Russia is Unhappy With OPEC’s Weak Oil Cuts

The oil cartel OPEC and eleven other petrostates agreed last November to cut oil production for the first six months of 2017 in an attempt to boost crude prices. That group recently agreed to extend those limits through March of next year, as the first round of cuts proved unable to kick off a rebound.

But at this point, oil is still trading under $49 per barrel—near where it was before this market intervention—and there’s no indication that this petrostate strategy will be effective. That fact is weighing heavily on every one of these major oil supplying countries, which have all had to painfully adjust to a dramatic drop in government revenues, but Moscow is particularly hard-hit. Russia’s energy minister isn’t mincing words these days, either, as he expressed his disapproval of Libya and Nigeria, two OPEC members that have been given a green light to increase their production while others are busy cutting. The FT reports:

“I think that these countries should join other responsible oil producers and contribute to the market stabilisation initiative as they reach a stable level of output,” Russian energy minister Alexander Novak told the Financial Times, ahead of a meeting in St Petersburg with other Opec energy ministers on Monday to discuss the agreement. “We believe that once oil output in Libya and Nigeria stabilises, there will be less uncertainty on the market as to their future moves,” Mr Novak said.

The comments are a potential sign that frustration is growing in Moscow over the increased production by the two Opec members, and suggests that Russia may be looking to Saudi Arabia to put pressure on them to pare back output.

These two African OPEC members weren’t included in OPEC’s cuts because civil unrest has already put a far larger dent in their daily output than these cuts ever would. It makes sense, then, that the cartel would choose not to kick these producers when they’re down.

But Libya and Nigeria are also making progress in restoring their production to more normal levels, and those gains are offsetting much of the cuts being made elsewhere. That’s part of the reason why this petrostate plan has been so ineffective to this point—and it’s why Russia is pushing for OPEC to start enforcing limits an all of its members.

It’s not clear, though, that the cartel is capable of keeping any of its members in line. As we noted last week, Ecuador’s energy minister is now openly admitting that his country will be unable to meet the reduction targets set out by OPEC. This isn’t just an Ecuadorian problem, either—according to the IEA, OPEC cut just 78 percent of crude it said it would in June, a far cry from the 95 percent compliance rate it pulled off the month before.

The longer this period of cheap oil goes on, the more desperate these petrostates are going to become. And the longer this production cut strategy shows itself to be fruitless, the less these petrostates are going to want to voluntarily cede valuable market share.

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