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What Was Russia Thinking In Refusing To Cut Oil Production?
Forbes
March 8
Excerpt
But this time one of the key partners of the coalition, Russia, refused to participate in additional cuts. They had previously signaled their resistance to additional production cuts in February when OPEC floated the idea.
Oil prices plunged by nearly 10% following this surprise move by Russia. It had been widely expected they would go along with the plan, because the alternative seemed much worse. So what exactly are they thinking?
Deja Vu
Let’s rewind back to 2014, when OPEC initially declared war on U.S. shale oil producers. Oil prices had begun to weaken as shale oil production continued to expand, so OPEC decided it needed to act to protect market share. A price war ensued that dropped oil prices all the way into the $20s. At that time I noted that the decision would probably cost OPEC a trillion dollars or more (and it likely did).
While some shale producers were forced into bankruptcy, most were far more resilient than OPEC had imagined. Thus, two years later OPEC waved the white flag and returned to the strategy of making production cuts in order to support prices.
The downside of this strategy for them was that, while these production cuts do help support oil prices, they also keep U.S. shale oil producers in business. So, shale production in the U.S. kept expanding. This put OPEC in the cycle of having to cut production again and again as shale production kept climbing. Many OPEC members deemed this unfair, but they had already experienced the alternative and it was worse.
From Russia’s point of view, all this strategy was doing was propping up U.S. oil producers at the expense of everyone else. The only way this strategy would ultimately work would be for OPEC and its partners to keep cutting until U.S. shale oil production began to decline. Their hope was that this happened sooner rather than later, but in the interim OPEC production fell to a 17-year low.
It’s worth noting that Russia also needs the money from its oil exports. But it is embarking on a potentially expensive gamble in refusing to cooperate with OPEC. They may sell more oil this way, but at a far lower price.
Coronavirus Changes the Equation
But the global coronavirus (COVID-19) outbreak has forced the issue. Now, instead of having to deal with the addition of another million BPD of U.S. shale every year, suddenly they had to cope with millions of barrels of excess oil on the market as demand collapsed in response to the coronavirus outbreak.
Oil prices plunged by nearly 10% following this surprise move by Russia. It had been widely expected they would go along with the plan, because the alternative seemed much worse. So what exactly are they thinking?
Deja Vu
Let’s rewind back to 2014, when OPEC initially declared war on U.S. shale oil producers. Oil prices had begun to weaken as shale oil production continued to expand, so OPEC decided it needed to act to protect market share. A price war ensued that dropped oil prices all the way into the $20s. At that time I noted that the decision would probably cost OPEC a trillion dollars or more (and it likely did).
While some shale producers were forced into bankruptcy, most were far more resilient than OPEC had imagined. Thus, two years later OPEC waved the white flag and returned to the strategy of making production cuts in order to support prices.
The downside of this strategy for them was that, while these production cuts do help support oil prices, they also keep U.S. shale oil producers in business. So, shale production in the U.S. kept expanding. This put OPEC in the cycle of having to cut production again and again as shale production kept climbing. Many OPEC members deemed this unfair, but they had already experienced the alternative and it was worse.
From Russia’s point of view, all this strategy was doing was propping up U.S. oil producers at the expense of everyone else. The only way this strategy would ultimately work would be for OPEC and its partners to keep cutting until U.S. shale oil production began to decline. Their hope was that this happened sooner rather than later, but in the interim OPEC production fell to a 17-year low.
It’s worth noting that Russia also needs the money from its oil exports. But it is embarking on a potentially expensive gamble in refusing to cooperate with OPEC. They may sell more oil this way, but at a far lower price.
Coronavirus Changes the Equation
But the global coronavirus (COVID-19) outbreak has forced the issue. Now, instead of having to deal with the addition of another million BPD of U.S. shale every year, suddenly they had to cope with millions of barrels of excess oil on the market as demand collapsed in response to the coronavirus outbreak.
snip
It is likely, in my view, that the endpoint will be similar to the last time this strategy was attempted. Oil prices could dip all the way into the $20s. Russia will probably eventually decide that the pain is too great, and come back to the table. In the interim, many shale oil producers will be forced into bankruptcy.
More at link: https://www.forbes.com/sites/rrapier/2020/03/08/what-was-russia-thinking-in-refusing-to-cut-oil-production/#5431c5837fcc
This is a good analysis. Not mentioned in this article is that one of the (domestic) hazards here is how insanely over-leveraged the shale extraction industry is. If their debts were to become unrecoverable, how would it affect financial institutions? I don't know the answer.
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I wonder if SA and Russia worked together on this, to give shithole cover and possible martial law status.