Streetwise Professor

December 3, 2008

No Honor Among . . . Colluders . . . or “Coordinators” for that Matter

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 3:08 pm

I have been adamant in my opinion that OPEC is a weak reed for non-OPEC producers like Russia to lean on, because cartel members face a prisoners’ dilemma that can make cheating a dominant strategy.   The market’s decidedly bearish reaction to various OPEC pronouncements suggests that most people who are putting their money where their mouths are share similar views.   Reuters reports that OPEC compliance–or lack thereof–has indeed been weighing on prices:

Members of the Organization of Petroleum Exporting Countries had pledged to lower output by 1.5 million barrels per day for November in order to prop up prices, but were only 66 percent compliant with the target last month, a Reuters survey showed on Tuesday.

OPEC’s decision to wait until later this month to take more supply off the market, combined with a steep sell-off in U.S. stocks, led to a drop of more than 9 percent in U.S. crude oil futures on Monday.

Benchmark U.S. stock indexes were up more than 3 percent on Tuesday as investors hunted for bargains amid optimism that the government will bail out the U.S. auto industry.


OPEC members remained concerned about oversupply in the world oil market and may decide to cut output further at their next meeting in Algeria on December 17.

“We are concerned about the glut … I think there is an indication that we will have another cut,” Qatar Oil Minister Abdullah al-Attiya said.

Top oil exporter Saudi Arabia has highlighted $75 a barrel as a “fair price” for oil.

Meanwhile, sources said two OPEC members, the United Arab Emirates and Kuwait, will increase oil sales to many major Asian customers, sending mixed signals about OPEC output cuts.

This is especially ominous for oil sellers because (a) compliance usually is at its peak immediately following new agreements, and (b) even in a competitive market, some producers would cut output anyways in the face of sharply lower prices, so the two-thirds compliance overstates the extent to which anybody is taking one for the team.

There were recently reports that Russia would cooperate with OPEC in an attempt to stabilize prices, although Medvedev’s comments on the subject during his love-in with that looker Hugo Chavez were decidedly mealy-mouthed:

Major price swings aren’t in the interest of either oil- producing or consuming countries, Medvedev said yesterday in a Caracas ceremony where he and Venezuela President Hugo Chavez signed energy accords. He said Russia would “coordinate fundamentally with Venezuela” and other OPEC nations, without specifying how.

“We will be coordinating, but it doesn’t mean that we’ll be colluding.”

And just what does that mean, exactly?

Ironically, through its tax policy, Russia has already effectively cut world supplies:

November oil exports fell to their lowest level since 2004 as firms cut supplies because of high export duties while output headed for its first decline in a decade.

Falling shipments have become a major concern for the government since the budget depends heavily on oil-export revenues.

Energy Ministry data showed Tuesday that Russian oil exports via pipeline monopoly Transneft stood at 3.70 million barrels per day in November, down by 12 percent from 4.21 million bpd in October. Oil companies had threatened to cut November deliveries by as much as a quarter because they said exports were loss-making with an export duty at $287 per ton ($39 per barrel). The average price for Urals blend crude was about $55 per barrel.

The decrease in exports made the government change the scheme of calculating the oil export duty, which, starting from December, will be set monthly instead of once every two months.

The December oil-export duty calculated under the new scheme was set at $192.1 per ton, almost a $100-per-ton decrease from the November level, but oil firms have said it was still too high to make exports attractive.

Viktor Vekselberg, one of the major shareholders at BP’s Russian venture, TNK-BP, said last week that the new export duty would help oil firms survive but was not enough to encourage investment.

The Energy Ministry data also showed that Russia’s oil production fell by 0.4 percent to 9.82 million bpd in November from 9.86 million bpd in the previous month.

Oil output fell throughout the first half of the year, and analysts had expected that it would recover in the second half after a number of oil companies started new fields.

That cut of 500m bbl/day is about one-third of the promised OPEC cut, and (per the Reuters numbers) about one-half of the actual cut.   So, if unwittingly, Russia has done proportionally much more than OPEC to support prices.   (OPEC output is about 34 mm bbl/day, Russian output is about 10mm bbl/day, so the Russian reduction is about 5 percent, OPEC’s 3 percent.)

But–and here’s where the irony gets even thicker–due to the shrieks of the domestic oil producers, Russia is considering a cut   in export duties, which would result in higher exports, lower world prices, higher domestic (after-duty) prices, and likely lower government revenues.   Thus, Medvedev, Putin, and others are talking out of both sides of their mouths, simultaneously promising Chavez, OPEC, that they will “coordinate” to keep world prices high, and telling domestic producers that they will ease export duties.

Ummm, sorry to break it to you guys, but it’s one or the other–either keep the export duty high to reduce exports and help prop up the world price while screwing domestic producers, or cut it to help domestic producers and undercut fast friends like Chavez and Ahmadinejad (who are the most hawkish OPEC members) while putting further downward pressure on world prices.   “Both” is not an option.

Ain’t choices grand?   Let us know when you make up your minds.

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  1. All that we are missing for a repeat of the oil the collapse in oil prices of a decade ago is a massive new oil field coming online, in other words the equivalent of the North Sea Oil that pushed down oil prices. One interesting contender is the Petrobras Pre-Salt Layer in the Santos Basin. Robert Amsterdam reports on the potential oil and natural gas that is to be found offshore.

    Comment by Michel — December 3, 2008 @ 4:04 pm

  2. “One interesting contender is the Petrobras Pre-Salt Layer in the Santos Basin.” – Michel

    Unfortunately, it is very expensive to develop – indeed, this same oil crash makes it unprofitable…and the credit crisis makes it hard for companies to make long-term, risky investments.

    I agree with SWP, choices are grand.

    Comment by Da Russophile — December 3, 2008 @ 4:44 pm

  3. True, choices are grand. When the global economy recovers, investors will have many options as to where to invest money: Russia or Brazil? Russia, Brazil or other countries? The treatment doled out to investors by Putin et al. in recent years will certainly encourage many to go elsewhere.

    Comment by Michel — December 3, 2008 @ 4:55 pm

  4. The fact is, Russia can’t afford to stop selling oil, and the only reason it did so was sheer neo-Soviet stupidity
    and greed.

    That error on the export duties has ravaged the balance sheets of the oil companies, who were already starved for
    investment funding as they watch the existing fields dry up and cannot explore new ones because they must ship all
    their extra cash to the Kremlin so it can use it to wage Cold War II.

    But the situation got so dire that even the Kremlin realized it had to accept dramatically less revenue. It was
    Putin’s Waterloo, there’s simply no doubt about it. Putin’s Russia is a dead man walking, only question is, as
    with the USSR, how long it will take to drop.

    Comment by La Russophobe — December 4, 2008 @ 3:45 pm

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