Moscow does not believe in tears. Nor does OPEC

Oil exporting countries leaders of OPEC hold a summit in Vienna during June 5-6 to set the strategy for the coming period. Most analysts were anticipating a summit of no surprises, having in view the position expressed by the main producer of the cartel. Saudi Arabia seemed to be rather satisfied with the global oil market developments since the last summit in November 2014. The Saudi oil minister Ali al-Naimi said before the summit that the market is heading the right direction, while slowing high-cost supply. Indeed, the cartel of twelve oil exporting countries decided to keep unchanged the current production level, at least until the next summit in November. They ignored the very issue of possible lifting of western sanctions against Iran, which would mean Tehran raises it output by 1 million barrels per day, as it has already announced. Hence, the summit brought no surprises against the expectations.

According to analysts’ anticipations, the only way OPEC would have been expected to decide on a strategy to cut the output was if reaching a deal with Russia. But Russia is facing huge budgetary problems and it needs currency cash as it breathes. The oil output has reached a peak level in May 2015 of 10.77 barrels per day. In order to keep its market share, Saudi Arabia itself also rides high with an output of 10.3 million barrels per day. Hence, the largest world oil producer (Russia) and the largest OPEC oil producer (Saudi Arabia) are struggling to keep the output high. In its turn, even Iraq has increased its output by some 450,000 barrels a day.

There were two reasons for which a deal between OPEC and Moscow was not reached. On one hand some OPEC countries are reluctant to trust Russia - among them Kuwait, the United Arab Emirates and Saudi Arabia - due to past broken promises. Furthermore, Saudi Arabia seems to have learned its lesson from the ‘80s, when it decreased its oil output in view of higher prices, but lost part of its market share. Currently the oil prices are around USD 65 per barrel, far lower than last year’s level in July of USD 115 per barrel.

Other sources say the OPEC and Russia’s representatives have met after all in secret in Vienna, before the summit. However, no deal has been reached; they did not reach an agreement on a joint communiqué. A so-called proof of a failed result seems to be the statement made by the Russian minister of Energy Alexander Novak, who was saying that Moscow will not play the way OPEC hard-liners want it to, i.e. to cut down production.

Russia has few ‘allies’ when it comes to cutting the oil output to target higher oil prices on the world market, countries such as Venezuela, Nigeria and Iran. But Iran is not very convinced, anticipating the lifting of western sanctions and a boost in oil exports as of end of June, as mentioned above.

It was expected though that the OPEC policy would remain unchanged, for fighting further on the US shale oil producers. The OPEC leaders were to discuss if it has been worth the policy of low prices, while the US Energy Information Administration forecasted that US oil output will still grow by more than half a million barrels this year before largely stalling in 2016. But the OPEC leaders did not focus too much on the issue, trying to appear not at all worried by the US shale oil producers’ resilience on the market.

“This is a game of patience. For the Saudi strategy to work, prices and expectations of future prices cannot rise too far, too fast, because it would undo a lot of the work already in motion,” a western analyst was saying.

In the absence of a deal with Russia, things have remained unchanged. As the OPEC states do not seem impressed by Russia’s approach (nor by the US producers’ approach), Moscow does the same. Before the summit in Vienna, most probably following the failure to reach a deal, the Russian minister of Energy Alexander Novak was stating that “the role of non-OPEC countries, especially those countries that are not members of OPEC and also not exporters but increasing production for their own consumption, is becoming more important,” in what looked like an attempt to minimize the importance of the summit in Vienna. Russia aims to keep production at 10.5 million barrels per day over the long term, Novak also said.

If one would be in search for a surprise after the OPEC summit, then the surprise came on the world oil market. On the first day of the summit, on June 5, right after the announcement that OPEC is to maintain the current level of production, the Brent oil prices went up by 2%!

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