In the aftermath of a do-nothing Dec. 4 Organization of Petroleum Exporting Countries (OPEC) meeting, Russia finds itself in a similarly vulnerable position as both OPEC and non-OPEC countries struggle with more supply than buyers.
For example at $50 oil, if Russia cuts a barrel, it’s lost $50. Now, every barrel that drops off has the potential to put upward pressure on prices, it’s not adding $50 of upward pressure on the price of remaining barrels.
“So for every barrel [Russia] takes off, they lose $50, but may get $1 on all the other barrels they produce. I think when they do the math, they’re just saying they don’t see how that generates more revenue for them,” he said.
Now, if the Russians were to shock the Western world and amicably agree to cut their own production, it would make it easier for the Saudis to save face while taking some of their own barrels off the market. And that could be the beginning of some sort of relationship between Russia and OPEC, an unlikely pairing.
Founded during the Cold War in 1960, the Organization of the Petroleum Exporting Countries were pro-Western governments steeped in capitalism. While Russia was part of the communist Soviet Union, it wasn’t company that OPEC particularly wanted to keep.
And as Pavel Molchanov, Raymond James analyst, told Rigzone, “In theory, Russia could have joined since the Soviet Union broke up in 1991, but this was never a priority for the Russian government.”
Ironically, Russia’s current dilemma parallels the for-profit publicly traded world of Western corporations, York noted.
“Why is an ExxonMobil going to cut [production]? They’re in the business of creating the most value for their shareholders. The Russians are in the business of creating the most value for Russian shareholders – the Russian government. And the Saudis are in the business of generating the most value for the Saudi treasury because that’s where a lot of that revenue goes,” York said. “They’re all trying to maximize the well-bring of their stakeholders.”
And Russia isn’t known for playing well with others. After bullying much of Europe into dependence on its gas, Greece and other members of the European Union members are seeking ways to get out from under their long-time antagonist.
Throughout the world of oil producers, 2015 has been a contest of market share. As York notes, it’s a gain-and-hold market and as the Saudis pursue market share in Asia and Europe, they’re trying to shoulder Russian barrels out.
“When you think about it from a commercial perspective, if the Russians cut [in those markets], they’ve sort of given [Saudi] ground and ceded that turf in Asia or in Europe because Russian barrels would no longer compete there,” York said.