#14
The Globe and Mail (Canada)
24 November 2001
Russians aren't likely to cut crude output any time
soon
By MICHAEL DEN TANDT
Michael Den Tandt is Investment Editor.
What a difference a day makes.
Thursday, with every other sector on the Toronto Stock Exchange in a deep drowse because of the U.S. Thanksgiving holiday, oil and gas stocks staged a spirited rally. There was rampant speculation that Russia, the world's second-biggest producer of oil, was about to cut a deal with the Organization of Petroleum Exporting Countries, and slash production.
Mexico was on side; Norway was on side; how could the Russians resist? Oil soared more than $1 (U.S.) a barrel in London, and equity investors fell over themselves jumping on the bandwagon.
Yesterday, Russia did exactly what many informed energy industry insiders expected it to do: nothing. Or, to be more precise, it agreed to slash output by 50,000 barrels a day for the rest of this year. That's 0.7 per cent of Russia's production, and about 150,000 barrels short of what the market was breathlessly expecting. The price of crude promptly dropped 6.5 per cent.
The TSE's oil and gas subindex followed suit, dropping 1.96 per cent and erasing much of the previous day's gains. All the signs are that there's more selling to come.
The Russians had a couple of excellent excuses for their paltry production cut. Apparently some of the country's more decrepit oil wells in Siberia fill up with water if production is reduced. Plus, although the state owns the national pipeline, Transneft, none of the top six Russian producers is state-owned. That makes them harder to control.
It's not like in the good old days, when a one-line telegram from the Kremlin did the trick. "You can't be cutting production at the speed of a scalded cat," one Russian oil executive huffed to Bloomberg News.
The subtext? The Russians don't need to cut production, don't want to cut production, and almost certainly won't cut production in any significant way, any time soon. They may talk the talk -- as they have frequently in the past -- but they won't walk the walk. In 1998 and 1999, a number of observers have recently noted, Russia promised to cut exports by 200,000 b/d. In 1999, the country's oil shipments rose 32,000 b/d. Russia, according to Bloomberg, now accounts for 10 per cent of the world's oil production. Fully 25 per cent of its export revenue comes from oil, and its crude exports are at a record high.
More than anything else, Russia needs hard currency, and oil exports provide just that. And the Russians, according to most analysts, can still profitably extract oil at prices significantly lower than yesterday's close of $18.96. Why then would it collude with OPEC in raising oil prices, harming its own efforts to expand market share?
Meantime, the political underpinnings of Russia's stance become ever more obvious. Thursday, George Robertson, Secretary-General of the North Atlantic Treaty Alliance, suggested that Russia should sit at NATO's council table when certain unspecified issues are discussed.
This proposal reportedly comes from Prime Minister Tony Blair, with the support of U.S. President George Bush. This is nothing less than a first step toward Russia's joining NATO -- something that would have been unheard of only months ago. It's reasonable to assume that a continuing supply of cheap oil is Russia's tidy quid pro quo to the West for a rapid acceleration of its political and economic integration with the Western democracies.
The Americans, for their part, desperately need a low crude price. First, cheap energy will help revive the U.S., Japanese and European economies -- in effect, mitigating the ill effects of the Sept. 11 terrorist attacks.
Second, Bush administration officials have unmistakably signalled that Iraq, and perhaps other nations, will be squarely in their sights once the Taliban is dispensed with. Nobody expected the war in Afghanistan to go as well as it has, as quickly as it has, and the United States wants to press its advantage.
In fact, the so-called Bush Doctrine -- that any nation harbouring or helping terrorists is itself guilty of terrorism -- requires a broadening of the war to nations beyond Afghanistan. But for that to happen without cratering the already moribund U.S. and global economies, oil prices must remain low. Any determined attempt to push Iraqi President Saddam Hussein from power could, temporarily, push oil prices up by at least $10 a barrel. The lower the price at the outset, the greater the leeway to act.
And if that's not enough reason to justify investor caution on oil stocks, there's this: Oil prices can experience short, very sharp fluctuations on output expectations. But the long-term median price is dictated by demand, not supply. And despite all best efforts to the contrary, the global economy will remain weak for some time.
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