Could Russia and OPEC really strike a deal on oil?


Rumors of a Russia-OPEC deal on curbing production has offered oil prices some much needed relief, with prices surging again on Wednesday on further hints of a meeting.

However, the messages have been mixed: Russian Foreign Minister Sergei Lavrov suggested on Wednesday Russia was open to a meeting with the oil-producing cartel. But comments from Russia's representative to OPEC said that it was unlikely the group would meet with Russia anytime soon, according to Russian news agency Interfax Wednesday.

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Analysts reviewing the possibility of the deal are doubtful that such a meeting could take place, but argue Russia's options for tackling it deteriorating economy are running out, as oil prices look to remain stubbornly low.

Chief markets economy at Capital Economics, John Higgins said the reports of a deal should at least be weighed, given that oil cartel OPEC's largest producer, Saudi Arabia, and Russia both produce some 10 million barrels of oil per day, but remained unconvinced that "anything tangible will come of the latest calls for coordinated action."

"If the wealthier Gulf producers are tolerating lower prices to protect market share, there are already plenty of signs that this policy is working. The number of active drilling rigs in the U.S. has collapsed and shale production there is now falling," he said.

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"There would also be major questions over compliance. Even if Saudi Arabia were ready to change tack and agree to coordinated output cuts, it is not obvious that Russia would be a reliable partner," he added.

Oil prices held onto gains despite the mixed messages on a possible deal, with Brent prices for April delivery up 99 cents, or 3 percent, at $33.69 a barrel in Wednesday afternoon trade, pulling away from a session low of $32.30. U.S. crude futures rose 81 cents to $30.71, off a session low of $29.40.

Hints of a deal come as the Russian economy, along with other less stable oil producing nations, is under major strain with economists predicting further contraction in 2016.

"A second year of recession looks likely in 2016. Most growth indicators will continue to slide in and while there is expected to be an improvement in the second and third quarter, this will only be due to the base effect. Under our base-case scenario, the economy will remain in recession through the first half of 2016 and we may only see a return to growth in fourth quarter," senior partner at macro advisory, Chris Weafer said.

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U.S. ratings agency Fitch said the Russian government has asked ministries to identify 700 billon rubles ($9 billion) of cuts, which will help with the deficit but will also likely dent demand in an economy weakened by lower oil prices and rouble volatility.

Brent crude prices have declined over 10 percent this year, and down around 70 percent over the last 18 months, hitting the budgets of oil-dependent nations, such as Nigeria and Azerbaijan, which have sought assistance from the International Monetary Fund.

"The Kremlin is now at a position where it has to choose between further spending cuts or drawing down its sovereign wealth funds, which may be more palatable given upcoming elections. With the Russian economy declining rapidly (by 3.7 percent in 2015), there are reports of small scale protests starting to occur, which President Putin will not want to gather momentum," said chief oil analyst at Energy Aspects, Amrita Sen in a note.

Sen also noted that because Russian oil companies such as Lukoil, which have seen a growing proportion of their production become increasingly uneconomical, have begun to call for output cuts and co-operation with OPEC, there is little downside for Russia to suggest a production cut deal with the cartel.