Russia: The OPEC+ Opportunist
June 6, 2019
With the OPEC+ meeting quickly approaching, speculation is rife as to whether Russia will agree to an extension of the current production cut. Some recent press reports claim that the OPEC+ deal is hurting the Russian economy and might drive Putin not to support an extension. However, the trendlines do not support this argument.
First, the OPEC+ deal has not prevented Russian oil production from growing. Despite signing onto to the pact two and a half years ago, Russia has still managed to increase its output year over year, reaching an all-time high of 11.5 million barrels per day (b/d) in 2018. More importantly, it has strategically maneuvered within the confines of the agreement to boost output and take advantage of higher prices as they arise and in turn, cut from a higher base running into this year. Both times, it has gradually eased its output towards conformity, doing just enough to satisfy the Saudis that it is cooperating.
Russia’s opportunistic maneuvering within the OPEC+ deal is further evidenced by its response to U.S. sanctions. For example, while it has been supportive of OPEC members Iran and Venezuela, denouncing U.S.-led sanctions on their respective oil sectors, it has also taken advantage of the drop in their exports (due to the well-placed quality characteristics of its Urals crude oil). When Iranian exports fell last year, it quickly boosted output to fill the anticipated supply gap, and so far, this year, it has increased its exports to the United States, helping to fill the void left by sanctioned Venezuelan supplies. Russian companies such as Rosneft are also using the sanctions on Venezuela as an opportunity to load more PdVSA cargoes at greater price discounts and in the process, draw down debts.
The OPEC+ agreement has helped push prices higher at little cost to output, which has been a boon to the Russian economy. The arrangement has also allowed Russia to create a platform to build alliances in the Middle East, while still being able to maneuver on the oil markets and within the agreement to benefit from openings as they arise. There have been winners and losers of the OPEC+ deal to date, and Russia is most certainly one of the former.