Russia hints that it will gradually boost its oil production from June 2018

OPEC and Russia have been withholding their respective crude oil production levels while oil producers from the U.S., Canada and Brazil have been boosting theirs. As a result of the production cuts, oil prices touched their multi-year high of $80.50 in May 17, 2018. However, with the U.S. increasingly gaining market share, Russia is now looking to prop up its production levels once again.

On Friday, prices of crude oil stopped their northward march following a hint from Russia that it is likely to gradually increase its oil production.

Since 2017, Russia has withheld oil supplies from the global oil pool in concert with OPEC.

As at 0534 GMT, Brent crude futures LCOc1 were seen at $78.63 per barrel, down by 16 cents from their last close, and down by 2.2% from its multi-year high of $80.50, which it reached on May 17.

U.S. West Texas Intermediate (WTI) crude futures were at $70.60 a barrel, down 11 cents from their last settlement.

“Oil prices are now starting to drift a little,” said Greg McKenna, chief market strategist at AxiTrader, a futures brokerage firm. He attributed the downward slide to the decision taken by Russia and OPEC for moving “toward an increase in production” from June 2018.

While OPEC still wants to withhold production levels to tighten the market and prop up prices, Russia has been floating the idea of an end to production cuts. On Thursday, Russian energy minister Alexander Novak was quoted as saying restrictions placed on its oil production could be eased “softly” if OPEC and non-OPEC countries see the oil market balancing in June.

“The Russians have always struck me as production cut tourists keen to get off the boat and crank up production as soon as inventories were stabilized and prices once again elevated … That possibility is top of the mind for traders and as a result oil prices are slipping,” said McKenna.

Nevertheless, the downside risk to oil prices could be limited by geopolitical factors.

“Oil prices, however, look primed to withstand the slip as heightened geopolitical risks from the Middle East, (and) raised prospects of a supply squeeze in Venezuela and Iran permeates global market sentiment,” wrote Benjamin Lu, an investment analyst at Phillip Futures in a note to clients.

Incidentally, oil producers such as the United States, Brazil and Canada are not bound by the OPEC’s and Russia’s agreement to cut oil production. By increasing their output further they are likely to improve their profitability.

“With oil prices rising more than costs, average industry profitability has turned positive this year,” said Bernstein Energy earlier this week while adding that the 50 largest listed oil companies in the world “need $47 per barrel oil prices to break even in aggregate”.


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