Alexei Kokin: "Russia will not make sacrifices of declining production"

Russia is ready to continue negotiations with the OPEC countries regarding freezing oil output levels to stabilize oil prices, the Russian Energy Minister Alexander Novak said. "The idea of ​​freezing oil production by producing countries, which was was discussed in April, has played its role in the stabilization of the market. Speculators have seen that producing countries can reach agreements. The door for further negotiations remains open in case the need arises," Novak said. A senior analyst of 'Uralsib', Alexei Kokin, told Vestnik Kavkaza about Russia's readiness for talks on an oil production freeze.

- Alexey Viktorovich, did speculators see that producing countries can reach agreements?

- This was exactly what speculators have seen. For several days, the market has been following a signal actually sent by Saudi Arabia. As for the statement by Novak, this is an old story – talks have been held more than once, but have always led to nothing. Russia could take some steps if the oil price were below $40. But in the current situation I do not think that any results will be achieved.

That is, Russia will agree to negotiate. Most likely, it will insist that all the countries stop their output at the level of the beginning of 2016. A zero option, in which everyone freezes their production at the current level. However, in any case, there will be no large increase from the current level of production in the near future. A zero option looks noncommittal, but I think that it won't be accepted by everyone. Well, Iran and Iraq have well-known plans for growth. Libya is also unlikely to agree.

Russia, Saudi Arabia, Kuwait and the Emirates could agree on a joint reduction of production, but it is unrealistic to expect that virtually all of OPEC will agree to reduce output. Such negotiations can be carried out ad infinitum.

Russia will not offer any serious measures to reduce the level of oil production if the oil price doesn't drop below $40. But I'm almost certain that this will not happen. For Russia, any decrease in the level of production is a serious problem, a serious difficulty. This is an expensive pleasure, which is fraught with serious consequences. Russia's decision to cut output requires a very good reason. The country must stand on the brink of a very serious problem or disaster, but there is nothing like that. Russia is not on the verge of any accident, the situation in the oil industry is fairly normal. At least, certainly better than in many other countries. Therefore, the maximum that Russia can offer is a freeze, but even a freeze will not be supported by everyone.

- Is an oil freeze potentially available?

- OPEC exists to set quotas, maximum production ceilings, but there are countries in OPEC which have plans to increase production. I do not think Iraq or Iran will agree to reduce their production so easily. If the Iraqis can believe that it is more profitable for them to refrain from increasing production, then Iran, I think, will do everything possible to increase its volumes in principle.

- Then what is the point of Novak's statement?

- Formally, this statement is the truth, because Russia will always agree to negotiate. But there are other parties, which will probably not support Russia's position. If you are involved in the negotiations, you have two options.

First. Show your willingness to make sacrifices and urge everyone else to make sacrifices. But Russia will not sacrifice its production, I am sure. It would be a very expensive move for Russia, much more expensive than for any other major producing country. Accordingly, such a negotiating gesture will not be made.

Second. Just leave it how it is. Then at least there will be no increase in production. This is a relatively cheap option, for Russia it is not painful, because it is not going to increase production greatly. Maybe in the range of 1% next year. Such a proposal is easy to make. But the above countries will not agree on it.

Nobody knows how flexible the position of Saudi Arabia is, how much it is bluffing, distracting the market. It is possible that Saudi Arabia is actually ready to reduce its production level. Such a possibility exists, because only the administration of Saudi Arabia knows the true situation with the country's budget. But I think that the probability that Saudi Arabia is ready to reduce its production is very small today. It cannot be written off and it is clear that the market believes in it. But I think that it is small, since Saudi Arabia will still survive such prices for at least another year. During this time it will be able to destroy some of its competitors and cause serious underinvestment in the oil industry of other countries. This simply will lead to a drop in oil output outside OPEC and in some OPEC countries in the next years. Then Saudi oil will enter this niche. It will be a wonderful moment to win new markets and raise oil prices at the same time. It just has to hold out a little longer and "kill" as many competitors as possible. But how long Saudi Arabia can hold out is certainly a question. Is it ready for a decline now, or will it continue for another year? This is the main question.