After weeks of pressure, Russia has increased its promises to OPEC for cuts in crude oil exports. But it appears that the government will simply raise quotas for more exports of fuel oil, leaving the oil cartel with no net gain.
Boston, 7 December 2001 (RFE/RL) -- The cycle of elation and frustration was played out on the oil market for the fourth time in the past month following Russia's decision to cut crude exports by 150,000 barrels per day at the start of next year.
The announcement came on 5 December after Prime Minister Mikhail Kasyanov's latest meeting with Russian oil companies, despite predictions that they would agree to greater reductions of up to 380,000 barrels.
The forecasts proved false, but the sagging market was still grateful for the smaller commitment after November's pledges for minor cuts of 30,000 and 50,000 barrels failed to keep pace with plunging demand.
Ten nations of the Organization of Petroleum Exporting Countries (OPEC) have insisted on cooperation from non-members like Russia before tightening their own supplies by 1.5 million barrels, or about 6 percent. The question was whether Moscow's new promise would be enough to bind OPEC and other producers together for concerted action to avert a price plunge.
The first signs were encouraging, as with each of Russia's previous moves. On 5 December, prices rose by nearly $1 per barrel on New York exchanges before news of glutted inventories brought them back down to a loss.
By midday on 6 December, the outcome was still uncertain as Norway and other non-members of OPEC weighed Russia's commitment. Although the betting was that OPEC would be forced to lower output in line with the slowing world economy, the cartel was still waiting for the result.
One reason for the delay was the deep skepticism over Russia's actions, in light of its history of broken promises to cooperate with OPEC over the past two years. But now that Russia has regained its place as the world's second-leading oil exporter, the current price crisis has left the cartel hanging on Moscow's every word.
On 6 December, the Russian investment bank Troika Dialogue accused the authorities and the industry of playing a "three-card oil trick" on OPEC, because Russian exports usually drop by about 200,000 barrels per day in winter, even without an announcement of cuts. The seasonal decline is the result of freezing in northern ports and the need to turn crude into heating oil.
In fact, the reduction may already be well underway. The Reuters news agency has reported that oil exports declined by 260,000 barrels per day in November due to bad weather at Russia's ports.
On 6 December, Troika Dialogue said in a research note that the government statement was curiously vague about details.
The bank said, "First, there is the question of where Russia will in fact be cutting back. The government has not elaborated on the crucial issue of the level from which the cut is to be made."
There have also been strong signs that Russia intends to divert more crude into products like heating oil for export to keep up a show of cooperation with OPEC while keeping revenues up at the same time.
In an interview with RFE/RL, Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, warned of just such a move, which would only serve to flood the market with oil in another form.
Ebel said, "If they're just going to cut crude, OPEC is going to be furious. If Russia just adds to petroleum products exports, the cuts in crude won't mean a thing." In fact, that shift may also be well underway. In late November, the Russian Energy Ministry announced that it would let producers export 25 percent of their fuel oil output, an increase from 21 percent, because the domestic market was already well-supplied.
On 6 December, the Prime-TASS news agency reported that Deputy Energy Minister Ivan Matlashov said that another increase to 40 percent is likely in the second half of December. "The Moscow Times" quoted analysts as saying that the hike in exports of fuel oil "might have been made to compensate for the possible losses of Russian oil companies from reduced crude exports."
If that is the case, the Russian cut will be one in name only, leaving OPEC with a smaller market for its own crude to be refined into fuel oil.
In an interview and commentary for "The Moscow Times" on 6 December, President Vladimir Putin's outspoken economic adviser, Andrei Illarionov, cast doubt on the whole notion of cooperating with OPEC on cuts.
When Illarionov was asked whether Russia could influence world oil prices, he answered: "No, it cannot. Given that the United States has been hit by recession, Japan is already firmly in recession, and there is a substantial slowdown in economic activity in Europe, it is completely nonsensical to take any measures to artificially support high oil prices. In conditions of recession one cannot have high prices. The Russian government's ability to influence oil prices is negligible."
Illarionov added, "If Russia cuts exports, it will simply lose market share."
Although Illarionov may only have been voicing his own opinion, the position seemed to be another sign that Russia will not give OPEC all the support that it wants.