Streetwise Professor

Russia’s sinister Deputy PM Igor Sechin announced that Russia is considering storing up to 16 mm tons of oil. More on the substance of that in a moment, but first there are some priceless parts of the Reuters article that are much more important/entertaining, and which confirm some of my December analysis of Russia’s strategy of whispering sweet nothings in OPEC’s ear and then producing and exporting to the max:

Deputy Prime Minister Igor Sechin, who oversees the oil and gas sector, said the move could help the Organization of Petroleum Producing Countries (OPEC) stabilize oil prices.

Sechin traveled to Algeria in December and told OPEC delegates that Russia, the world’s second-largest oil exporter and the biggest outside OPEC, could cut exports by 16 million tons, or 320,000 barrels per day, if oil prices fell further.

As oil prices have stabilized around $40 per barrel, Russian exports have instead risen to above 4 million bpd in the past two months in what traders said was further proof Russia will limit cooperation with OPEC to verbal pledges. (Emphasis mine.)

. . . .

Specifying a time period and elaborating on the means of stockpiling are key questions left unanswered by Sechin’s comments.

“He’s using all sorts of caveats. It’s a politically astute statement, and he’s not really committing to anything,” Mike Wittner of Societe Generale said.

“I’m skeptical that they’ll do this. The Russian economy continues to deteriorate and they need the money. I think they’ll sell every barrel they produce,” Wittner said by telephone in London.

Go on.  You mean that Sechin’s word isn’t gold?  I noted soon after Russia played Lucy to OPEC’s Charlie Brown, pulling the football of promised output cuts at the last moment, that the country’s behavior was inconsistent with any effort to reduce exports in order to help support oil prices.  The country cut export taxes dramatically, and as the article notes, its exports actually rose.

The only question is whether OPEC will be credulous–I mean dumb–enough to believe Sechin’s 16 million bbl pickup line again.  I’m sure they felt so used, so cheap, last time, and hopefully will be smart enough not to repeat the performance.  

If Russia does store oil, it will only be because it perceives that price structures make this a rational move, not because they are engaged in tacit cooperation with OPEC to cut output and raise prices.  Storage volumes are ballooning world wide as price taking producers with access to reasonably priced storage (and even storage that would have seemed unreasonably priced not too long ago) can make a good profit by storing into this huge contango (with the deferred futures price far above nearby prices.  That relationship went totally whack on the WTI last Thursday, but came back a bit the next day.)  

Given the inelasticity of Russian supply, arising from the technical rigidities associated with production in Siberia, storing into the contango could make sense if they have the storage capacity.  I’m not sure that they do, however.  (Anybody know the answer to that?  Past behavior suggests that storage capacity is limited.)  Maybe they’ll charter ships as North Sea producers, the Iranians, and others have done, if their onshore storage options are limited.  

But the point OPEC should remember is that if Russia decides to put supplies into storage, it’s not in the spirit of doing their part to keep oil prices higher.  It’s because it’s a profit maximizing move for a country that perceives itself as a price taker with an interest in letting OPEC do the heavy lifting and selling as much as it can at prevailing prices.  

In other words, the Saudis, etc. should invite Sechin to the Middle East to pound some sand, of which they have plenty.