Olive branch

10 February 2016 By Andy Critchlow

Moscow’s most influential oil official has given a strong sign that the Kremlin may be serious about cutting a grand bargain with OPEC. Igor Sechin, chief executive of Rosneft, suggested on Feb. 10 that cuts of as little as 1 million barrels per day of crude by major oil producers would be enough to boost oil prices. For struggling members of OPEC like Venezuela and Nigeria, a deal among the world’s great oil powers might just come in the nick of time.

Brent crude has fallen by almost 20 percent this year. Goldman Sachs warned on Feb. 9 that oil could slump below $20 per barrel amid a glut of supply. That should have the world’s biggest oil producers putting aside their political differences in the Middle East and agreeing to limit supplies. Instead they have opened their spigots wider. Russian output has hit new post-Soviet era records this year and Saudi is pumping comfortably above 10 million barrels per day, its highest rate in at least 15 years, according to Datastream.

Coming from Sechin, normally a critic of OPEC, such remarks could signal a deal is possible. But most importantly, politics suggests one ought to be. If coordinated, a plan between OPEC and Russia to trim what would be the equivalent of just 2.3 percent of their combined output could create higher prices, but without a significant shift in market share if all take part. Sechin didn’t make a firm commitment, but has floated an achievable figure that can get talks going.

Saudi Arabia might rather wait for market forces to run their course and shut down higher-cost producers. But that isn’t happening quickly. OPEC’s latest monthly report forecasts production outside the cartel falling by just 700,000 barrels per day this year. Meanwhile, lower prices have left Venezuela with a near 99 percent probability of default, based on the price of its 10-year credit default swaps, while Nigeria’s swaps imply a 56 percent chance of default. If the olive branch is proffered, all sides have a strong reason to grasp it.


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