With OPEC members generally in agreement to extend last year’s oil production cut deal beyond its March 2018 expiration date, the focus is now on OPEC’s non-OPEC partners—specifically Russia.
Last November, when the deal was first struck, Russia’s cooperation played a key role in obtaining the initial OPEC consensus that was needed to initiate the production cuts. In fact, the OPEC deal probably would not have materialized if Russia had not committed to cut 300,000 bpd. All told, non-OPEC producing countries contribute a total of 558,000 bpd in cuts, and without the non-OPEC participation it may have been impossible to convince some OPEC countries to participate.
This past October, Russian President Vladimir Putin told reporters he supported extending the cuts through the end of 2018. However, Russian oil production is not exactly centrally controlled and cuts require the nominal consent of Russian oil companies. Russian oil minister Alexander Novak equivocated on plans to continue the cuts, and told reporters in late October that Russia planned to increase oil production if the deal was not extended. He has since cited the need to meet with the heads of major Russian oil companies, primarily Rosneft (OTC:OJSCY), Lukoil (OTC:LUKFY) and Gazprom Neft (OTC:GZPFY), before determining whether Russia will support extending the cuts.
Novak met with these companies on 14 and 21 November, with no confirmed outcome. Two days after the first meeting, the head of Gazprom Neft announced that the company plans to increase production in 2018 even if Russia and OPEC agree to extend the cuts. It is unclear if this is just a statement by Gazprom to express its desire for no cuts or if it is an actual threat to oppose a possible government decision. In any case, the Russian government has apparently not made a decision yet and has said it would wait until Thursday’s OPEC meeting to decide about whether to support an extension of the cuts for another year.
Despite the lack of clarity from Russia, OPEC seems to expect the key participants to support extending the cuts. At issue, then, is the duration of an extension, which could be cut from the expected 9 months to 6 or even just 3 months. If anything less than a 9 month extension is announced in Vienna, oil prices are likely to fall following the meeting. The participating countries will also have this in mind, though they have shown of late that they are not driven to act solely by immediate price swings.
Even if Saudi Arabia’s Khalid al Falih is able to persuade Russia’s Alexander Novak to agree to the longer extension of the cuts, traders may have little faith that the Russian oil companies will comply. It is unclear still what narrative will appear on trading floors after Thursday’s OPEC meeting.
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