Is Russia Bailing On The OPEC Deal?

Authored by Tim Daiss via,

For the first week of June, Russia, the world's largest oil producer, exceeded the amount it agreed to produce as part of the January 2017, OPEC/non-OPEC supply cut deal.

For the first week of June, Russia produced some 11.1 million barrels per day (bpd), far exceeding production limits outlined in the deal, Interfax news agency said on Saturday, citing a source familiar with the matter.

As part of the oil production cut, Russia agreed to trim its production by 300,000 bpd from 11.247 million bpd. The output cut deal called for its members to remove some 1.8 million bpd of oil from global markets.

That deal was orchestrated to stop the bloodletting in global oil markets at the time due to a ramp up in U.S. shale production and Saudi Arabia's late 2014 strategy of trying to drive U.S. shale producers out of business by opening the production flood gates and sending prices to multi-year lows.

However, the Saudi’s plan backfired. Global oil prices tumbled from more than $100 per barrel in mid-2014 to under $30 per barrel by the start of January 2016, throwing global markets into a historic supply overhang, and causing financial chaos for the Saudis who had to start issuing international bonds to offset record budget deficits - a development that is still ongoing as the Kingdom shores up its finances from that low oil price period.

Now that OECD oil inventory levels have reached the OPEC/non-OPEC members’ goal of five-year averages, there is talk and speculation among not only media but oil producing countries asking if it’s time to ramp up production. Also, geopolitical factors are coming into play as renewed U.S. sanctions against Iran will remove as many as 500,000 bpd from global markets, perhaps more according to other forecasts. In addition, OPEC member Venezuela's oil production is coming apart at the seams, also removing more barrels from the market.

Moreover, the production overage the first week in June could indicate Russia’s strategic thinking that it’s time to increase production.

Alexander Dyukov, head of Russian energy firm Gazprom said on Saturday that his company is ready to hike crude oil production if the global deal on oil production cuts is modified.

“It is obvious now that the (production) quotas should be revised, the quotas should be increased, this will be beneficial both for producers and consumers,” Dyukov said after an annual general meeting.

“We believe that the time has come that it makes sense to keep the deal in place but be more flexible on quotas,” Dyukov said.

Saudi Arabia, for its part, is also poised to increase oil output amid reports that President Trump put pressure on The Saudis to reign in higher oil prices that hit the $80 mark last month.

A perfect storm

Saudi Arabia, which has been OPEC’s de facto leader for decades, has also caused a rift in the oil exporting cartel recently by speaking on behalf of OPEC without the consent of all of its 14 members.

Regional rival Iran has taken Saudi Arabia to task over this overture. Last week, Iranian oil minister Bijan Zanganeh said OPEC ministers “have implicitly or unwittingly spoken for the organization, expressing views that might be perceived as the official position of the OPEC.” This is obviously a reference to Saudi Arabia’s comments over the situation.

The obvious tension being felt by Iran over upcoming sanctions ratcheted up yet another level on Friday when the Islamic Republic said that a request from the U.S. to Saudi Arabia to pump more oil to cover a drop in its own oil output was “crazy and astonishing.” It added that OPEC would not heed that appeal.

However, it’s likely, given the sway Washington still has with Riyadh and both U.S. and Saudi Arabia falling on the same side of trying to prevent further Iranian influence in the region, that Trump’s request will be granted.

U.S. oil production, on the back of shale output is also still increasing, though infrastructure bottle necks will restrain more U.S. oil coming out of the Permian basin until at least some time next year, a development that is also creating a wide divergence between global oil benchmark Brent and NYMEX-traded West Texas Intermediate (WTI) crude. The price divergence as of June 8 stood at neatly $11 per barrel, creating arbitrate opportunities for U.S. producers and traders, particularly in Asia.

The U.S., which bypassed Saudi Arabia recently to become the world’s second largest oil producer is poised to overtake Russia either later this year or the start of next year when U.S. output will reach around 11 million bpd. However, if the OPEC/non-OPEC deal is modified in June, allowing more Russian production, the time frame for the U.S. becoming the top global oil producer will be modified.

OPEC and other leading oil producers including Russia will meet in Vienna on June 22-23 to discuss the future of the deal, which is valid until the end of this year.