The recent OPEC decision to cut their oil production made during the unofficial OPEC summit seems to be putting Russia in a rather difficult situation. For those of you who don’t know, OPEC held an unofficial summit in Algeria on September 28, 2016. At first, the rumors said that Russia was also going to participate in the summit, but alter on the Secretary General of OPEC said that this summit was for OPEC members only and therefore Russia was not going to participate in it.
As the result of the meeting, OPEC members finally agreed to cut their oil production in the near future. Needless to say that this came as a surprise to financial markets in general and the global market of crude oil in particular since nobody had really believed in reaching this agreement. The news pushed oil prices much higher almost in an instance. This was a logical outcome since the production cuts are going to gradually restore the balance in the market, or at least to make the oversupply shrink to the minimum.
To be more specific, the daily production quotas within the scope of OPEC is going to be cut from 33,24 million barrels a day down to 32,5 million barrels a day. At the same time, OPEC is determined to urge other major oil producers to hold their horses as well.
It should be noted that OPEC and Russia are not the only oil nations suffering from low oil prices. Every single oil producer out there doesn’t mind selling crude oil at a much higher prices. When the prices are low, those oil nations have to spend their reserves, which undermines the economic and financial situation in those countries.
As we have mentioned, OPEC’s decision to cut their oil production resulted in a strong in the global market of crude oil. During the first day of rally alone, the price gained 5% in a matter of hours.
If the agreement does take effect, this will mean that Saudi Arabia has abandoned its policy in the global market. The Saudis have been increasing oil production for the last couple of years despite declining prices. This was aimed at winning more of the market share while ousting rivals from the market. Now, everybody is looking forward to the forthcoming official OPEC summit in late November. This is where we are going to find out whether the agreement is not a trick.
At the same time, Russian oil companies cannot cut down on their production. The thing is that Russia has been advocating the idea of freezing oil production instead of cutting it. Even freezing production is a problem for Russia since there is no administrative procedure regulating this process. Russia is planning to discuss the possibility of cutting production only after OPEC officially confirms the agreement.
