From Russia With Love

Oil prices saw weakness as disappointing compliance numbers from Russia shook the faith in the long-term viability of OPEC production cuts. Even as OPEC compliance is at an astonishing 94% compliance rate, there are some concerns that the cheating Russians and rising shale output may cause fissures in the OPEC/non-OPEC pack.

Even when predicting strong OPEC compliance, we knew that Russia would take a bit longer to hit compliance targets. I said this and just to be clear I had no contact with any Russian officials either before or after the OPEC cuts were announced! The market got a little freaked as it was reported that Russian oil production was steady at 11.1 million barrels of oil a day in February. That was despite Russia’s energy minister Alexander Novak pronouncement just days ago, that Russia’s oil production in February will be lower than the January output, claiming that Russia was cutting more than the 117,000 barrel away from January. Still, while it may take time, the Russian oil minister swears that his country will get to full compliance and will be trying to speed up the gradual cutting of the 300,000 bpd it had promised by the end of the first half with a possible target of early next month.

Unlike OPEC, for Russia it is harder to ramp up and shut off production. The timing will depend on the capabilities of the companies, the minister said, as quoted by RIA Novo due to the formations and weather that the Russians have to deal with. On top of that, Russia has to coordinate with many different and separate oil companies. Despite market doubts, I predict that Russia is going to get close to an 88% compliance rate soon, just ahead of the next meeting with OPEC to talk about an extension of oil production cuts. Still even with Russia cutting only a small amount, non-OPEC only compliance has been estimated to be anywhere from 48 percent to 66 percent depending on who you want to believe and that is still better than most of the street predictions after the deal was made.