5 Reasons OPEC And Russia Won’t Cut Oil Production

OPEC

(also on investing.com)

Last week the Russian energy minister started a rumor that Russia would be entering into discussions with OPEC aimed at a joint reduction in oil production as soon as February. An OPEC official later denied the veracity of the Russian oil minister’s statement, but the damage was done and the price of oil jumped several dollars.

Immediately, Iraq’s oil minister came out in support of any production cuts, but Iran issued a statement that it would not commit to production, regardless of promised non-OPEC cooperation. As it turned out, the rumor was false. Russia and OPEC are not preparing for discussions to cut oil production, although OPEC maintains the position that if non-OPEC producers wish to discuss joint production cuts, the organization is open and willing to talk.

Investors need to be wary of such rumors because the likelihood of joint OPEC – non-OPEC production cuts is extremely low, for the following reasons:

  1. Iran cannot agree to production cuts. With sanctions just lifted, it desperately needs new customers for its own oil. In fact, Iran wants cuts from other OPEC producers to make room for its oil. Agreeing to future production cuts would be counter-productive to its interests, so even if Iran did signal an intention to participate, there would be significant doubts that Iran would follow through.
  2. Saudi Arabia has reason to believe that even if Russia agreed to production cuts, it would fail to follow through. Russia has made promises to OPEC several times over the past 15 years and either reneged or failed to follow through on promised cuts.
  3. OPEC and Saudi Arabia have stated that its policies are working and that they are committed to maintaining high levels of production.
  4. With Russia and Saudi Arabia jockeying for market share in China anyway, it is way too premature to think that OPEC entertain across-the-board production cuts in conjunction with non-OPEC members, especially with Russia.
  5. Russian oil companies are at least nominally independent of the government. It is not entirely clear and has not been proven whether Putin and his government can unilaterally decrease production from Rosneft (MCX:ROSN), Lukoil (OTC:LUKOY), etc.

At this point, the rumors are just rumors, and are not substantial enough to justify action.