Putin and the oil market in 2017

The year 2016 is over, and the biggest surprise of the year for many industry observers, the oil market was made in December, the announcement that Russia, in cooperation with the Organization of countries-exporters of oil in 2017 will cut production.

Looks like this is the first case of cooperation between oil-producing countries OPEC and non-members of the organization since 2001, and initiated pre-emptively, was none else but himself, Russian President Vladimir Putin. When OPEC November 30 announced the reduction of its production to 1.2 million barrels per day, the cartel simultaneously, confidently noted that its member countries will cut production by 600 thousand barrels a day, and that most of the cuts will provide Russian.

After 10 days, when not members of OPEC confirmed it, it was to reduce output by approximately 558 thousand barrels per day. It’s not fully meet the requirements of the oil cartel, but this figure is still important for the market where the driving force is mood, where Russia pledged to reduce production by 300 thousand barrels a day.

More importantly. Putin himself made the announcement, confirming Russian commitment. Of course, the devil is in the details. As I understand it, proposed by the Kremlin, the reduction in real terms. Only data aggregators will be able to tell definitely by March 2017, all of this turns out. Putin quite frankly said that the basic production level in Russia is its indicator Oct 2016 11,247 million barrels a day, which has not happened since Soviet times.

Of this amount Russia plans to reduce production by 200 thousand barrels per day to 11,047 million barrels for the month of March. A full reduction to 10,947 million barrels per day sometime in June. It seems to me, is more than a managed decline.

But Putin is smart and cunning leader, and how he formulated his statement, made the market believe that starts something new in real terms, and that all this is not a correction. It is also worth noting that the statements of the other countries on the reduction of mining is controlled by the adjustments, and therefore Putin’s Russia is in this way not alone. However, it is the largest producer among non-OPEC countries.

Giving 23 December, a press conference at the end of the year, Putin said that Moscow will fulfill its part of the deal to, in cooperation with OPEC support world oil prices.

He also expressed the hope that oil prices in the medium term stabiliziruemost at current levels (more than 55 dollars for barrel). Putin said that such a price level above the average price of $ 40, which is embedded in the budget. In presenting the calculations of his government, the President added that if oil prices average $ 50 per barrel, the Russian budget in 2017 will receive an additional 1.75 trillion rubles ($28.9 billion).

This is the position of Russia, and on the other it is impossible to hope, if the old proverb “better to see once than hear a hundred times” will come true in the sense that the Kremlin will fulfill their public promises. Putin demonstrates confidence in the implementation of the agreement since its signing. Perhaps OPEC gave their own guarantee to the Russian government, although the recently published autobiography of the former oil Minister of Saudi Arabia Ali al-Naimi (Ali Al-Naimi) speaks about the disgusting results of cooperation between the two sides.

Another question is I have a lack of detail in terms of how Russia will distribute the planned reduction of production to 300 thousand barrels per day in the oil-producing companies in the country. In itself this reduction, if it is implemented, is less than three percent of the total production volume in Russia.

The reputation of Putin as a strong and powerful man is what makes the market confidence to the country, which in the past have never cut production, as opposed to that of States in the Middle East. Mike Wittner (Mike Wittner), head of oil research at Société Générale does not believe that Russia will go on reduction of production based on it is not the best reputation in the past.

“But this time it could all be different, because it involved Putin personally. Russia has two major state oil company (“Rosneft” and “Gazprom”), and the largest of these and produces more than 40% of the national volume. These companies Putin could give a direct order to implement production cuts. For other companies it is able to exert considerable pressure in order to convince them to go to a decrease in domestic production. This factor should not be underestimated”.

With regard to the Russian budget in 2017, which is in the approval process, that says a lot about the fact that state revenues from oil companies will be relatively stable. Increase tax on extraction of mineral resources, but it compensates for the reduction in export duty from 42 to 30%.

However, Fitch notes that in the longer term, the Kremlin may try to increase its share in oil and gas revenues. “This risk will increase significantly if the price of oil will fall below $ 40 per barrel for an extended period of time, as this is the level which is set in the state budget. But because of the cooperation with OPEC, this scenario becomes less likely.

“This transaction should help to accelerate the rebalancing of the market, which will lead to a more rapid recovery of prices than previously expected, although the risks of implementation are significant. And the United States in response can increase the production of shale oil, and it will be a very important factor for oil prices”, — said the rating Agency in a note to its clients.

Overall, on the horizon loomed very interesting in 2017, but until Putin’s speech provide a tendency to increase.