Tag Archives: Russia

OPEC Deal Likely to Fall Short – 12/14/16

The OPEC deal will bring oil prices up, but looks set to fall short of stated goals.

OPEC data shows that, throughout 2017, record oil inventories change little unless both OPEC and non-OPEC producers complying with supply restrictions in full. On paper, OPEC’s supply deal could drain almost half the global oil glut within six months. According to Bloomberg calculations using data IEA data, over the six months covered by the deal, 46% of the 300 million-barrel stockpile surplus could be cleared.

However, OPEC’s actual track record shows only 80% of promised cuts actually occur and Ali Al-Naimi, the former Saudi oil minister, has said OPEC members “tend to cheat.”

Non-OPEC nations have every reason to cheat on the deal and gain market share by pumping more. Benefiting from higher prices and more sales is a powerful incentive to put in minimal effort and call it compliance. For example, involuntary declines from aging fields are expected for most oil producers after years of heavy production which could be regarded as cuts.

In the 80% compliance scenario typical of most OPEC deals, non-OPEC rivals would need to make 600,000 barrels a day in genuine cuts to make a significant dent in global oil stockpiles in 2017. Reaching that number seems unlikely.

Exempt OPEC members Libya and Nigeria, as well as reluctant ones like Iran and Iraq already threaten to prevent substantial output declines. And the most crucial of non-OPEC producers, Russia, has a spotty record of following through on pledges to OPEC. When the effectiveness of the deal depends on Russia reducing output by as much as 300,000 barrels a day, its so-so history of cooperation doesn’t inspire much confidence.

Oil prices may rise as traders see any cooperation as a good sign, but cracks are already forming in the OPEC deal.

OPEC Approves First Deal to Cut Output in 8 Years – 11/30/16

OPEC successfully agreed to some crude oil production cuts for the first time since 2008 yet the effect it has on oil prices will likely be minimal.

Oil traders and investors may cheer the deal to curtail oil production, but history shows implementation of such agreements is often imperfect. In this case, exemptions have already been granted to Iran, Nigeria, and Libya making the collective target for the group all but unreachable if those nations boost output as planned. OPEC is also relying heavily on a reduction from producers outside the bloc of 600,000 barrels a day, half of that cut coming from Russia which has produced mixed results in the past.

Even with full compliance with the quotas by OPEC and non-OPEC, Goldman Sachs expects oil prices to only rise to about $60 a barrel. Other analysts from Morgan Stanley and Wood Mackenzie similarly see prices staying in the $50 to $60 a barrel range at best.

While 20% increase in oil prices would definitely improve the financial situation of oil drillers, it pales in comparison to 2014 prices that reached above $100 a barrel. It also risks reviving the competitors that OPEC hoped to force out of the market: U.S. shale drillers.

Fracking has changed the marginal economics of oil forever. Fracking shale deposits to get at tight oil is dramatically faster and less capital-intensive than traditional oil drilling, which is why output of U.S. oil spiked in recent years. And the U.S. is likely to only produce more tight oil in the coming years, according to the EIA.

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Shale oil drillers may have been devastated during the last two years of low prices, but a revival in their output is inevitable once prices start rising again. And renewed production in the U.S. would effectively cap oil prices even if OPEC’s deal goes perfectly and make efforts to keep prices above $55 “self-defeating”, according to Goldman Sachs.

OPEC Deal: Problems for Before and After – 11/21/16

Even if a deal between OPEC members is reached, increased supply from Iraq and Iran threatens Saudi Arabia’s control over the group. Iran and Iraq both asked for exemptions from any cuts in the deal citing a need to recover from sanctions and a need to fight the Islamic State respectively.

Iraq and Iran have raised oil output to record highs. Together they produce more than 8 million barrels of oil a day, almost a quarter of the oil pumped by the group and nearly as much as Saudi Arabia, the group’s largest producer.screenshot-2016-11-25-at-7-19-54-pm

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The decision of whether or not to allow the exemptions was ultimately delayed to the meeting on Nov. 30, where OPEC ministers will work out a shared cut in production aimed at reversing a price slide that has devastated the budgets of oil-dependent nations like those in OPEC. Benchmark Brent crude fell from more than $115 a barrel in mid-2014 to less than $30 before rebounding to a still low $45-$50 range.

Both Iran and Iraq would benefit from the higher prices, but they benefit more if they were able to sell more oil while others cut back. While a special exemption might be necessary to make the deal work, it would leave Saudi Arabia to shoulder most of a collective decrease and sacrifice its market share for the sake of its two biggest OPEC competitors.

If there’s no agreement to restrict output, the International Energy Agency has said that oil prices are likely to fall in 2017. OPEC’s own estimates of supply and demand also show that even following through on the agreement would barely drain a record oil surplus without the cooperation of non-members like Russia.

No non-OPEC nations are likely to make substantial cuts to their output. Russia is producing at a post-Soviet era high and has repeatedly said it “prefers” a freeze to a cut. And participation from other major producers like the U.S. or Canada has never been realistic. The U.S., the only oil producer on par with Russia and Saudi Arabia for total output, in particular could cause trouble for the deal. It was the massive increase in U.S. shale oil production combined with lackluster global demand for oil that caused the glut in the first place. Should oil prices rise as intended, revitalized shale driller output will likely put a ceiling on how high they can actually go.

The OPEC Deal: A Last Gasp of Relevance? – 10/31/16

OPEC may have pushed oil prices above $50 with promises of their first production cut in eight years, but doubts remain about how effective a deal could actually be. Between bulging inventories, internal tensions, and a loss of market share relative to non-OPEC producers, even the largest cuts promised in the range put forth in September look relatively minor, as well as unlikely.

Still, OPEC members have been too shaken up by the price collapse for the group to take no action. And should the group have a repeat of Doha, where the talks collapsed over Iran’s part or lack-thereof in the cuts, the costs to the already battered economies of OPEC could be massive. Failure to finalize the deal could mean a return to prices in the low-$40s, according to Goldman Sachs Group Inc.

Of course, if OPEC does manage to implement the maximum cuts, then they would still need to wait for the record surplus to fall off.

The bloc’s own data show that, under the cuts, the excess held in stockpiles would fall just 11% next year. Should competitors — chiefly Russia and the U.S. — decide to increase production and take advantage of the situation to gain a higher market share, the deal could easily fall apart. Any deal not involving at least Russia would have a superficial impact.

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If OPEC reduces output by 900,000 barrels a day from September levels as agreed in Algiers, inventories would contract as a result; however, even within OPEC, countries are probably going to miss that target. Four OPEC countries claiming exemption from the deal — Libya, Nigeria, Iraq, and Iran — increased output by 450,000 barrels in October alone, according to a Bloomberg News survey of available data. Any increased output from those members would have to be matched by grudging cuts by other. Most extra cuts would probably be coming from Saudi Arabia which faces its own economic troubles and reluctance to sacrifice market share for the sake of a losing battle.

Cutting output by enough to achieve OPEC’s objective also hinges on non-OPEC producers, especially Russia, playing their part. Yet Russian officials have said at most refrain the nation would refrain from further increases, according to Interfax, and Russia has had mixed history when it comes to following through with agreements with OPEC.

Representatives from other major oil countries such as Brazil, Kazakhstan, and Oman are also hesitating to accept or outright denying any responsibility to cut their oil output. Officials from Oman have said the nation is willing to cut production as part of deal, but is waiting for OPEC to reach an internal agreement before deciding on its own cuts. Meanwhile, Brazil has publicly committed itself to boosting output by 290,000 barrels a day next year, the biggest increase of any non-OPEC nation, according to the IEA. Kazakhstan also plans to boost output next year following the restart this month of its Kashagan oil field after 16 years of development.

Should OPEC implement its deal, it will almost certainly mean some increase in oil prices. How much some means will depend heavily on how much stock investors put in the group’s ability to affect markets as it used to. As U.S. shale drillers return, threats to oil demand come in new and old forms, and so many more factors outside of OPEC’s control threaten its relevance, it’s hard to say how much longer markets will focus so intently on what the group does.

Russia and the OPEC Deal – 10/18/16

Russia will join in the OPEC deal to limit oil production… at least according Putin.

With an economy heavily dependent on oil revenues, Russia has suffered greatly under low oil prices so it was naturally supportive of the agreement in Algiers between OPEC nations to limit output and boost prices. The next OPEC meeting on Nov. 30 that will deal with the distribution of cuts and whether or not producers outside the group will take part will be a chance to show how committed to the deal Russia actually is.

Russia would prefer to freeze its output at current levels rather than make reductions, according to Energy Minister Alexander Novak. Yet, Russia is pumping more oil than ever before bringing into question whether or not it can actually be trusted to cooperate with OPEC.

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“Traders have welcomed the news from Russia that it is ready to join other members to adopt sensible strategy to curb the supply and stabilize the price,” Naeem Aslam, chief market analyst at ThinkMarkets U.K. Ltd., said. “Caution may be the best practice. If history tells us anything, it is that these major oil players also have the habit to not respect the agreed agreement.”

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Russia and the OPEC, who together pump about half the world’s oil, could actually boost fuel prices and revive the energy industry if the output restrictions are put into effect. Yet, while Putin’s comments suggest such an agreement is possible, Russia not committed to pulling back.

An OPEC committee will work on the details of how to share the burden of cuts and present its proposals at the formal Nov. 30 meeting in Vienna. There ministers from some group members will meet with non-OPEC nations including Russia to discuss wider cooperation.

The odds of a successful deal remains, according to Goldman Sachs, since Libya and Nigeria are pumping 500,000 barrels a day more than expected and poor compliance from non-core OPEC producers is expected.

Iran and the OPEC Deal – 10/14/16

In oil news, few events stir up more volatility than OPEC deal talks so the next few articles will be taking a look at the effects of such talks on some major stakeholders in the oil industry. This series will start with Iran.

Iran has essentially won an exemption from the production controls most other countries agreed to at the recent OPEC meeting. The nation will continue to increase its oil output after successfully arguing that it should be allowed to return production to levels achieved before US-led sanctions devastated its energy industry.

Although OPEC agreed on a new overall range for production and will set up a committee to decide on output quotas for individual members, the probability of a cap on Iran’s production is insignificant for a reason. Iranian officials have repeatedly said they will up production to regain the nation’s pre-sanctions share of the market. Relative to other OPEC members, Iran has little to lose by boosting production and undermining the price support. If anything, Iran welcomes the opportunity to win back some market share.

Iranian officials are seeking to increase output to about 4 million barrels of crude a day. Iran produced 3.62 million barrels a day in August, according to data compiled by Bloomberg.

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Yet, the country’s withered energy infrastructure and investment base will make the official goal difficult to reach. Without a larger influx of foreign capital and technology, something that could take years to happen in earnest, Iran is not recover this year.

Iran has begun the process of attracting foreign investors. National Iranian Oil Co. agreed to the framework of a $2.2 billion deal with Persia Oil & Gas Industry Development Co. aimed at increasing crude oil exports. Moderate forces in Iran, which need to show that easing tensions with the West is paying off, will continue pushing such agreements as they seek higher oil revenues. The oilfield development accord combined with rising crude exports suggests a positive trend for Iran’s oil industry.

Of course, a positive for Iran is often a negative for its regional rival, Saudi Arabia. Because Saudi Arabia is the largest producer in OPEC it is expected to make up for make cuts where others cannot or will not to keep overall production within the range the group agreed upon. Meeting that expectation means conceding market share.

Adding to the deal’s troubles are few other issues: Nigeria has also claimed exemption from any cap on its output as it recovers from militant attacks on its oil assets, Iraq has said it doesn’t accept OPEC’s estimates of its production levels, Libyan output is rising substantially, and Russia, with its history of not following through on similar deals, boosted output last month to a post-Soviet record. None of those issues will help the deal but, like Iran, those countries may be expecting Saudi Arabia to pick up the slack anyway.

Saudi Arabia and Russia: A Broken Record – 9/15/16

The world’s top two crude-oil producers, Saudi Arabia and Russia, pledged to cooperate to stabilize global markets, while failing to announce any real measures to bolster prices and raising the question of what, if anything, they actually hope to accomplish.

The Energy Ministers of Saudi Arabia and Russia have both agreed at a joint press conference that an output freeze would be the most effective way to  restore oil prices, but stopped short of pledging actual production limits. Saudi Arabia and Russia struck a similar agreement earlier this year, but it quickly fell apart in Qatar when the Saudis suddenly insisted that Iran take part.

Meanwhile Iran, continuing to ramp up output to return to pre-sanction levels, is unlikely to agree to adhere to any limits if asked again.

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Oil traders and oil officials are skeptical the pact will amount to much.

“Don’t expect anything of substance to be agreed on output at the Algiers meeting,” said Victor Shum, Singapore-based vice president at industry consultant IHS Inc. “It will be a non-event and any attempts to manage output won’t happen. It will be a dud but that’s not a surprise.”

“A freeze doesn’t resolve anything if Saudi Arabia and Russia are both freezing when their production is at a record high,” Saad Rahim, chief economist at oil-trading house Trafigura Group Pte, said in Singapore.

While it’s “easier” to have talks on freezing supplies now than it was at a meeting in Doha earlier this year, a deal is unlikely at a gathering in Algiers later this month, said David Fyfe, Gunvor Group Ltd.’s head of market research and analysis.

“There won’t be an agreement but it does no harm to keep talking about this because that itself is price supportive,” Fyfe said at the Asia Pacific Petroleum Conference in Singapore on Wednesday. “Of course, there’s a risk of crying wolf. But at some stage it’s the law of diminishing returns when you keep talking about a production agreement and not actually reach one.”

Their pessimism is understandable. OPEC members that can raise production are seeking to, the others are already close to short-term limits.

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Still, OPEC and Russia will probably keep at the same dance so long as prices go up whenever they suggest an agreement is coming, and likely after if only to keep up appearances.

EU Still Wary of Russia – 8/12/16

EU nations are set to renew sanctions against Russia for six more months amid renewed tensions in eastern Ukraine.

The consensus follows months of lackluster progress in implementing the February 2015 Minsk peace accord. So far the countries involved — Russia, Ukraine, Germany and France — have had little luck enforcing the ceasefire with the most recent setback being an alleged incursion into Crimea by Ukrainian forces. Since the incident, troops on both sides of the Crimean border have been put on high alert.

The sanctions are set to lapse on July 31 and require a unanimous vote for extension, but Russia has done little to improve its standing with the EU since they went into place between subterfuge in European politics and unrelenting calls for nationalism in its mostly state-controlled media. It would be surprising if Putin’s Russia convinces any EU member to fight on its behalf. Considering many of the countries in the EU also belong to NATO, which is stepping up security in Eastern Europe in response to Russian aggression, one can expect that solidarity will compel most to extend the sanctions.

The EU and US sanctions limit Russia’s access to international capital markets and energy technology such as hydraulic fracturing equipment, both painful areas for Russia. Faced with a long recession and hamstrung by the oil price collapse, Russia is burning through reserve funds at an alarming rate considering it took about a decade of high oil prices to make them in the first place. As those funds run low, Russia needs to depend more and more on borrowing from other markets. And without the fracking technology that helped fuel the U.S. shale revolution Russia may find itself struggling to keep up its oil output as it pushes its aging fields to keep up record production levels. Russia may find itself unable to take advantage of recovering oil prices if it can’t keep output steady.

Russia Eyes China with Concern – 8/11/16

After an economic slowdown in China triggered a collapse in the price of oil, the Kremlin has paid more attention than ever to its largest trading partner.

Squeezed by the crash in oil prices and Western sanctions, Russia has looked for ways to ween its economy off neighbors resentful of illegal forays into Ukraine, the Middle East, and even U.S. elections. China originally seemed like a good option when its growth rate was still steady and it was free to spend hundreds of billions of dollars on Russian energy projects. Imports of Russian crude last year jumped 28% making it China’s largest supplier on an annual basis after Saudi Arabia. Few other countries have the need or desire to tie themselves to Russian oil and gas.

For better or worse, Russia’s fate is tied closer to China’s than ever. A 1% slowdown in the Chinese economy would translate into a deceleration of about half as much in Russia’s gross domestic product, according to Bank of Russia First Deputy Governor Ksenia Yudaeva. Coming off a GDP contraction of 3.7% in 2015, Russia is not in a position where they can blithely accept losses.

After a slowdown in China came in 2016 and triggered a collapse in oil prices, the yuan fluctuations, capital outflows, and stock market panic that followed only exacerbated fears about China’s economy. The nation’s GDP supposedly grew at 6.7% in the first quarter of the year, in line with the government’s growth target range, but many economists still have their doubts about China’s notoriously unreliable, government-guided economic indicators.

Russian officials are clearly nervous that a hard landing for China would mean trouble for Russia right before parliamentary and presidential elections.

“The Bank of Russia is monitoring the situation in China and will take measures to maintain financial stability if needed,” said Yudaeva, speaking for the Bank of Russia.

Though it is hard to say what form those measures would actually take, Russia’s central bank has a 150-billion-yuan ($23 billion) swap agreement with People’s Bank of China, signed in 2014 to facilitate direct settlement between the ruble and the yuan, avoiding use of the dollar.

Russia’s Labor Market Distortions – 8/10/16

Russia’s labor market is struggling with distortions as policymakers put short term stability ahead of long-term growth by ignoring demographic and productivity issues.

A S&P Global Ratings report released last month revealed a deep concern about population aging in Russia. It forecasts the country’s population will fall from 143.5 million to 128.6 million in the next 35 years, with age-related spending increasing from 13.1% to 19.1% of GDP compared to the current median of 7.8% in emerging economies.

Officials now publicly say the pension age will be raised to 65 from 55 for women and 60 for men. The average life expectancy in Russia is around 65 for men and 77 for women reflecting a health system poorly ranked by the World Health Organization. Pensions for those who are still working will also be eliminated.

The raising of the pension age will keep many in a workforce already overburdened with unnecessary workers. Thanks to government pressure on businesses to avoid any job cuts there have been almost a million job gains during Russia’s latest oil glut induced recession. As a result, many held onto their jobs only to see their salaries plunge or go unpaid entirely. Unemployment in Russia is expected to hold at less than half the rate of the euro region at the cost of productivity and economic flexibility.

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While it still existed, the Soviet Union kept unemployment numbers artificially low by controlling all firing decisions, making registration as unemployed pointless and costly, and starting witch hunts against “idlers”. Today, Russia still has some of Europe’s most restrictive rules against firings according to the OECD. Employers are all but forced to keep unproductive, unprofitable plants running resulting in widespread use of salary cuts and unpaid vacations to keep costs down. The salary cuts in turn create a feedback loop of decreased consumer demand causing demand for workers to drop causing more salary cuts, all because Putin is forcing businesses to make decisions favoring political stability over efficiency.

In Russia, real disposable incomes have fallen 6%, retail sales are down 9.8% and wages adjusted for inflation have plunged 7.5% between July 2015 and July 2016, according to Bloomberg.

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