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Why Russia Just Cried Uncle

by | published October 6th, 2015

Over the weekend, Russian Energy Minister Alexander Novak announced that Moscow is ready to meet with both OPEC and other oil producers to address the low price of oil.

For the first time in nearly 11 months, geopolitics is likely to give support to higher crude, and oil prices saw a new push.

Ever since OPEC decided last Thanksgiving to defend market share rather than price, crude has been in a swoon. That has had a major negative impact on countries relying upon the sale of oil to balance their central budgets. All producing countries have been affected as oil declined from the triple digits to around $40 a barrel.

And even U.S. producers have taken it on the chin. The American scene may be accentuated by huge new reserves of shale and tight oil, but these are more expensive to extract, requiring an average price of well above $70-75 a barrel.

But since last year’s OPEC decision, little has been done on a geopolitical scale to correct oil prices. So why has Russia just cried uncle?

Here’s my take on why Russia’s planning to meet with OPEC… and what the outcome will be…

With State-Owned Companies, a Price Decrease Is a National Disaster

Whereas oil production in the U.S. is a private affair, in all other major producing countries the sector is either led or controlled by state companies. So for Russia and all OPEC countries, the dive in prices was more than a private sector bottom-line consideration.

All government programs and expenditures are impacted. To make matters worse, these economies are largely undiversified. Oil is the sole source (or, in the case of Russia, oil and natural gas are the primary sources) of revenue.

Russia also has other concerns. The Western sanctions issuing from the crisis in Ukraine and Moscow’s annexation of Crimea have restricted access to the outside hard currency markets essential to operating hydrocarbon exports (almost all contracts are denominated in U.S. dollars and must be pre-financed).

The double whammy of low prices and sanctions has resulted in a significant reduction in the value of the ruble. That, in turn, has created additional domestic market problems for average Russians.

Somebody Else Must Blink First

On several occasions over the past month, I have discussed here in Oil & Energy Investor the unsustainable OPEC position and the rise of U.S.-Russian combined responses to it.

All OPEC countries (with the exception of Iran – given its own sanction barriers and the dreadful state of is oil industry) have been producing well over their monthly quotas. The OPEC Secretariat determines these each month by first estimating global demand, then non OPEC volume, followed by what is termed the “call on OPEC,” divided into quotas for each cartel member.

Low prices have required that OPEC members flood the market with crude in an increasingly desperate drive to raise needed revenues. And that, of course, has simply driven the overall prices even lower.

Russia and the U.S. have experienced downward pressure as well. But of the two main non OPEC providers, Russia has the most acute (and immediate) problem. And Novak’s statement comes after indications from OPEC sources that an accord is developing.

Nobody yet knows exactly what this will mean or how any agreement will play out. The consensus (which I happen to share) is that the Saudis require some indication that the strategy to maintain market share has been successful.

The clearest way of accomplishing this is to have somebody else blink first.

A Latin American “Spring”?

All OPEC members have faced an acute situation for some time. All – even the Saudis – have been running increasing budget deficits. Riyadh has also begun to withdraw billions from foreign investments as the need to support domestic financial realities has intensified.

Other cartel countries are in more dire shape. Venezuela, Nigeria, Libya, and Iran require oil prices in the high triple digits to have any pretense of stable central government accounts. Any price improvement notwithstanding, this is simply not going to happen.

Perhaps the most serious situation is taking place in Venezuela. The national economy has stopped functioning, there are food and commercial pricing riots in all major cities, and sources within the national oil company (PDVSA) privately acknowledge that reliance on crude revenues to import essential commodities has failed.

A transition of the crisis to the political realm would mark the beginning of a Latin American parallel to the Arab Spring. And with stability crumbling in Brazil and Argentina, economic problems intensifying in Ecuador (the smallest of the OPEC nations), and a stabilization under pressure in Colombia, this could get very nasty very quickly.

How Russian Involvement Will Affect Prices

Rising oil prices will not solve all of the problems, even if that rise were an accelerating one. But it would provide at least one welcome element.

Overproduction has become so bad that even Saudi Arabia has increased both production and exports. The convoluted rationale behind this tactic has strained credibility. The real reason is simple: The Saudis cannot prevent other OPEC nations from rising volume in a desperate attempt to collect revenues. So they need to appear to be leading the effort.

Russia may be the short-term key to allowing OPEC to ease production levels. Moscow will never become a member of OPEC because the Kremlin would never allow an outside organization to dictate how much oil it can produce or trade. But, unlike the U.S., Canada, or Mexico, the Russians have had a high-profile observing delegation at the OPEC headquarters in Vienna for some time.

The stage now seems set for a Russian-Saudi meeting to precede a broader OPEC session. That should be enough for crude prices to find a floor and improve. I’ll keep you posted as this situation plays out.

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  1. Tore Schanke
    October 6th, 2015 at 14:11 | #1

    How dire is the situation for Norway?

    I don’t think we Even have any gold left, in the sentral bank…
    But, we have alarge production of Seafood.

  2. Benjamin
    October 6th, 2015 at 14:30 | #2

    Can Fort Knox have gold, or dust.

  3. dennis parkstone
    October 6th, 2015 at 14:40 | #3

    for someone that has never invested in stocks of any kind,how does a person get started???

  4. Glenn Koons
    October 6th, 2015 at 14:55 | #4

    As a 76yr. old amateur investor, here is my view on energy. I am pro America and frankly hope OPEC collapses. I do not care at all for the energy problems of the Chicoms, Rooskies, Brazil, India or other nations including Mexico unless, UNLESS, they are willing to supply us with cheap energy. So, instead, I want on and offshore drilling. I want all out fracking here. I want use of our huge energy supplies via oil, gas, coal , and safer nuclear energy. I want the US to be energy independent . I do not care a rip about , the global economy now. Obama has ruined our domestic economy. I the Pipeline signed. I want and all out energy exploitation and just ignore the Left and the radical enviros. We are in desperate trouble and we need to use what we have…..which is hundreds of years of potential and supplies.

  5. Glenn Koons
    October 6th, 2015 at 14:56 | #5

    Read: I want the Pipeline signed. I want an all out… Please forgive my typing. I was ticked off.

  6. Andre
    October 6th, 2015 at 20:37 | #6

    Do not make average people believe 50$/barrel is a low price. Remember around 1985, price went up to 35$/barrel and companies made vertiginous profits (I was working for EXXON).The production costs for countries like Venezuela, Middle East etc are still today just a few dollars/barrel. The actual price does not reflect by far the production costs.
    We do not have to maintain a rent to those countries, it is not our obligation and we do not have to suffer high prices just to maintain those in a shameful luxury living (ie Middle East)at our expenses. They have to learn to diversifie and boost their industries. I am tired of reading what those countries needs to survive. Let them start using their brain and working a little hard! Being members of a same organization OPEC, there should be a distribution of the profit between themselves according to their production cost. 50$/barrel is still far above what deserves a lot of them.If the North is richer is the result of hard work, so do not be so complacent toward those who live on our back.

  7. Ricky
    October 7th, 2015 at 19:36 | #7

    In 1985 it was a lot cheaper to drill & complete a well to bring on production . People doing the same job I am currently doing in the industry were making a 1/3 of what I make now so the labor & equipment cost are higher from service companies to the oil company to drill & complete a well. That means a lot less overhead & they also had less cost due to less government regulations, So the price of 50$ a bbl for oil does not have the profit margins for a Domestic US company that people might think it does, especially in the shale plays because most of that is horizontal drilling which is more expensive to drill & to frac than it was to drill & frac a standard vertical well in 1985

  8. Gavin
    October 7th, 2015 at 21:03 | #8

    I have never lost money on recommendations by Dr. Moors.
    That said, one MUST have patience with his recommendations I have learned.

  9. Ronald West
    October 8th, 2015 at 01:36 | #9

    @dennis parkstone
    Very carefully. Read a lot and learn for yourself. Very few people can be trusted. Do not ask your friends and family for advice. Get the best advice that you can afford and then jump in and have faith. That’s all most experts have anyway. Half the time they are right and wrong the other half. Once you make a decision stick with it and average down if you really believe in it. Keep adding to your positions with regular investments. Never over extend yourself and hang on for the long term. Avoid trading, which is pure speculation, until you learn how to do do it. Never put more than 25% into speculation, unless you are okay with losing it all. That’s about it. Good luck.

  10. Ronald West
    October 8th, 2015 at 01:46 | #10

    @Benjamin
    Fort Knox is empty. The US gave all of their gold to China and Russia for dirt cheap because gold is a pet rock to them. Any gold remaining in Fort Knox is owned by others. It’s very sad for the US because right now, the only thing keeping the USD alive is faith and the Petrodollar because it is the reserve currency. From where I sit, that faith is failing rapidly and when it reaches the tipping point, look out below.

  11. Javed Iqbal Butt
    October 8th, 2015 at 05:15 | #11

    Andre :
    Do not make average people believe 50$/barrel is a low price. Remember around 1985, price went up to 35$/barrel and companies made vertiginous profits (I was working for EXXON).The production costs for countries like Venezuela, Middle East etc are still today just a few dollars/barrel. The actual price does not reflect by far the production costs.
    We do not have to maintain a rent to those countries, it is not our obligation and we do not have to suffer high prices just to maintain those in a shameful luxury living (ie Middle East)at our expenses. They have to learn to diversifie and boost their industries. I am tired of reading what those countries needs to survive. Let them start using their brain and working a little hard! Being members of a same organization OPEC, there should be a distribution of the profit between themselves according to their production cost. 50$/barrel is still far above what deserves a lot of them.If the North is richer is the result of hard work, so do not be so complacent toward those who live on our back.

  12. Javed Iqbal Butt
    October 8th, 2015 at 05:17 | #12

    Feel sorry for irresponsible petroleum dollars free loaders
    Mistreating imported labor
    What about actual consumers all over the world

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