The Fuse

Russia Poised to Meet Its Production Cut Pledge Next Month

by Matt Piotrowski | March 06, 2017

The deal struck late last year between the OPEC cartel and key non-OPEC players was an extraordinary measure to manipulate fundamentals and support oil prices. While the agreed cuts have kept oil prices on the exchanges in New York and London above $50 per barrel, producers say they still have more work to do in order to rebalance the market.

Russian Energy Minister Alexander Novak told reporters at CERAWeek by IHS Markit that his country will reach its pledge to slash output by 300,000 barrels per day (b/d) by the end of April. Meanwhile, news reports surfaced that Iraq believes OPEC will likely have to extend its cut throughout the second part of the year, and the Iraqis would go along with any deal. Novak didn’t say whether the agreement should be extended, instead suggesting it would look at the situation come end-May, when OPEC meets again.

The positive mood at CERAWeek is in stark contrast to last year, when the market had just tanked to below $30 per barrel. The industry is in much better spirits, thanks to higher prices and the belief the market is on its way to rebalancing.

Prior to speaking to reporters, Novak took part in a Q&A before an audience at CERAWeek. When asked whether his country would join OPEC, he said that Russia would not. But he expressed the importance of cooperation with other producers in order to bring stability to the market, noting how “mutual trust” has been established through the recent OPEC/non-OPEC collaboration. The coordination among 23 countries to cut output has raised the stakes for producers, forcing them to rely on each other despite years of suspicion and distrust.

The positive mood at CERAWeek this year is in stark contrast to last year, when the market had just tanked to below $30 per barrel. The industry is in much better spirits, thanks to the higher price levels and the belief the oil market is on its way to rebalancing. The biggest questions in the short run is whether OPEC and its non-OPEC counterparts will recommit to throttling back in May and whether U.S. shale can fully offset these cuts and push down prices. John Hess, the CEO of Hess Corp., said at the conference that lower costs, improved technology, and better sentiment in the financial markets have helped shale get back to a growth trajectory. “When shale went down, American ingenuity went up,” he said. However, he warned U.S. supply will not be enough to meet demand this year and next.

Novak said that the current price range of $50-$60 will bring increased upstream investment, which is needed to stave off a supply shortage further down the road. According to Novak, the production cut—which was necessary to lift prices after an extended period of a weak market—has reduced volatility and brought about needed investment. Earlier in the day, IEA’s Fatih Birol warned that current levels of upstream spending is not high enough, predicting that prices will spike at the beginning of next decade.

Novak talked up his country’s industry, saying it now has a “good investment climate,” despite the last few years of low prices and Western sanctions. Even though Russia wants to diversify its economy, it still sees a large amount of untapped potential for oil and gas, particularly in Arctic offshore.

Even though Russia wants to diversify its economy, it still sees a large amount of untapped potential for oil and gas, particularly in Arctic offshore.

Iraq’s oil minister Jabbar al-Luaibi, who will speak at CERAWeek on Tuesday, said today, according to news reports, that his country will agree to curb its output if the group maintains the output cut for the second half of 2017. Last year, Iraq committed to cutting back by 210,000 b/d, but has not fully followed through on its pledge.

OPEC meets with hedge funds

Massive bets by speculators on higher prices provide one motivation for OPEC to continue with its cuts. If the cartel fails to continue its production curbs, a large number of speculators would liquidate their positions, potentially puncturing prices. A Wall Street Journal piece published Monday reported that OPEC members and its secretary general have met with hedge funds and other financial oil traders to better understand how they operate.

OPEC members and its secretary general have met with hedge funds and other oil traders to understand better how they operate.

The large number of speculators betting on higher prices has helped OPEC lift prices over the past six months. For years, OPEC demonized speculators in the oil futures market, deflecting blame on them for economic and political fallout from higher prices. Now, however, OPEC sees them as an instrument to help get prices to acceptable levels. The Journal reported that a hedge fund manager explained to OPEC Secretary General Mohammad Barkindo the importance of maintaining the output cuts, noting that an extension would cause the investor to shift his views and bet that oil prices would keep rising, the source told the Journal.

Barkindo, speaking at a press conference at CERAWeek, confirmed the reports, saying that OPEC could “no longer ignore [funds’] impact on oil.” He acknowledged that before it was “taboo” for OPEC members to meet with money managers, but since the “impact of financial markets on oil continues to be magnified,” producers within the cartel want to get more insight on how they operate.

This story was updated from its original version with Barkindo’s comments at CERAWeek

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