Russian plans to boost oil production are breaking the government's pledge to the Organization of Petroleum Exporting Countries (OPEC) that it would cut output to keep prices from dropping. The oil cartel seems to have ignored warnings that Russia would not honor its promise and that it risked turning its price-setting power over to Moscow.
Washington, 23 January 2002 (RFE/RL) -- Signs are increasing of a fundamental shift in the world oil market as a result of December's face-saving deal between Russia and OPEC.
In late December, 10 OPEC nations agreed to slash production by 1.5 million barrels per day in exchange for a pledge by Russia and other non-OPEC states to take similar cuts.
The goal was to keep ahead of plunging demand, which has pulled oil prices down below OPEC's target range of $22 to $28 per barrel. But in the three weeks since the new trims took effect, it has become clear that OPEC gave up quite a lot and got very little in return.
Russian Prime Minister Mikhail Kasyanov brokered the deal that was supposed to reduce the country's exports of crude oil by 150,000 barrels per day. The promise formed the basis for commitments by non-OPEC producers to lower their exports by 462,500 barrels per day.
The amount fell short of the 500,000 barrels that OPEC first sought, but with a crisis of confidence on oil prices, the cartel decided to look the other way.
OPEC continued to avert its gaze as the Russian government encouraged a shift of the country's production into refined products like fuel oil, turning the export promise into a cosmetic cut.
In January, the government sharply reduced its export tariff on fuel oil under new customs rules and completely lifted its quotas on fuel oil exports, citing a domestic glut.
The final blow to the OPEC deal came in mid-January, when several Russian oil companies led by second-largest Yukos confirmed earlier plans for big increases in crude oil production in 2002.
The result is likely to be a major loss in OPEC's market share and its power to manage world prices.
The International Energy Agency recently said that OPEC's share of the world market has dropped to less than 32 percent, the lowest level since the mid-1980s. The Paris-based group said OPEC is unlikely to recapture its clout even if the world economy recovers because non-OPEC countries plan more expansions, the "Financial Times" reported.
The "Middle East Economic Survey" reported recently that cheating by OPEC members led to production of 569,000 barrels per day over their assigned quotas in December, even before the new limits took effect.
All signs now seem to point toward weaker prices and a rise in Russia's leverage, perhaps to levels not seen since Soviet days.
In November, Russian President Vladimir Putin's economic adviser, Andrei Illarionov, called OPEC "a historically doomed organization" after it hinted it might wage a price war to make Russia comply with its demands. On 10 January, Illarionov predicted that oil prices would fall to $10 per barrel, saying, "none of the price-fixing agreements can resist the markets," the Prime-TASS news agency reported.
The Russian government may step in before prices sink that far, but in the meantime Russian oil companies seem determined to show their new strength.
Yukos recently announced it would raise its 2002 output by 17 to 20 percent. That increase alone could equal well over 200,000 barrels per day. Sibneft, the fifth-biggest Russian producer, is set to add over 100,000 barrels per day this year. Even state-owned Rosneft has announced plans for 12 percent annual increases.
Only Russia's leading oil company, LUKoil, has voiced dismay over the broken promise to OPEC. The "Financial Times" quoted LUKoil Vice President Leonid Fedun as saying that domestic prices have dropped by two-thirds in two weeks and may approach $5 per barrel.
The biggest question may be why oil traders believed in the OPEC deal for so long in the face of Russia's apparent intention to flaunt it from the start.
The industry newsletter "Petroleum Argus" recently wrote, "Russia, in time-honored fashion, is clearly not going to do what OPEC seems to be expecting of it."
"The only surprise in all this is the fact that OPEC does not appear to have noticed what is going on, or rather it appears to have chosen not to notice," it added.
Following the new OPEC limit on 1 January, the cartel's basket of crudes rose briefly to a high of $19.64 per barrel on 4 January. Since then, the prices have steadily softened, settling at $17.21 on 18 January, the official Iranian news agency IRNA reported.
Russia's pledge to cut exports for the first quarter might not support prices even if it were kept. Since much of the market is based on future deliveries, any artificial restraint may only lead to more exports and lower prices later on.
OPEC seems to be relying on forecasts of an economic recovery to absorb the excess oil. But ample inventories, combined with a mild U.S. winter and Russia's rise in output, may leave the cartel on thin ice, particularly if recovery is delayed.
After its disastrous deal with Russia, OPEC can hardly afford another one, making it unlikely that its members will soon agree to reduce production again.