Could Russia-OPEC Meeting Lead to a Production Cut?

Mikhail Mordasov/AFP/Getty Images

Mikhail Mordasov/AFP/Getty Images

Russia, clearly worried about the effect of low oil prices on its economy, is sending Energy Minister Alexander Novak to meet with OPEC members just before the cartel meets to discuss production levels, though there is no evidence that any reduction in output is planned. The meeting of OPEC at its Vienna headquarters is scheduled for June 5. The cartel plans to conduct a seminar on oil for oil ministers of its 12 member states.

Novak also is expected to attend to press talks already under way with many OPEC members, according to his spokeswoman, Olga Golant. “We were holding bilateral meetings with representatives of the OPEC states during the whole last quarter,” Golant said. “We met practically with all members. The next meeting will be held in Vienna.” She said the ministry will issue a detailed agenda for the meeting in about two weeks.

The exact date of Novak’s meeting on oil production levels isn’t known. While he’ll attend the seminar June 3-4, he said April 28, “I’ll be meeting [OPEC ministers] on 2-3 June.” Russia is the world’s largest energy producer, taking oil and gas together, but its economy has been hobbled not only by Western sanctions over the Ukraine crisis but also by the precipitous drop in oil prices, which fell from more than $110 per barrel in late June 2014 to the mid-$60s today. Russia’s budget relies on oil and gas revenue for half its budget, and this has led it to the brink of recession, with its economy expected to shrink by 3% this year, according to the World Bank’s Russia Economic Report issued earlier this month.

So far OPEC, led by its most productive and influential member, Saudi Arabia, has been no help because it refuses to cut oil output, which would raise prices. The strategy is primarily to undersell U.S. producers of shale oil, which rely largely on hydraulic fracturing, or fracking, which is affordable only if prices are higher.

Novak said he recently held one of his semiannual meetings with the cartel’s secretary general, Abdullah al-Badri, to discuss various energy issues, including the price of oil. But two OPEC delegates from the Persian Gulf region said there was no reason to believe that the talks would lead the cartel to work with Russia to cut production. “The Russian comment does not mean a joint cut in production it just means that there is concern over price,” one delegate told Reuters, “but in the end, there might be no action taken.” Another dismissed outright any prospect of a production cut.

This is extremely bad news for Russia. Besides the sanctions, which have barred Russian industry from borrowing from the West and importing technologies for its energy sector, the low price of oil has had a devastating effect on its economy. The World Bank’s report said recession in Russia won’t be limited to 2015 but will continue for at least one more year, with the economy contracting 0.3% in 2016, when oil prices are expected to experience only a trivial increase. As for the sanctions, they will be lifted only when Moscow and the West agree to terms about the bloodshed in Ukraine.

Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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