How Russia is manipulating the oil market

Leonid Bershidsky:
It's hard to blame Russia for using its propaganda machine to help build a post-fact world when its economy depends on a post-fact market -- the oil one. The market's reaction to news from the Organization of Petroleum Exporting Countries highlights its spurious mechanics.

Bloomberg News reported recently that Russia as a country made $6 billion just by talking to OPEC about cutting its oil output: News about the negotiations drove up the price. Now, Russia has agreed to a cut by 300,000 barrels per day by January "if technically possible." It looks like a lot -- a quarter of the total cut OPEC members have agreed among themselves -- but then Russia's output increased by 520,000 barrels a day between the end of August and the end of October, reaching an absolute record level. Russia has been making money on the increasing price while growing production -- the best of both worlds thanks to some deft news manipulation and nothing else. Now, even if Russia cuts output by about 2.7 percent of the current level, as it has promised, it will still reap a profit if the price of crude holds at the current level -- about 7 percent higher on Thursday morning than three days before.
If the current price doesn't stick, Russia and the OPEC countries simply won't make the promised cuts. There's no mechanism within OPEC, and certainly none in the case of an outsider like Russia, to punish non-compliance. Saudi Arabia used to operate an ad hoc mechanism, raising its own production to punish smaller rivals with lower prices, but the kingdom can't do that effectively today without losing market share to Russia and the resurgent Iran. It's because of the non-binding nature of the deal that the Saudis have, after a lot of hand-wringing, agreed to allow arch-rival Iran to increase rather than cut output.
There is more.

The deal looks like desperate market manipulations by a group that has lost its ability to control the marketplace.  They seem to go through this ritual on a monthly basis of late.  They are going to lose even more influence over the market after the Trump team takes over in the US and relaxes the restrictions Obama has put on the production of oil and gas.

This will probably lead to Big Green lobbyist becoming OPEC's and Russia's best friend in the US.


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