Does Russia want to stir up trouble in Opec and make life difficult for the Saudis? Photo: iStock
Novak said that the Kingdom of Saudi Arabia (KSA) had proposed a 5% production cut. This was quickly rejected by officials from KSA. Although the rebuttal comments were quickly reported on the wire of the Wall Street Journal it was too late to stop the price jumping by 2.85%, as shown in the chart below.
Source: www.investing.com, Spotlight Ideas
Russian rumours or Moscow maleficence?
Maleficence may be too harsh a way to describe the behaviour of the Moscow minister and yet one has to wonder why he would openly make such a claim, only for it to be swiftly denied by KSA. Is this Russia seeking to stir up trouble within Opec and make life difficult for the Saudis?
After all, the Russian economy is under extreme stress and the government has had to rewrite the budget at least twice as the price of oil has steadily fallen since the end of June 2014. Novak said a proposed 5% cut had been previously floated by Algeria and Venezuela, but now he said the Saudis and their Persian Gulf allies…
"…are ready to cooperate with others to bring stability to international oil markets …”
Immediately, Iraq’s oil minister came out in support of any production cuts, but perhaps the Saudis found an unlikely ally as Iran issued a statement confirming it would not commit to reduce production, regardless of promised non-Opec cooperation.
That stance from Iran cannot be a surprise as it has only just secured legal access to release its crude production onto the world market. The Iranians would hardly be prepared to relinquish much needed oil income, albeit at lower prices, after so many years of official market exclusion.
Iran is in no position to consider production cuts as it urgently needs new customers for its own oil. That said, the Iranians would not object to other Opec producers reducing their output in order to create some space for its oil. Well, that is just not going to happen.
Market manipulation or masking a mess?
What did Russia think it was going to gain from spreading this rumour? Even if one is generous to the Russians and consider that KSA initiated such a proposal, it was never going to be openly admitted.
The Saudis may just be starting to see their “flood the market” strategy paying off, as the low prices have certainly forced the closure of many oil rigs in both the US and Canada.
The Russian economy shrank 3.8% year on year in the fourth quarter of 2015, following a 4.1% contraction in the previous period. It is the worst performance since 2009, as western sanctions and lower oil prices hurt external trade and public revenues. In 2015, overall GDP contracted 3.7%, according to figures from the Federal Statistics Service.
The impact of the low oil price has already forced Russia’s government to cut back high-profile projects such as the space program. Now, in a bid to raise much needed capital, the economy minister, Alexey Ulyukaev, is considering selling its stakes in both Sberbank (50% + 1 share) and VTB (60.9%) and use the raised capital to shore up other parts of the domestic banking system.
In Russia the total value of delinquent loans, while levelling off over the past month or two, has increased 60% over the past year to RUB1.6 trillion. Data from the Central Bank of the Russian Federation shows that there is no single sector that hasn’t seen the balance of bad loans increase. Given the economy is in the grip of a broad based recession, the pace of increase differs rather dramatically.
The worst increase in delinquent debt is found in the construction sector, with a gain in both the total amount of delinquent loans and the percentage share. Since the beginning of 2014, construction’s share of the total has more than doubled, going from less than 10% to more than 20%. No other sector shows a performance that is anywhere close to being this dismal.
Increased privatisation of state assets has been on the agenda for at least six months as the economy has struggled amid western sanctions and lower commodity prices. It is a policy that reportedly has the approval of President Putin, who knows that even he cannot mask the cracks that are appearing in the economy. The budget deficit is standing at 2.6% of GDP, not terribly high, but the currency is collapsing and the bite of sanctions and weak commodity prices is simply piling on the pressure. This means that Russia will have to make a cutback of a further 10% to the state budget.
Prime Minister Dmitry Medvedev said in Moscow on January 13:
“…We need to prepare for the worst scenario …We need to live according to our means, including by reducing budget expenditures, decreasing spending on the state apparatus, the privatisation of part of state assets. ..”
KSA has become wary of forging agreements with Moscow as Russia has made promises to Opec several times over the past 15 years. Each time it has reneged and blatantly failed to follow through on the pledge.
What is at stake is a play to seize and control as much market share as is possible, and at the moment it is the Saudis who have the upper hand in being a sales maximiser by achieving the highest possible sales volume, without making a loss. In the chart below, to the right of point Q, the firm will make a loss, and to the left of Q sales are not maximised.
By following this strategy KSA is building for itself an increase in monopoly power which may enable the oil producer to put up prices and make more profit in the long run. Certainly, as rigs have closed in North America it is clear that the pursuit of predatory pricing has led to a significant reduction of rival supplies.
The Saudis are willing to sacrifice profits in the short term to increase profits in the long run. That would appear to be their plan as the International Monetary Fund is suggesting that the Saudi royal family are having to consider cutting back their luxury lifestyle and the kingdom may actually need to consider imposing taxes and reduce its generous electricity, water and oil subsidies for citizens.
Clearly the low oil price is not doing any producer a favour, but Saudi Arabia is in a far stronger position than any other nation to cope with the present price predicament.
– Edited by Susan McDonald
is managing partner at Spotlight Ideas. Follow Stephen or post your comment below to engage with Saxo Bank's social trading platform.