By Ed Bentley
OPEC is squaring up for a spat with Moscow as it becomes increasingly frustrated with Russia's reluctance to curb oil output as agreed with the international cartel.
Oil prices continued to hover around the $50-a-barrel mark despite a statement from the International Energy Authority (IEA) that demand would fall more than expected. However, OPEC is becoming for prices above $60 and is frustrated with Russia for not reducing its exports in line with the cartel's record cuts this year.
Russia's oil exports increased 6.3 per cent in February and 2.2 per cent in March, including by 10-fold to the United States. At the same time U.S. imports from OPEC fell by 14 per cent, or 818,000 barrels per day.
"OPEC is frustrated with the fact that Russian oil production is not falling as promised (it rose in March)," said Chris Weafer, chief strategist at Uralsib in a note to investors. "It is believed that Russia assured OPEC, at a December meeting, that oil production would slide steadily all year."
OPEC's cuts have raised the oil price from $35 in February to around $50 a barrel, but Saudi Arabian Oil Minister Ali Al-Naimi said at OPEC's last meeting on March 16 that suppliers need a price of $60 to $75 to support production of higher cost resources. The following day, Algerian Oil Minister Chakib Khelil said he was disappointed Russia hadn't cut production to support prices, Bloomberg reported.
Russia is expected to reduce production this year but only by about 1.5 per cent, which is considerably less than OPEC's cuts. Although Russia does not have any formal obligations to OPEC, it would naturally benefit from higher prices.
"I think some kind of price regulation was discussed jointly but in terms of quota setting and production Russia has its own independent policy," said Lev Snykov, an oil and gas expert at VTB Capital.
Despite being the world's largest oil producer, the 5.02 million barrels OPEC shipped in January dwarfs Russia's exports of 157,000 barrels per day to the United States, limiting the amount they can influence prices.
"I don't think that Russia will have an effect on the price and in addition I don't think the Kremlin has abandoned its plan of aligning itself with OPEC's efforts to sustain price levels," said Artem Konchin, oil and gas analyst at UniCredit Aton.
Some Western analysts have claimed that Russia is trying to increase its exports to the United States and is trying to take advantage of OPEC's commitment to reducing production by 4.2 million barrels per day.
"Russia has been trying to get a foothold in our market for a long time," said Bill O'Grady, chief markets strategist at Confluence Investment Management in St. Louis, Bloomberg reported. "With both gas and oil Russia hopes to gain geopolitical leverage."
The IEA announced last week that world oil demand would fall 2.4 million barrels a day this year, while OPEC predicted it would slide 1.37 million barrels per day. Both groups have revised these figures upwards from previous forecasts, which is likely to put downward pressure on the oil price in the short term
Russian analysts have warned that it doesn't matter who Russia sells oil to, but did say that it could cause problems with OPEC, which wants to support the oil price.
"Russia will resume building up exports and this could raise issues with OPEC," said Valery Nesterov, oil analyst at Troika Dialog.
The Russian government's budget takes a large chunk of its revenue from the energy sector and has forecast an average price of $42 a barrel for 2009. However, Snykov stated that VTB expects it to be $55 for the year, while Mary Ann Bartels, chief market at analyst at Bank of America's Merrill Lynch Unit predicted a price of over $70 a barrel this year, Bloomberg reported.
If Russia does not cut production then OPEC might increase production to lower the price in order to put pressure on the Russian budget, which already has a big deficit at $42 per barrel.
"If Saudi Arabia decides to make life difficult for Russia over the next few months to bring pressure to try and force production cuts, then the second quarter might be even more difficult than expected," said Weafer. "Saudi Arabia is in a better position to withstand a period of much lower oil prices to try and force Russian compliance."
While the federal budget would suffer, Russian oil companies would be well placed to withstand this kind of attack from OPEC. Production costs in Russia are approximately $15 per barrel and any decrease in price would hurt all suppliers.
"There is the theory that OPEC can flood the world with oil to make it really tough for Russia to get by but price wars would also hurt OPEC," said Konchin. "Russia and OPEC are mature enough to find a common aim in this situation."
