Oil Price Drop Imminent If Moscow Says "No" To Extension
As the November 30 meeting in Vienna of OPEC and its partners in the oil production cut deal nears, worry has returned among traders: one of the brokers of the deal might decide to walk out on the deal instead of participating in another extension.
We’re talking about Russia, the world’s top producer and exporter, who many believe played OPEC and specifically its leader, Saudi Arabia, by agreeing to a relatively minor production cut from its nearly record-high rate of production.
Reports emerged last week that Russia is considering a delay on the decision to extend the cut.
That’s after Energy Minister Alexander Novak hinted more than once that from Moscow’s perspective, this decision is far from urgent. With a budget based on Brent at US$40, Russia is indeed in a sweet spot compared with its partners in the deal: it can remain in the black at any price above US$40.
But there may be another reason for Moscow deciding to opt out of the extension. Lower oil prices could actually be more beneficial for the Russian economy.
Macro-Advisory analyst Chris Weafer lists six ways in which lower oil prices would be better for Russia, and all of these make sense, counterintuitive as this line of argument might seem at first glance.
For starters, the higher the price of oil, the greater the risk of another collapse down the road. The more oil costs, the more producers will invest in new production, possibly leading to a repeat of the 2014 collapse. Or prices could simply take a dive once the OPEC deal ends, which it must at some point.
A higher oil price would also likely compromise a budget reform currently in the works, which aims to rein in spending. More importantly, Russia’s economic diversification efforts may well be compromised if oil prices remain higher—a point we’ve made repeatedly on Oilprice, not just with respect to Russia but to all oil-dependent economies.
According to Weafer, however, renewable energy does not play a large part in this diversification. He says that stifling investments in renewable energy is one more reason for Moscow to want oil prices to fall: the higher oil prices are, the more attractive renewable energy becomes.