If OPEC can agree to a production freeze agreement, will Russia join in? The jury is still out on whether OPEC members will be able to reach a production agreement, but without Russian participation it will have no hope of reducing the physical supply glut. Despite what Putin says, investors should be extremely wary of Russian intentions to participate in any sort of OPEC-Non-OPEC production freeze.
Putin told the World Energy Congress in Istanbul that, “Russia is ready to join in joint measures to limit output.” However, Putin (along with leaders from other oil producing countries) is known for making statements to cause a speculative bump in oil prices regardless of his actual intentions. Later that day, Rosneft (MCX:ROSN) CEO Igor Sechin told the same audience that Russia’s largest oil producer would not cap oil production. Later, a Rosneft spokesman walked back these comments and said that if Russia and OPEC reach an agreement, Rosneft will comply. Of course Rosneft cannot contradict Putin who rules Russia firmly, but Sechin’s original comments indicate that he sees a deal as a remote possibility. In public, Russian oil producers support the government’s pro-oil freeze line, but internally the matter is not settled.
In the meantime, the Saudis and the Russians announced plans to meet on October 22 and 23. The last time the Russian oil minister, Novak, and the Saudi oil minister, al-Falih, met (on the sidelines of the G20 conference), speculation that the meeting might lead to an oil freeze agreement caused oil prices to spike 4%. This time around, investors should not be as gullible. Billed as part of a technological cooperation agreement, the Saudis will likely be showcasing (or intimidating the Russians with) their state-of-the-art oil facilities. Do not expect any production negotiations from this meeting.
Russia’s most recent market move should give some indication of its future plans. Rosneft recently entered into a deal with Trafigura to purchase Indian oil refining giant Essar Oil. The purchase will provide Rosneft with a major distribution network for its own crude oil in India’s emerging market. This deal indicates that Rosneft is beginning to imitate Aramco’s global diversification strategy.
Over the past five to ten years, Aramco made strategic purchases of refineries and distribution outlets in Chinese, Korean and American markets that secured outlets for its own crude oil. In fact, back in February, Aramco itself was considering making a bid for a 49% stake in Essar Oil. Rosneft’s acquisition indicates that the company is, if anything, planning to increase its crude oil production and is actively seeking new customers and markets for this oil.
Russia’s own history provides another important clue. In 2008 and 2009, Saudi Arabia convinced Russia to cut oil output along with OPEC countries. After Russia agreed to the deal, Igor Sechin of Rosneft did not follow through. If the Saudis are skeptical of Russia’s intentions, investors should be skeptical as well.