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Schork: The Russians Are Coming

The Russians are coming, the Russians are coming… towards the end of last week the crude oil market in New York (NYMEX) surged 11% on headlines that the Russians were once again sending their heavy hitters, Vagit Alekperov, CEO of OAO Lukoil and energy czar and vice premier, Igor Sechin to this Sunday’s OPEC meeting.

This news was indeed significant; especially in light of the Kremlin’s implied threat last summer and this winter to the flow of Trans-Caspian oil and gas. At OPEC’s September meeting the unexpected appearance of Russia came as quite a shock to us and our media contacts that were in the room prior to the closed-door session.

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OPEC

Non-members are routinely invited to attend OPEC meetings. Thus, Russia’s appearance was not peculiar in and of itself. Be that as it may, the country’s outreach to the producer group was unmistakable. The delegation from Moscow, headed by Mr. Sechin and which included Sergei Bogdanchikov, CEO of Russian oil giant OAO Rosneft, was by far the largest of any nonmember in the room. The signal was received by everyone in attendance at the September meeting; OPEC and Russia are striving for greater cooperation.

This signal was cemented in Sunday’s address to OPEC by Mr. Sechin. While the September appearance of Russia caught the press off guard, Sunday’s appearance certainly did not, as evidenced by the abnormally large contingent of Russian speaking reporters gathered at OPEC’s Vienna headquarters.

In his opening speech Mr Sechin linked the current depressed price structure in oil to the crisis in global financial markets. As such, Mr. Sechin noted that “… the risk of a further decrease of the oil price is unfortunately extremely high.”

“Unfortunate” that is, for producing countries.

While global demand for oil is falling, Mr. Sechin noted the implied threat this poses to future supply… “Oil consumers should understand that the decreased demand will not allow maintaining necessary investment levels what is true even at the present price levels, not to speak of a further price decrease”.

Mr Sechin also stated Russia’s desire to coordinate policy with OPEC to exorcise surplus barrels from the market. For its part, Russia is attempting to manipulate crude oil exports through a combination of taxation and customs instruments. The country has also taken measures to spur domestic demand and has “temporarily” terminated licenses on new large fields (Trebs and Titov).

Mr. Sechin proposed the establishment a new oil and refined products trading system and for a move to a multicurrency basket for payments of oil.

This would appear to be a direct threat to the NYMEX and ICE franchises. The goal would be to move to longer dated contracts as the basis for the new Russian trading system. According to Mr. Sechin, this would lead to greater predictability in price.

In our opinion, this would retard price discovery and transparency and would ultimately lead to even greater volatility.

At the September meeting a Memorandum of Understanding was drafted between the Russian Ministry of Energy and OPEC. The stated provision of this agreement was for a gradual development of the cooperation between the two oil producing giants.

In a follow up to this Memorandum, Mr. Sechin discussed the issue of having a permanent representative of the Russian Federation to the OPEC’s Secretariat.

Is this the first step to Russia joining OPEC? Stay tuned.

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Stephen Schork is the Editor of, "The Schork Report" and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.