Vladimir Putin has unexpectedly agreed to support the long-awaited oil production freeze together with the OPEC countries, yet Russia's giant oil producers seem to have some different plans.
During the Monday's World Energy Council in Istanbul, Vladimir Putin have said something not many expected to hear: Russia is ready to support the OPEC countries in limiting the oil output. The production freeze has been discussed over and over again in the past months as the record-high oil pumping levels of Russia and the OPEC countries together with the growing market share of the U.S. dragged down the oil prices to their lowest levels in years. But by now, none of the countries have managed to agree on the freeze, considering that their economies are heavily dependent on oil and limiting the oil production would also mean losing the "race" to their rivals.
That is why, Putin's announcement came as a surprise to many experts as the country has been neglecting the need to limit the oil output and breaking one oil pumping record after another. Yet, this week, the Russian President has finally indicated that the country was ready to support the OPEC countries and the oil output limit initiative.
"We support the recent initiative of OPEC to fix oil production limits. We hope that at the OPEC meeting in November, the idea will be embodied in an official agreement, giving a positive signal to the markets and investors. In the current situation, we think that a freeze or even a cut in oil production is probably the only proper decision to preserve stability in the global energy market,” said Putin at the World Energy Council.
Russia's support of the oil production freeze could finally stabilize the alarming situation in the oil market and help the oil prices to recover from their bottom level. Freezing the output is the industry's best bet to bring the current vast oversupply of oil back into balance with the market demand and recover the prices.
The oil prices jumped shortly after Putin's speech in Istanbul to the highest levels of this year, with Brent growing almost $2 to over $53.60 per barrel and WTI going up to $51 per barrel. However, already on the next day, the prices slumped again after Rosneft's CEO Igor Sechin said that his company was not planning on supporting the freeze. Rosneft is Russia's biggest oil producer accounting for about 40% of the total oil production and is owned by the state.
Directly after Putin's speech on Monday, Sechin said "Why should we do it?" when asked about his opinion on the production freeze. Sechin, known for his "anti-OPEC" position, said that he seriously doubted that such countries as Saudi Arabia, Iran and Venezuela would actually freeze their oil output. In addition to that, if oil prices go higher than $50 per barrel, as a results of the proposed output limit, this would make the American oil production more profitable, he added. So why should Russia do it?
Sechin's statement was made public by Reuters yesterday. Shortly after that, Putin's Press-Secretary Dmitry Peskov rushed to say that the statement of Rosneft's CEO was "taken out of context" and was generally misunderstood by the journalists.
"First of all, Sechin's words were taken out of context. His answer was much longer and more detailed than that, so we don't see any conflict here. The official statement was presented by the President Putin," Peskov told RIA Novosti.
According to Reuters, just before Putin's speech on Monday, Sechin said that his company was planning to boost the oil production even further. This also doesn't fit well with Putin's statement on the Council. Therefore, some experts believe that Putin's promise to finally freeze the production of oil in the country might not result in any tangible agreement between the countries. Russia and Saudi Arabia have discussed the possibility of the production cap only last month, when the oil price jumped on the agreement expectations and fell down to the previous levels. A lot of industry experts said that the last month's meeting between the two biggest producers made it clear that none of them planned on halting the record-high production levels as the countries said there was "no urgent need" in doing so.
Russian Energy Minister Alexander Novak will meet with Saudi Arabia's Khalid al-Falih and other prominent oil ministers today to discuss the production freeze suggested by Putin. The Wall Street Journal reported that Russia supposedly planned to cut between 200,000 to 300,000 barrels per day. But it may be still too early to talk about any definite effect of Putin's Monday speech on the current market situation.
"Given the propensity of OPEC and other producers to talk up prices, and the history of failed deals among OPEC and between OPEC and Russia, we would continue to treat the news somewhat carefully for the longer term," Sberbank said in a report, as presented by Reuters.
Therefore, this week's increase in the oil prices is only a short-term result of Putin's production freeze promise. It is yet to see whether the countries will be able to come to any meaningful agreement during this week's negotiations and pave the way to the next OPEC meeting in Vienna on November 30.