Ole Hansen
Stay updated on what’s happening with oil, gold and other raw materials. Join Saxo Bank Head of Commodity Strategy Ole Hansen as he explores the world of commodities and how fundamentals, geopolitics and other factors could influence prices. He also looks at market opportunities for both traders and investors.
Article / 22 September 2016 at 10:00 GMT

Oil freeze on the cards, but not in September

Russia oil and gas expert
United Kingdom
  • Signals pointing to a deal between Russia, Opec producers
  • Change in output reporting may point to negotiations
  • 2017 Russian production likely to be flat or slightly lower, y/y

Oblique signs from the Kremlin indicate that Moscow may be setting up 
an oil production deal with the Opec nations. Photo: iStock 

By Nadia Kazakova

Through a glass darkly, one can just about see the outlines of a possible deal between Russia and the Opec producers. It can be gleaned from snippets of interviews in the media, from the interesting change in the way Russian daily output statistics are being presented, and from employing a bit of common sense (if this even applies to oil markets).

In my view, Russia is preparing for a year-long deal with a daily production ceiling of around the equivalent of 11.2 million barrels/year, effective early next year. 

The argument for a deal between Russia and Opec is that the political decision has already been made by president Vladimir Putin and helpfully spelled out in a timely Bloomberg interview in early September. His job has been done and the details have been left to be sorted out by the lower ranks. 

As such, September 5 saw the energy ministers of Russia and Saudi Arabia sign a strategic co-operation agreement and sett up a joint oil and gas task force. Russian energy minister Alexander Novak commented at the time that the sides could be looking at a deal to freeze output for three to six months at the level of a certain month within H2'16. 

The oil markets did not pay too much attention to this bright new era of cooperation between Russia and Saudi Arabia. There are, however, a couple of signs that indicate some movement beneath the surface...

The first indication is what seems to be an abrupt change in the way Russia's daily oil output is reported by the official Russian energy data service, or CDU. From early September, without so much as an explanation, daily output seems to have been reported on a different basis that is not directly compatible with previous monthly data. 

This means that Russian output has apparently increased from just over 10.7 million barrels/day in August to close to 11.2 million b/d in mid-September. It is highly unlikely, however, that Russian production jumped by over 400,000 b/d. Given this, we can only surmise that a wider range of oil-like liquids may have been included in the calculations.  

Historically, the Russian energy ministry has reported daily output for crude oil and gas condensate only. Then various agencies (including Opec and the International Energy Agency ) would adjust this number to include other oil-like liquids, including refinery feedstock, additives, and other hydrocarbon derivatives to make the data globally compatible.

Russian annual oil output according to various sources, million barrels of oil equivalent:

Judging by Opec's monthly report, the cartel itself seems to have been struggling with the consistency of its Russian output data. Hence, the Russian and Saudi sides might have agreed to use IEA methodology (and data) to monitor Russia's monthly output. 

Conveniently for Russia, this methodology gives the highest of all available estimates for Russia's output of oil and other liquids.

Russian oil output as per Russian energy ministry, IEA, million barrels of oil equivalent:

Another observation is that IEA, Russia, and Opec broadly agree that Russian output would be broadly flat (or slightly lower) year-on-year in 2017, with marginal fluctuations either way when adjusted for the different methodology of daily output calculation. 

This makes it easier for Russia to agree to a deal, as it would effectively mean relatively little in practical terms. Therefore it would not matter if the deal lasts for six months or for a year.

Russian and Opec oil output projects for 2016-2017, million barrels of oil equivalent/day:

Russia might be ready for it, but Saudi Arabia would probably want time to hash it out. It is telling that the first meeting of the Russian/Saudi oil and gas task force takes place in October, after the unofficial Opec gathering in Algiers next week. 

Discussions within Opec might also take a while, with some observers not expecting a water-tight deal before the end of the year. The best-case scenario for oil bulls is that something concrete would be signed at Opec's Vienna meeting on November 30. The ongoing drop in US inventories might also take some immediate pressure off Opec members. 

Meanwhile, a well-placed remark here or there would keep speculators from taking too bearish a view on the price of crude.

Next week's oil summit in Algiers will likely host further talks, but don't 
expect a deal announcement just yet. Photo: IStock 

— Edited by Michael McKenna

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector 
Pandorra Pandorra
Thanks Nadia for your article, but could you please summarize for written above. Does it mean strong demand on surplus crude oil output that could support oil prices ..or maybe it means speculative quick popping to exclude 'reducing idea' per se?. maybe it means we'll get empty oil wells for next generations that could trigger a lack of oil? Please clarify. Many thanks.
Nadia Kazakova Nadia Kazakova
Hi, My feeling is that Saudis want to a real deal rather than a fudge this time around. I think the demand side would be disappointing over the coming year or two and a production freeze (or more likely an agreement on production ceiling) is a must to keep oil prices at around $50/bbl. If and when the deal is signed, I think it could be more positive for the markets than is currently assumed.

As to mid-term oil supply outlook, I think there is a bit of spare (idle) capacity in the system around the world to keep the market relatively well supplied. Russia has ability to produce at around current levels for 3 years or so (possibly a bit longer) at the current level of capex/technology.


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail