Oil Price Drop Imminent If Moscow Says "No" To Extension

Authored by Irina Slav via OlPrice.com,

As the November 30 meeting in Vienna of OPEC and its partners in the oil production cut deal nears, worry has returned among traders: one of the brokers of the deal might decide to walk out on the deal instead of participating in another extension.

We’re talking about Russia, the world’s top producer and exporter, who many believe played OPEC and specifically its leader, Saudi Arabia, by agreeing to a relatively minor production cut from its nearly record-high rate of production.

Reports emerged last week that Russia is considering a delay on the decision to extend the cut.

That’s after Energy Minister Alexander Novak hinted more than once that from Moscow’s perspective, this decision is far from urgent. With a budget based on Brent at US$40, Russia is indeed in a sweet spot compared with its partners in the deal: it can remain in the black at any price above US$40.

But there may be another reason for Moscow deciding to opt out of the extension. Lower oil prices could actually be more beneficial for the Russian economy.

Macro-Advisory analyst Chris Weafer lists six ways in which lower oil prices would be better for Russia, and all of these make sense, counterintuitive as this line of argument might seem at first glance.

For starters, the higher the price of oil, the greater the risk of another collapse down the road. The more oil costs, the more producers will invest in new production, possibly leading to a repeat of the 2014 collapse. Or prices could simply take a dive once the OPEC deal ends, which it must at some point.

A higher oil price would also likely compromise a budget reform currently in the works, which aims to rein in spending. More importantly, Russia’s economic diversification efforts may well be compromised if oil prices remain higher—a point we’ve made repeatedly on Oilprice, not just with respect to Russia but to all oil-dependent economies.

According to Weafer, however, renewable energy does not play a large part in this diversification. He says that stifling investments in renewable energy is one more reason for Moscow to want oil prices to fall: the higher oil prices are, the more attractive renewable energy becomes.

Yet another reason is that Moscow prefers to keep the ruble cheaper as this stimulates exports, curbs imports, and boosts competitiveness. Traditionally, the Russian currency has followed Brent’s moves closely, but this link has now been severed thanks to a fiscal rule mechanism employed by the Russian Finance Ministry that involves converting more rubles into forex as tax on the oil industry rises, pressuring the local currency. If, however, Brent goes high enough, there may be a spike in speculative interest in rubles, which will cause the currency to rise, too.

All of these reasons make perfect sense for Russia. They are unlikely to be praised by its partners in the deal, however. Right now, according to analysts, OPEC’s meeting on November 30 and the deal extension expected to result from it is the single most important tailwind for oil prices, as the effect of tensions in the Middle East begins to subside in the absence of any escalation. In this context, the consequences of Russia pulling out of an extension beyond March 2018 are all too easy to guess.


BritBob Wed, 11/22/2017 - 05:09 Permalink

Falklands Oil - Worth a Punt?By a ruling of the UN, Argentina will extend its maritime platform (Politica Argentina) ; New map of the maritime platform reaffirms the sovereignty of Malvinas with UN endorsement (ElCronista); Argentina enlarges its territory 35%, with a UN endorsement ...(La Capital).To add to this euphoric atmosphere the Argentine Foreign Minister stated, ''This is a historic opportunity for Argentina. We have taken a great step in the demarcation of the outer limit of our continental shelf; the most extensive boundary of Argentina and our border with humanity,'' Foreign Minister Susana Malcorra told La Nacion, which tomorrow will publicly announce the details of this resolution. (Susana Malcorra, quoted by Dinatale M, La Nacion, Argentina, 27 March 2016). But what is the truth...Argentina's Continental Shelf Claims and The UN CLCA Commission (1 page):-https://www.academia.edu/33898951/Argentinas_Continental_Shelf_Claims_-The_UN_CLCS_Commission 

Crazy Or Not Wed, 11/22/2017 - 05:33 Permalink

>BobI'm sure there's some parallel universe where HM the Queen, Theresa May are porn stars, God lives in Oxford & the Empire rules the waves...Its not here though! Drop 50mg of MDMA and take yourself off there - or drop 100 & don't come back.

Sapere aude buzzsaw99 Wed, 11/22/2017 - 16:52 Permalink

Ha ha. If it wasn't so sad that you believe this it would be funny.Russia called for the extension, and market share is not everything. Russia had to engage in maintenance of wells pushed to the limits as did the saudis, and in Russia's case the agreement was just 300,000bbls.they make more than this by the increase in price on the oil they are exporting, so its ridiculous to talk about bills when Russia makes more money in the agreement with OPEC which RUSSIA called for OPEC to extend.Truth is Saudi and Russia tweaked output to the limit for too long, and this causes well damage, and they are both suffering from that, so output would have been curtailed anyway.

In reply to by buzzsaw99

Tugg McFancy Wed, 11/22/2017 - 06:04 Permalink

Really think they're going to telegraph an agreement for 6 weeks like last time and watch the price drop $2.50 when the obvious is confirmed?They may have learned their lesson.   

NDXTrader Wed, 11/22/2017 - 07:09 Permalink

Oil is going to $70 a barrel so they can take Aramco public. Period. If they have to bribe a few Russians and Americans along the way then so be it

Sorry_about_Dresden Wed, 11/22/2017 - 14:12 Permalink

Feral Reserve churns UST debt, while creating more, to pay Saudis and maintain petro dollar strangle hold on Planet.

Oil deflation will cause big problems for money changers / printers 'cause higher oil prices facilitate Feral Reserve creation of moar deficit spending.

Lower oil prices reduces USTbond created to fund deficit spending, churn for SOMA operations. The reduction of notional value of petroleum dollars, caused by oil deflation, will cause liquidity problem for FOMC trying to continue SOMA operations.

If you want to end Feral Reserve, buy a electric car and install solar panels.

Been watching for since 2009 and the stock market is highly correlated to oil prices.

Anyone else draw this same conclusion?

Cloud9.5 Wed, 11/22/2017 - 08:01 Permalink

The petro dollar and the Federal Reserve are long in the tooth but I doubt the world can go to electric cars.  Calculate the number of gas and diesel vehicles there are in the world and then do a back of the napkin calculation of what it would take to replace them with electrics.  The grid requirements would be enormous not to mention the physical limitations on battery construction. Electrics can and will work in localized applications.  If Niagara Falls powers your power plant, electrics make perfect sense.  If your power plant runs on coal or gas, not so much.

NoWayJose Wed, 11/22/2017 - 08:09 Permalink

Sorry, but no oil exporter wants lower prices.

And as far as expectations of future drilling activity - just look at oil services stocks (OIH ETF) - which are near 52 week lows. Unless they start higher, there won't be any over production.

Sokhmate Wed, 11/22/2017 - 11:32 Permalink

If the reports are correct, Russia's strategy is akin to fasting. Fasting is great for the body. The body emerges stronger during and after fasting. Good for you Ruskies

Jeepers Creepers Wed, 11/22/2017 - 09:55 Permalink

OPEC tried to put under American competition and it didn't work.  The oil rigs still were pumping, just maybe a different company name on the site. Quicker they can get back to over $70 a barrel, the quicker the Russian oligarchs can fill their offshore acconts and the Saudis can stop bleeding red ink.

Sapere aude Jeepers Creepers Wed, 11/22/2017 - 16:48 Permalink

The funniest most ridiculous uninformed comment I've seen in a long time.The US competition as you call it, are losing billions of dollars in producing oil they sell for $55 but which cost them $100.With all the talk from Chief Execs, NOT ONE shale company shows a real profit on its shale ponzi schemes, ably assisted by Fed funding at ZIRP and NIRP and backflowing oil from the SPR to pretend its rising production.Ask Chesapeake!

In reply to by Jeepers Creepers

King of Ruperts Land Wed, 11/22/2017 - 10:36 Permalink

OK enough is enough with the bogus charts. Were did you learn that? At the Michael Mann school of hockey stick charts?

And annother thing. How many Rubbles does Russian oil trade for as $USD is meaningless now that US has sanctioned itself out of Russian and other world trade.

Sapere aude Wed, 11/22/2017 - 16:46 Permalink

I really get concerned at ZH, it appears it takes a financial position and then uses anything it can to assist it.What the fictional work misses is that Moscow gains financially from the arrangement with Saudi.Its got nothing to do with the lifting cost, and in any event the idea that Moscow lifting costs are less is wrong.Have you ever tried lifting oil cheaply in Tomsk, where temperatures hit -55C on occasions!Now lets see how much oil does Russia exportDuring 2016 at a period of low oil price it was $73.7billion!With oil at $58 dollars and rising, that's around $12 more than mean average of 2016.That's over a 25% increase for lifting the same amount of oil or put it this way they gain another $18.43BILLION pounds for the same amount of oil and even if they cut 300,000 its a massive gain, leaving resource for when oil is back to $100 which is will be.I suggest you close your short position ZH because some of the articles of late smack of self interest.Ironic too that it was Russia that called for the oil agreement with OPEC to be extended!