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Russia May Be Better Off Quitting Crude Cut Extension

Russia May Be Better Off Quitting Crude Cut ExtensionRussia May Be Better Off Quitting Crude Cut Extension

The world's largest oil exporter could be poised to back out of a widely anticipated extension to global supply cuts, Chris Weafer, senior partner at Macro-Advisory, said on Friday.

OPEC members are reportedly forming a consensus with other allied crude exporters to extend their production deal by nine months. That would prolong the agreement among OPEC, Russia and other oil-producing nations to keep 1.8 million barrels a day off the market through the whole of next year, CNBC reported.

Nonetheless, Weafer said that while at first glance Russia backing out of a production deal looking to clear a global supply overhang seemed to be a "crazy position to take", the context of Russia's changing industrial priorities meant it actually made "perfect sense".

The official added that if oil stays in the $60-65 a barrel range, Moscow's support for a deal extension beyond March next year would be "very unlikely".

Weafer said Russia still makes money with the oil price in the mid-$50s and any higher would prompt US shale firms to ramp up production. He also believes that this price would incentivize the Russian economy to diversify away from oil, a major long-term benefit for the country.

"The higher the price of oil then raises the risk of more investment into, for example, US shale and Canadian Sands projects which, as was seen in 2014, risks a big increase in global supply," Weafer said in a research note originally published in an article for The Moscow Times on Thursday.

He argued, therefore, that Russia's sustained backing of the OPEC-led deal could "create a risk of another collapse" next year.

Russia's Energy Minister Alexander Novak—a key architect of the output cut deal that was extended last May—said in October that Moscow would be in favor of extending the OPEC-led production deal into late 2018.

However, Weafer said Novak's comments had since lost relevance because they were made at a time when the oil price was drifting in the $50-55 range.

Brent crude traded at around $62 a barrel Friday afternoon. The price of oil collapsed from near $120 a barrel in June 2014 due to weak demand, a strong dollar and booming US shale production.

OPEC's reluctance to cut output was also seen as a key reason behind the fall. But, the oil group soon moved to curb production—along with other oil producing nations—in late 2016.

 

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