Russia mulls its move

02 November 2001

Prices seesawed in mid-November amid growing signs that non-OPEC producers, including Russia, were willing to make real cuts in production. With supply ready to be tightened, there was also bullish demand news. The American Petroleum Institute reported on 20 November an unexpectedly small rise in US crude stocks, signalling an improvement in the otherwise poor demand picture.

At its 14 November Vienna meeting, OPEC agreed to cut production, for the fourth time this year, by 1.5 million barrels a day (b/d), but only on condition that non-OPEC producers cut their output by 500,000 b/d. With early indications pointing away from such co-operation, all the signs were of an impending price war.

Later in the month, Russia made more conciliatory noises. Deputy prime minister Viktor Khristenko was quoted on 20 November as saying: 'The adoption of more serious measures aimed at stabilising oil price levels is possible.' Russian participation in an output cut is difficult to enforce because the state has little direct control over the private companies running the industry. Analysts say that some of these companies can turn a profit on a price as low as $11 a barrel, making them unwilling to cut production. The country has sharply increased its output since the oil price recovery of 1999. Production levels grew by 6.1 per cent in 2000 against the previous year, and is now running at 7.1 million b/d.

Mexico and Norway are both moving closer to a cut and are lobbying Russia to adopt a similar position. 'I think for Russia to come up with a couple of hundred thousand-[b/d production cut] would be reasonable,' said Norwegian Oil Minister Einar Steensnaes. A Norwegian output cut would be recommended to parliament on 22 November, he added. However, Norway has signalled it is unwilling to help defend OPEC's target price band of $22-28 a barrel.

Whether OPEC can fully comply with its own quotas is also a matter for debate. Production in September was about 24.3 million b/d, some 1.1 million b/d above the ceiling. The organisation is understood to have improved discipline during the intervening two months but, if the price does not improve, the temptation to cheat will grow.

Benchmark Brent crude on 20 November was valued at $17.06 a barrel, a fall of $2.17 a barrel from the previous week but a jump of $1.21 a barrel since the previous day, highlighting the volatile market conditions.

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