Vladimir and Igor Tap Out and Turn Down the Oil Taps

A little more than a month ago, when the China virus was first wreaking havoc in the oil market, Vladimir Putin and Igor Sechin demurred when the Saudis requested an extension of OPEC+ oil cuts. Furious, the Saudis retaliated by promising to ramp up oil production by more than 1mbpd, and prices truly cratered.

No problem!, said Vladimir and Igor. This is part of our master plan to destroy US shale! (Never mind such “logic” is right out of Economics for Mouth Breathers.) Furthermore, Russia has ample financial reserves, and its government can ride out a long stretch of low prices. (The Russian people? Ha! Demonstrating the state-centric nature of Russian policymakers.) The ruble crashed. No worries! In fact this is GREAT for Russian oil producers, because their costs are in rubles and the weakening of the currency cushions the impact of a lower dollar oil price on revenues. (The Russian populace? Again Vova and Igor DGAS.)

But despite the bold talk (which in some ways reminded me of the old story about G. Gordon Liddy holding his palm over an open flame to prove how he could take pain without cracking), the magnitude of the collapse, and the possibility that it would endure, obviously caused considerable consternation in the Kremlin.

The first indication was when the Russians claimed that the Saudis had taken their action to harm US oil producers, a complete flip for Russia’s bragging that that’s why they were taking the hard line.

In the past few weeks, Trump cajoled the parties to the bargaining table, and yesterday–after overcoming a Mexican holdout–the parties agreed to a deal. And what a deal it is, involving Russia agreeing to cut production by 2.5mbpd–almost 23 percent–an amount 4 times what they refused to accept a little more than a month ago. (I also note that it flies in the face of repeated Russian statements over years saying that it was operationally impossible for them to cut more than trivial amounts.)

The Russians had insisted on formal commitments from the US to cut. Trump–who brokered this deal–said that US production would fall due to price declines. (True dat–I’ll try to provide some estimates tomorrow.). The Russians said that wasn’t good enough (apparently demonstrating an ignorance of the limited ability of the US government to force output reductions)–they wanted mandated cuts. But in the end, the deal was done, absent any formal US commitments.

In other words, Putin and Sechin cried uncle. Hell, they tapped out like an MMA fighter in a chokehold. This makes a mockery of their bold front of a month ago. I think it reveals that they were truly shocked by the Saudi reaction, and were desperate to find a way out, but they didn’t want to show it. They needed some sort of fig leaf, and Trump gave them one.

Now this is being spun as some sort of Putin master plan to curry favor with Trump to gain negotiating leverage on other issues.

All together now: Suuuurrrre it is, Vova. Suuurrrre. Trump don’t owe you–you owe him.

I oppose the deal, despite the fillip it will provide to the US oil industry. Artificially boosting oil prices will harm already devastated consumer economies (including the US). Further, this will potentially rejuvenate OPEC post-crisis. Again that would be good for the US oil industry, but not for the US.

I also wonder whether Putin (and the Saudis) will come back later with proposals to get the US government to take measures to reduce output in a coordinated fashion. Just how that would be done is rather mysterious. The only plausible measure that I could think of would be some sort of tax (either on production, or on exports). But this would require Congressional action–it’s not something Trump or any president could negotiate unilaterally–and I don’t see that happening.

But that’s for the future. In the present, Putin and Sechin reaped what they sowed. They thought they could force the Saudis into bearing the brunt of supporting oil prices, while they could continue to produce at capacity. The Saudis responded like it was 1986, and the resultant collapse in prices brought the brilliant schemes of the KGB masterminds crashing down. In the end, they had to capitulate. No matter how hard they try to spin it, it’s obvious that they did.