Oil prices and OPEC

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The dramatic fall in oil prices from the end of 2014 struck a heavy blow to the Russian economy. Weaker global demand and surging US shale production provided the conditions for a ‘perfect storm’ as the global balance of supply and demand was completely upended. With Russia losing roughly US$2 billion in revenue per dollar reduction in oil prices, the country’s finances came under intense pressure, with economic forecasts for 2015 showing growth forecasts being slashed and warning of an imminent recession. However, much like Saudi Arabia and other major oil producers, there was initial reluctance to cut output. Energy Minister, Alexander Novak was quoted at the time as saying, “If we cut, the importer countries will increase their production and this will mean a loss of our niche market.”4

By the beginning of 2016, low oil prices (and other factors) had caused Russia’s GDP to fall by 3.7%,5 prices were near their lowest levels for years (~US$30) and output from US shale had failed to die off as expected. It is perhaps unsurprising then, that by the OPEC meeting of 30 November that year, Russia had indicated its willingness to take part in production cuts. Oil prices immediately surged to over US$50 on the news, and have continued to be supported by the so-called OPEC+ cuts ever since. On 30 November 2017, Russia and OPEC agreed to continue the cuts until the end of this year in an eff ort to remove the last of the supply glut. Paradoxically, the problem that Russia now faces is the risk of prices rising too fast. Russia has been lobbying its OPEC allies to provide clear guidelines on exactly how and when the cuts will be repealed; getting the timing wrong would likely result in supply shortage, skyrocketing prices and a renewed surge of output from the US. For now, Russia and OPEC have agreed to wait until this year’s June meeting before making any adjustments.

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