Russia's Slushy Oil Freeze

It's no real sacrifice to hold production at high levels.

Russia's oil bosses have signed up for a plan to freeze supply, or at least that was the message from a meeting they held with President Putin earlier this month. The latest numbers from the U.S. Energy Information Administration, released Tuesday, suggest this isn't quite as self-sacrificing -- or bullish for oil prices -- as it seems. 

The big question hanging over the oil market is when supply will stop outpacing demand, allowing the current glut of inventories to start dropping and thereby supporting a sustainable rally in prices. In answering that, attention typically focuses on the U.S., where supply is starting to fall already as shale drillers cut back to save cash.

But it's a big world out there, especially when it comes to oil. Iran, for example, has the potential to condemn oil markets to another year of purgatory at least. In its latest set of forecasts, the EIA assumes OPEC production will increase by about 920,000 barrels a day, on average, across this year and next, with much of that coming from Iran, post sanctions. On that basis, supply and demand don't come close to balancing until the second half of 2017.

Profusion Energy

Projected excess of global oil supply over demand

Source: Energy Information Administration

Another country adding to the glut in these numbers, though, is Russia itself.

The International Energy Agency recently released its latest projections. While acknowledging that Russia has defied expectations and raised production in 2015 in the teeth of a perfect storm of recession and sanctions, the IEA expects supply will be virtually flat this year and start falling in 2017.

The EIA sees things slightly differently:

Russia is one example of production exceeding EIA’s expectations. Fourth quarter 2015 oil production in Russia is 0.2 million [barrels a day] higher than in last month’s STEO, with initial data indicating it has remained at high levels in early 2016. This higher historical production creates a higher baseline level that carries through the forecast period.

Given Russia's long history of enduring abject adversity, it probably shouldn't have come as surprise that its oil majors are coping better than the EIA expected. A big reason for their resilience is the ruble. While the U.S. dollar price of Brent crude has fallen by almost two thirds since the summer of 2014, it is down by only a quarter when priced in Russia's currency:


Brent crude oil priced in dollars and rubles, indexed

Source: Bloomberg

A slumping ruble might ding national pride, but it helps tremendously when that is the paper you use to pay your costs. Capital expenditure in Russia's oil sector plunged by almost a fifth in U.S. dollar terms in 2015, according to a global survey published this week by Morgan Stanley. But that should be set in the context of a 37 percent drop in the average ruble exchange rate last year. The tax regime, meanwhile, is tilted heavily in favor of the Kremlin when oil prices are high, but conversely offers protection against low prices.

So under the EIA's projections, Russian oil output is set to actually rise this year by 173,000 barrels a day. That is not only more than last year's gain, it is 143,000 barrels a day higher than the IEA's forecast.

Overall, the EIA is projecting non-OPEC oil supply to fall by only 364,000 barrels a day in 2016, much less than the IEA's anticipated 600,000 barrels-a-day decline. Russian resilience explains 60 percent of the difference. As an aside, the two agencies are virtually aligned in expecting U.S. production to fall by about half a million barrels a day.

It would, of course, be deeply cynical to speculate that Russia's embrace of a coordinated supply freeze -- quite out of sync with its history -- has anything to do with the country having only just boosted its output to record levels already. Suffice to say, even if the freeze takes hold 1 , winter isn't coming just yet in Siberia's oil patch. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. The whole notion of the freeze may well be moot anyway, given deep skepticism within OPEC's own ranks about getting full agreement on it. The latest example also came on Tuesday, this time in reported comments from Kuwait's acting oil minister.

To contact the author of this story:
Liam Denning in San Francisco at

To contact the editor responsible for this story:
Mark Gongloff at

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