiat currency and thus gives them pricing power when selling to dumbfucks like Europe and China.

The Saudis continue to elect to be camel fuckers who enjoy Obama's and Goldman Sach's asstaste and decide to keep their camel dung pegged to the USD.

Which is more cost efficient?

Not the camel dung.

philipat's picture

So now that Russia is pricing ALL its exports of energy to Europe in Rubles, what do you suppose might happen to the value of the Ruble (Which will have to be bought for EUR and USD in the market)?

This is yet another nail in the coffin of the USD. With oil at $35 (Down from $100+) the demand for petrodollars has already dropped by 70% even without factoring in that the BRIC nations also dump UST's. And Saudi Arabia will shortly agree to China (Its largest customer) paying for oil in CNY. So what do you suppose might happen to the value of the Dollar? All those unwanted Dollars will sooner or later come home and will cause massive inflation, at a time when nobody else wants dollars to fund the US trade defecit.

You can ignore reality but.........

nofluer's picture

"All those unwanted Dollars will sooner or later come home and will cause massive inflation,"...

You mean the FED will have to get out the "dollars" book and subtract a few trillion from the bottom line total of "dollars in existence"?

Back in The Day when they actually PRINTED dollars in circulation, they'd have dollars "coming home" and causing inflation. Dollars with no real-world presence cannot cause inflation... they evaporate too fast. IN the "modern world" the FED doesn't even have to acknowledge that they exist on the books. Where do you think they got those trillions to buy up the MBS' they "bought" from the banks? (If you dn't know, they waved their magic mouse and "created" the zeroes to put at the end of a number and "Lo, USDs magically appeared and were put in sealed money cages and credited to the bank's accounts at the FED." (Abt $2 Tn worth, IIRC.)

koperniuk666's picture

And it was a spelling error, not a grammatical mistake

Still Losing Money's picture

wow, who would have thought that the store across the street would run a sale when I lowered my prices....

Russia HAS TO run at full prodution to keep the cash flowing. Walmart lowers its prices until kmart can no longer compete and goes out of business. Sme here. Drop the price until Russian production reaches peak and they can't generate enough cash flow due to low prices, you can't make up for it with volume.

Russia raising production totlals is a sng they ARE LOSING not winning. just like new lower prices at kmart was proof walmart was driving them out of business. but ZHers can't see that because they are  too busy hating the USA and kissing putey pute's azz.

Dame Ednas Possum's picture

Your stated belief is a combination of flaccid nonsense, puerile ignorance and naive ad hominem attack that doesn't merit engagement.

The fact is that a race is on to pull as much oil out of the ground at virtually any price before the inevitable onset of renewables as an inevitable technological shift. (Note: in the case of oil this evolution can't come soon enough for the planet as the human power structure built around oil become superfluous).

Still Losing Money's picture

wow what a load of horseshit. just cause you wrap it in fancy words doesn't mean you cover the smell. Fancy words usually equals poor argument.

FrankDrakman's picture

Nope, the Dame is spot on. New electric car technologies will make the ICE a niche product by 2050, if not before. Electric motors are hugely more efficient than gas motors - the latter are limited to about 40% right off the bat by the Carnot cycle, and then much of that is lost in the transmission, cooling, and other functions. Electric motors just drive the wheels, period. 

Currently (sic), ICE motors have two big advantages - first, gas is much more energy dense than the best battery, so it takes less weight in gas than it does in battery to power the car. Second, refilling is much faster than recharging. Those drawbacks are being overcome with bigger and better batteries, and more (and more available) charging stations. 

Already, just by improving the fuel economy of current ICE's, there has been a permanent drop in gasoline demand in the US. Pile on 'carbon taxes' from revenue-thirsty gov't, and the economics of switching to an electric or hybrid for at least one of the average American family's 3 cars gets even better, again reducing gasoline demand. 

Saudi is sitting on the world's largest pool of potential buggy-whips. Cutting prices was part of their plan to stall the electric car revolution. Like Canute, they will fail. 

nofluer's picture

Well... by 2050 I doubt they'll let me drive anyway. BUT - At present tech (which will not last forever - it WILL be improved) says the ICE will be around for a long time. Like I can carry extra gas without worrying about overheating batteries and fires. (ie for real world living, battery tech has GOT to be RADICALLY improved.)

Another aspect of the power industry is that whatever tech is developed, they will HAVE to make allowances for sparcely inhabited areas - like farms. Farms use a lot of energy to grow and harvest (etc) food. Without more efficient batteries, spending half the day changing out batteries and putting the spent ones on the charger will waste huge amounts of time. The time spent charging will be a non-issue as most people will have enough bateries to keep an extra set or two on the charger while using a set and carrying a set. So snap-in snap-out tech will eliminate the whole issue.

I'm finding it highly amusing to see that so many supposedly intelligent people seem to think that all you can do with oil and its derivatives and by-products is to burn it. Oil is one fo the key components of a huge part of the stuff that we use every day. (Plastics, etc. etc)

koperniuk666's picture

Saudis are probably the only non- western group to realise that 'resources' have no intrinsic value . they only have a value to a group `( the west~) ' that has an economy and technology to use and value them. The non west , largely does not have this economy. The west can - as it has on many occasions before- simply go away and invent a new way of doing things with new stuff that now becomes a 'resource' if necessary. The saudis have immense amounts of this valueless stuff (oil) and if they overprice it the west will go away and invent something else ( eg fracking, nuclear, renewables, saving). The oil will then become completely valueless..... just sticky muck in the ground.....

philipat's picture

In part correct but Western Europe is hurting far more than Russia because of the sanctions. Russia had become the largest consumer market in Europe. It could be worse. At least Russia has energy to export, which is a lot more dependable than paper derivatives?

Krumnoltzwitsky's picture

Russia has to run at full production otherwise their wells freeze over and are unable to be restarted. The price of oil has nothing to do with it.

Fod's picture

Since this is an important piece of information, can you provide a source that this is a real issue?

koperniuk666's picture

Bollocks. I was there yesterday and Russia is doing just fine. They can produce all the way down to 10 dollars if not lower. Saudi is already in very very severe pain. its not just the cost of extraction but the cost of running the country. Saudi have a hugely expensive socialist paradise to run. They are bleeding cash. add in the transport costs ( Russia to China) and the political incentive of China to want to fuck up USA and the above is NO SURPRISE TO ME AT ALL. Dont fuck with Russia - we will NOT win against them. They have resources , space, a lot of people , great leadership,industry, technology and gorgeous women. We have a porch monkey in charge, huge debt, urbanisation(concentration) , and industry outsourced to China. Even the military is not what it once was ( I was in it for 25 years- H&S, PC , paperwork, mindless complexity that no-one can operate and a suicidal dependence on the network).

Blankone's picture

Re Occident:  "The West has crashed the Rouble with sanctions, therefore Russian oil production costs are now the lowest in the world."

By that flawed logic if the west causes the rouble to go to zero then Russian oil production will be free and cost nothing. 

The truth is that since the rouble has been crushed the amount of rouble to get the work done goes up since the true value of the rouble is less and buys less. 

HenryHall's picture

Russia's indisputable low production costs are due to a policy of no significant debt. Not due to currency manipulation or weakness. Production is financed by retained past profit, not by debt as in the West.

No debt to service, no relevance of interest rates.

As to maximized production, this is done so as not to have to dip (materially) into savings (foreign reserves etc).

For every debt owed there is a creditor due collection. In Russia the big creditor is the state. In the West the big creditors are a handful of "faceless men" for whom no amount of wealth will ever be enough.

East Indian's picture

Russia does not have to import many things necessary for survival - it in fact has almost everything needed for an austere living - not comfortable but survival. This was not the first time the "free world" tried to crush it through isolation. In 1920s - 30s the same thing was tried; it resulted in Russia developing an isolated economy. This concept then spread to China and to a large extent to India; this was called, 'self- sufficiency". Even today, China and India can live, except importing petroleum, on their own for many years.

Russian economy is still in this mode. In this mode, prices of everything are determined in the local currency. It does not matter if it rises or falls in the "open" market vis-a-vis dollar or yen. As everything is produced and sold in rubles, a falling ruble does not cause any price rise. On the other hand it will make Russian exports cheaper and attractive. "Crush by isolation" wont work for territorial giants or population giants.

Freddie's picture

I like Putin but if he is selling out Hezbollah and will not back Syria taking back the Golan then he is just another cog in the ZWO. 

The hit on Hezbollah leaders who are fighting against ISIS and head choppers of evil in Syria is not a good sign that Russia and Putin are the good guys.

Blankone's picture

Putin lured Hezbollah out into the open for Israel.

Russia has the same jewish mafia issues as the US.

Russia has betrayed every allie it has had in the ME.  Including Iran.

If Hezbollah does not move quickly back to their home base they deserve what Putin will help be done to them. 

Still Losing Money's picture

The West has crashed the Rouble with sanctions, therefore Russian oil production costs are now the lowest in the world.

and thanks to the devaluation, food prices ars some of the highest.and shortages are starting.

Motasaurus's picture

 food prices ars some of the highest.and shortages are starting.citation needed

Romanoff's picture

And what if Russia, having one of the lowest costs of oil production, decided to give both the USA and Saudi Arabia a bit of nudge towards economic ruin by increasing production?

Russian scientists pioneered research into abiotic (naturally replenishing) oil reserves. It seems that the world's oil reserves are a mixture of biotic (biological origin) and abiotic reserves. Russia seems to have a fair proportion of abiotic oil reserves.

So if you happen to be a country like Saudi Arabia with biotic reserves they will eventually run out. You are limited by land mass in your chances of finding more reserves. Similarly the USA while having a very much larger land mass has severely depleted its biotic reserves and has now resorted to expensive shale oil to make up the difference.

So if Russia can produce unlimited quantities of ever replenishing oil at world's lowest cost why wouldn't it do what it is doing?

And how stupid is USA and Saudi Arabia to piss their diminishing oil resource up against the wall to try to pressure Russia?

US oil sector debt bubble about to burst. Saudi Arabia about to go bankrupt.

What's not to like about that?

Still Losing Money's picture

what's not to like? how about another great depresion you moron.What is it with you ZHers who keep championing for a new depresion. most of you wouldn't last a day and a hlaf if you lost power, water, internet and I don't care hw much gold you have buried in your backyard. it is WORTHLESS if there are no goods on the shelf to buy. So yeah,let's destroy the world economycause nothing will happen when we do.

Fod's picture

Still, capitalism supposedly is a cycle, and we are artificially not allowing the economy to deflate to avoid the inevitable depression. And we are not at the end of history, major wars will keep happening when resources are finite. 

Miles Ahead's picture

@NoDebt.  YOU may have a single world currency.  Speak for yourself.  Not to hard to guess which state that world is though.  No doubt can hear riverboats on the Mississippi...

Selling oil in an insolvent soon to collapse currency... genius.

MalteseFalcon's picture

"For analysts, Russia's resiliency has come as a surprise. “I know of no one who had predicted that Russian production would rise in 2015, let alone to new record levels,” Edward Morse, Citigroup’s global head of commodities research said."

LOL.  Even the "analysts" were surprised.

Oil reserves and the actual cost of oil are state (or in the case of the West, corporate) secrets.

Academics who analyze these things "for the people" are fed whatever information that will profit those who control the secrets.  Such academic studies are syllogisms and nothing more than myth making.

Peak oil was bullshit, but the people of the West bought it for 40+ years and paid through the nose for it.

agent default's picture

I don't know what the global picture for oil is, but for SA peak oil looks very real. 

MalteseFalcon's picture

Peak oil is sometimes qualified as peak cheap oil.

If the Saudi's are at peak oil it's because the Saudi "cost structure" is too high and includes generous welfare to keep their over-procreating rabble from revolting, expense accounts for over 100 "princes", funding for extreme Islamic radicals all over the globe, a war in Syria and a war in Yemen.

In a word: bullshit.

secretargentman's picture

I don't know how they can sell oil for less than $40 a barrel. I can't even get a decent *empty* barrel for less than $30.

Liquid Courage's picture

*BADDA-BOOM*

Thanks, folks. I'll be here all week. Try the veal.

*MIKE DROP*

nofluer's picture

If you don't mind having the top cut out, you should be able to get an empty barrel for about $10, and you get about a quart or two of whatever oil/etc was in them too.

And as to "peak oil"... Is my rememberer remembering correctly when it tells me that during the Iraq War (the first one) they kept mentioning oil fields that hadn't eve been tapped yet? Or is that another ME country?

And didn't Israel just "find" a new undeveloped field...

ThanksChump's picture

I suspect SA, who can still ship vast quantities, is playing a game of chicken with Russia: see whose production abilities falter first, winner take all.

Stupid game. SA ran out years ago if you use their stated reserves data, but that doesn't mean SA has an unlimited RESERVE reserve. Yes, they can damage their wells trying to overextract, and may already be doing so. They're not a common-sense oriented people.

SA will lose this game if they're lucky, or get roasted by Russia if they don't. Either way, it's good.

Maybe Russia will push for regime change in SA to end the beheadings and stuff. Install a shiite puppet.

Spice must flow.