News Russian oil output approached a record in May, preceding meetings by OPEC this week promising major players might drop production. The global supply gut has caused prices to tumble worldwide so far this year, but Russia and Saudi Arabia are continuing to pump at record levels.
According to data from the Russian Energy Ministry’s CDU-TEK unit, production of oil and natural-gas condensate was up 1.6 percent from a year earlier to 10.708 million barrels a day. This figure is very close to January’s post-Soviet era record of some 10.713 million barrels a day. Bloomberg quoted the Oxford Institute of Energy Studies’ James Henderson saying:
Construction of new gas facility GP-1
“Russian output has proven to be pretty resilient to the fall in prices, and they will not have a problem keeping production up for the next year or two.”
The Organization of Petroleum Exporting Countries (OPEC) will meet this Friday, June 5th, in Vienna to discuss global supply. Experts say the target output of some 30 million barrels a day will likely be maintained, as global supply has outdistanced demand since the cartel began a policy of keeping market share worldwide. In May, Russia’s crude exports were over 5 million barrels per day, an increase of over 2% YoY over the previous ministry data.
Another reason for Russia’s peaking production has to do with tax incentives instituted by the government, which help companies like OAO Lukoil. Billionaire CEO Vagit Alekperov said of this initiative; “The realization of the maneuver may positively influence oil output levels.” Interestingly, Russia’s production numbers have continued to rise despite U.S. and European sanctions. The Bloomberg report, among others, indicates Saudi Arabia’s strategy has been a successful one in response to increased US output and price cutting.
The Wall Street Journal reported earlier today on Russia energy officials and OPEC counterparts having had secret meetings in Vienna with no public statement as to the results. Today the stories seem to read Saudi Arabia wants Russia to be the first to slow production. At least this is reading between the lines of this Wall Street Journal report from yesterday. Meanwhile, Russia seems to be in the driver's seat considering prices are edging up even at current production levels, and projects such as the controversial "Turkish Stream" (above) present serious geo-strategic obstacles for Russia's competitors.
The World Bank just raised Russia's economic forecast based largely on a rise from $58 per barrel in 2015, to a projected price of $63.6 per barrel in 2016. The market, in search of some equilibrium, may well be governed by which players are the most efficient, rather than who is the cheapest. The bottom line may well be, "can Russia reduce its costs of production and downstream costs?" Russia diverting sales to China and other markets will also reboot the market situation greatly, though no critical analysis of this aspect has come to light. It still remains to be seen what OPEC decides this week, and how Russia and other producers will respond. We may be seeing an energy war of attrition taking place.
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