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5 Reasons OPEC And Russia Won’t Cut Oil Production

By Ellen R. Wald, Ph.D.CommoditiesFeb 02, 2016 07:58AM ET
www.investing.com/analysis/5-reasons-opec-and-russia-won%E2%80%99t-cut-oil-production-382872
5 Reasons OPEC And Russia Won’t Cut Oil Production
By Ellen R. Wald, Ph.D.   |  Feb 02, 2016 07:58AM ET
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Last week the Russian energy minister started a rumor that Russia would be entering into discussions with OPEC aimed at a joint reduction in oil production as soon as February. An OPEC official later denied the veracity of the Russian oil minister’s statement, but the damage was done and the price of oil jumped several dollars.

Immediately, Iraq’s oil minister came out in support of any production cuts, but Iran issued a statement that it would not commit to production, regardless of promised non-OPEC cooperation. As it turned out, the rumor was false. Russia and OPEC are not preparing for discussions to cut oil production, although OPEC maintains the position that if non-OPEC producers wish to discuss joint production cuts, the organization is open and willing to talk.

Investors need to be wary of such rumors because the likelihood of joint OPEC – non-OPEC production cuts is extremely low, for the following reasons:

  1. Iran cannot agree to production cuts. With sanctions just lifted, it desperately needs new customers for its own oil. In fact, Iran wants cuts from other OPEC producers to make room for its oil. Agreeing to future production cuts would be counter-productive to its interests, so even if Iran did signal an intention to participate, there would be significant doubts that Iran would follow through.
  2. Saudi Arabia has reason to believe that even if Russia agreed to production cuts, it would fail to follow through. Russia has made promises to OPEC several times over the past 15 years and either reneged or failed to follow through on promised cuts.
  3. OPEC and Saudi Arabia have stated that its policies are working and that they are committed to maintaining high levels of production.
  4. With Russia and Saudi Arabia jockeying for market share in China anyway, it is way too premature to think that OPEC entertain across-the-board production cuts in conjunction with non-OPEC members, especially with Russia.
  5. Russian oil companies are at least nominally independent of the government. It is not entirely clear and has not been proven whether Putin and his government can unilaterally decrease production from Rosneft (MCX:ROSN), Lukoil (OTC:LUKOY), etc.

At this point, the rumors are just rumors, and are not substantial enough to justify action.

5 Reasons OPEC And Russia Won’t Cut Oil Production
 
5 Reasons OPEC And Russia Won’t Cut Oil Production

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JESUS CARRERO
JESUS CARRERO Feb 05, 2016 9:07AM ET
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Dear Ellen,. I agree with you completely. I have been following the oil industry for several years and I think you nailed down, base on historical facts, the expected OPEC's actions. We have seen this kind of "oil wars" for a hundred years. The most recent one in the 80's. Great article.
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Idar Bar
Idar Bar Feb 04, 2016 4:21PM ET
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Hei Ellen R. Wald, great article! n could u please shed a light on the following matter: Is Iran selling oil in the market now after the sanctions were lifted? How can I check how much oil r they producing now? Thanks a lot.
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Idar Bar
Idar Bar Feb 04, 2016 4:20PM ET
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Hei Ellen R. Wald, great article! n could u please she a light on the following matter: Is Iran selling oil in the market now after the sanctions were lifted? How can I check how much oil r they producing now? Thanks a lot.
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August Brown
August Brown Feb 02, 2016 3:13PM ET
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Hello everyone, could you please explain me one moment ? I just couldn't. So, if Iran cannot agree to production cuts, with sanctions just lifted, it desperately will needs new customers for its own oil, right? So, what we see now? Iran wants cuts from other OPEC producers to make room for its oil. And agreeing to future production cuts would be counter-productive to its interests, so even if Iran did signal an intention to participate, there would be significant doubts that Iran would follow through. Is it statement right? What do you thing guys?
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Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Feb 02, 2016 3:13PM ET
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Thanks for your comment. You are correct that Iran cannot commit to production cuts at this stage admit is actively engaged in looking for new (or old) customers. Neither can other OPEC countries cut production to "make room" for Iranian production, so we are in for more of the same. Even if Iran agreed to production cuts, Saudi Arabia has no guarantee that Iran will follow through. Many times in the past countries have not adhered to OPEC production levels (think Kuwait right before Saddam Hussein invaded).
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Widyanarto Wibowo
Widyanarto Wibowo Feb 02, 2016 10:58AM ET
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Ru is begging for mercy..just go to ********Putin!
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MegabotGummyBear onRoids
MegabotGummyBear onRoids Feb 02, 2016 8:20AM ET
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5 point is wrong ... check it through orbis data base for good sake.. .Rosneft is for 69% indirectly owned by the Russian Federation. Lukoil's biggest shareholder is hiding its identity via the Virgin Islands...
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Siva T V
Siva T V Feb 02, 2016 8:20AM ET
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Hello...Author meant the same.. both are directly controlled by Russian government.. Whats your point here ?
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