For years, the Organization of Petroleum Exporting Countries (OPEC) has courted Russia, though without much success. It's easy to see why the attraction is there; the world's largest country has huge oil reserves and the geopolitical clout to boost the cartel's "muscle" by about a third.
But this past weekend, Russian Energy Minister Alexander Novak announced that Moscow is ready to meet with both OPEC and other oil producers to address the low price of oil.
This is an important development. It means that for the first time in nearly 11 months, geopolitics is likely to give support to higher crude – meaning oil prices get a new push.
We can expect something more from these meetings, as well…
Oil's Plunge to $40 Has Everyone in a Tight Spot
OPEC's decision to protect market share over price has even hit American producers, with their huge, expensive-to-extract new reserves of shale and tight oil.
But even as exporting countries struggle (sometimes violently) to balance budgets with deep oil revenue cuts, very little has been done on a geopolitical scale to correct oil prices. Major producers, like Russia, have appeared to sit back and watch their revenue crumble.
But now, Russia has all of a sudden cried "Дядя!" Uncle…
It's who's doing the producing that's the pain point.
Whereas oil production in the United States is a private affair, in all other major producing countries, the sector is either led or controlled by state companies.
So for Russia and all OPEC countries, the dive in prices was more – much more – than a private sector bottom-line consideration. All government programs and expenditures are impacted.
To make matters worse, these economies are largely undiversified; oil is the sole source of revenue. Even in Russia, oil and natural gas are the primary sources.
But Russia also has other concerns.
The Western sanctions issuing from the crisis in Ukraine and Moscow's annexation of Crimea have restricted access to the outside hard currency markets that are essential to actually exporting oil and gas – almost all contracts are denominated in U.S. dollars and must be pre-financed.
The "double whammy" of low prices and sanctions has resulted in a significant reduction in the value of the ruble. That, in turn, has created additional domestic market problems for average Russians.
But the pain isn't limited to Russia. This "race to the bottom" is running every exporter ragged.
Someone Has to Blink… but No One Wants to Be First
All OPEC countries (with the exception of Iran, given its own sanction barriers and the dreadful state of its oil industry) have been producing well over their monthly quotas to their own detriment.
If that seems bizarre, it's because they have no choice.
You see, the OPEC Secretariat determines these each month by first estimating global demand, then non-OPEC volume, followed by what is termed the "call on OPEC," which is then divided into quotas for each cartel member.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.