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Vladimir Zernov
Crude Oil

Oil Video 02.06.20.


Russia’s May Oil Production Is Close To OPEC+ Target

Oil continues to move higher as general market optimism and hopes for an extension of current production cuts support the market.

One of the two leading members of OPEC+, Russia, is sticking to its production quotas despite the technological challenges.

According to Interfax, Russia’s oil production in May was 9.39 million barrels per day (bpd), down from 11.35 million bpd in April. The OPEC+ deal implied that Russia will cut its production by 8.5 million bpd but this number did not include gas condensate which is usually produced at a rate of about 750,000 bpd.

Adjusting for the gas condensate production, Russia is very close to its quota which is a major achievement.

Now that Russia has managed to cut its oil production to the levels indicated by the OPEC+ deal, it will be easier to reach consensus on the extension of existing production cuts.

Russia’s oil industry is heavily influenced by the state so if the decision to extend current oil production cut will be made at the highest level, Russian oil companies will comply with it.

Current Oil Production Cuts Are Unlikely To Be Extended For More Than Two Months

Previously, reports indicated that Saudi Arabia was willing to propose the extension of current oil production cuts until the end of the year.

Saudi Arabia has a bloated budget and needs higher oil prices to avoid large deficits. Russia’s case is different since Russia needs oil to stay just above $40 per barrel to balance its budget. In addition, Russia has a flexible currency exchange rate which helps offset some of the damage done by lower oil prices.

Now that the front-month WTI oil contract is above $35 per barrel while the December 2020 contract is above $37 per barrel, OPEC+ members may start thinking about the fate of the U.S. shale oil industry.

Current prices ensure additional production declines in the U.S. However, a rapid increase in oil prices will allow shale oil companies to hedge their production at higher price levels.

In this light, OPEC+ members, especially Russia, may not be interested in pushing oil prices to high levels in the near term in order to deal additional damage to the U.S. shale oil industry and grab additional market share once the production cut deal is over.

Thus, it looks like the extension of current production cuts for two more months is the most likely scenario.

If the previous reports about a June 4 OPEC+ meeting were correct, we’ll soon learn what is the game plan of the leading OPEC+ members.

For a look at all of today’s economic events, check out our economic calendar.

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