Russia and OPEC to hold talks on oil production cuts

As oil lingers around $30 a barrel, Russia has raised the possibility of production cuts in coordination with OPEC producers

A Russian oil rig in the Caspian Sea. The Russian economy has been squeezed by low oil prices, but the country cannot afford to cut production unless OPEC member states do so as well

Russia is set to hold talks with Saudi Arabia and other OPEC member states in order to discuss coordinated oil production cuts. The prospect of oil producers finally reducing output raises the potential for the price of oil to pick up after two years of depressed prices.

According to Nikolai Tokarev, the head of the Russian oil pipeline monopoly Transneft, Russian oil executives and government officials had agreed talks with OPEC were needed in order to discuss production cuts aimed at raising prices.

If one producer holds out, they have the potential to gain market share while also benefiting from the raised price

“At the meeting there was discussion in particular about the oil price and what steps we should take collectively to change the situation for the better, including negotiations within the framework of OPEC as a whole, and bilaterally”, said Tokarev, according to Russian news outlets. The news was welcomed by markets, which saw a rally on the price of oil, pushing Brent crude up to around $33.

While this could be good news for oil prices, whether or not any agreements will be reached is uncertain. Russia would like to see the oil price once again rise, but it is wary of cutting production in case it loses market share. In late 2014, talks between OPEC and non-OPEC producers failed to reach a consensus on cutting production. The Saudis and other OPEC members are also fearful of cutting production without other producers following suit – again, out of fear for their market share.

The Russians have hoped the Saudis would lead the production cut without them. If all, or most, major producers cut market share, all will see a price increase. However, if one producer – or group of producers – holds out while others cut, they have the potential to gain market share while also benefiting from the raised price.

The Saudis are already operating near full production capacity, meaning they have no ability to gain further market share, putting them solely in the position of defending what they already have. In this defensive position, the Saudis are likely to agree to an oil production cut only if they are certain other major producers will follow suit. While the Saudis would hope to see prices increase – as they face a growing, albeit manageable, fiscal gap – depressed oil prices are, for now, a better option than losing significant market share.

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