Will Russia Join OPEC Agreement on Oil Production Cuts?

After OPEC unexpectedly decided to cut their oil production during the unofficial summit in Algeria on September 29,2016, the international community started asking one and the same question, which is whether Russia is actually going to join the agreement. The thing is that Russia was one of the first advocates of this idea and urged every energy nation out there to make this crucial step for their mutual benefit based on higher oil prices and bigger profits from oil exports.

To be more specific, OPEC agreed to cut their oil production down to 32,5 million barrels a day. The agreement is expected to take effect in November 2016. So far, the details of the secret agreement are kept hidden. We don’t even know whether there are going to be some penalties applied to those who violate the agreement. If this agreement boils down only to some declarations, recommendations and intensions to cut the production quotas down to the mentioned level, we don’t have reasons to expect any serious impact made on the global market of crude oil. 

It turns out that OPEC members decided to go back the old practice of quoting their oil production. For those of you who don’t know, OPEC decided to abandon production quotas in December 2015. To be more specific, they decided to increase their production to 100% of the capacity and later make the quotas adjust to it.

At the same time, OPEC members violated the quotas continuously anyway, which leads us to believe that those quotas became useless. For example, OPEC’s oil production was at 32,44 million barrels a day in May 2016. There was no punishment for violating quotas, so OPEC nations started some kind of an oil production race. Everyone started producing as much oils as they wanted. They didn’t worry about the consequences for their fellow-members of the OPEC cartel.

Venezuela suffered most of all from low oil prices driven mainly by overproduction and oversupply.  The local Minister of Oil even warned OPEC that oil prices may crash all the way down to $20/b if OPEC fails to cut the oil production in the near future. Now it seems that the minister was eventually heard.

Now, OPEC nations seem to be ready to address other non-OPEC oil nations to do the same thing they did, i.e. to cut their oil production as well. Aleksander Novak, Russia’s representative was in Algeria as a participant of the International Economic Forum, but he wasn’t invited to the unofficial OPEC meeting since Russia is not an OPEC member. Apart from Russia, OPEC is going to urge other major and minor oil producers to join the agreement.

According to some representatives of the Russian energy sector, Russia is ready to join in and cut its oil production if needed. Moscow may well freeze and even cut its production by as much as 5%. He underlined that the top management of Russian oil companies already approved this step.