The oil principle of non-action

The meeting of the OPEC+ countries on February 1 and the upcoming discussions around it may allow us to understand what strategy the Russian authorities have chosen to ensure acceptable parameters for oil exports. Even though a month and a half has passed since the entry into force of the Russian oil price ceiling and the EU embargo, it is still unclear exactly how Russia intends to respond. There have always been two main options: either to reduce production sufficiently to cause an increase in oil prices in the world and thereby break the ceiling mechanism itself, or to focus on maintaining export volumes, leaving oil companies and the market to find ways to circumvent restrictive measures. Both options have their risks, but at the end of 2022, based on the rhetoric of the Russian authorities, it seemed that the first approach would be chosen. Therefore, when in December these expectations were deceived and it turned out that Russia itself was not going to limit production, oil prices in the world at the moment fell by 15%, and Urals quotes by more than 30%. As a result, the difference between the price of Russian oil in December and the budgeted price ($70 per barrel) reached $30 per barrel.

Obviously, a budget hole of this size is unacceptable. This makes the vast majority of market participants think that the Russian authorities will be forced to adjust their policy of non-intervention and still urge oil companies to cut production, or, more precisely, to reduce the proposed discount on Urals exports, which in practice is one and the same. The best option for Russia is to reduce production together with the OPEC+ countries, since this will not only achieve a greater effect on world prices, but also avoid misinterpretation of Russia’s actions by the main buyers of its oil (these are India, China and Turkey). The course of discussions at the meeting on February 1 will give an understanding of how much such a scenario is desirable for the Russian authorities, as well as to what extent they are able to obtain support from Saudi Arabia, which is generally satisfied with current oil prices in terms of filling the budget.

If it fails to get OPEC+’s consent to cut production, then Russia will have only the weakening of the ruble as a powerful tool for balancing the budget. Such a move would be highly undesirable for many reasons, including rising inflation and an additional slowdown in imports, not to mention social considerations.

Finally, there is always the option of doing nothing, hoping that oil prices will rise by themselves due to the opening of the Chinese economy, the reversal of the policy of the US Federal Reserve, or simply “something”. Ultimately, this Taoist approach is definitely as good as others, provided you are willing to apply it consistently.