Can Russia Put An End To The Current Oil Price Rally?

by: Gaurav Agnihotri

Summary

Oil prices are hovering around $50 a barrel as OPEC is getting ready to meet non-OPEC producers (mainly Russia) in Istanbul this week.

Iraq is planning to defy the upcoming OPEC production cut.

Khalid Al Falih has already stated that he will meet Alexander Novak in the next few days in Istanbul.

Oil prices are hovering around $50 a barrel as OPEC is getting ready to meet non-OPEC producers (mainly Russia) in Istanbul this week. As uncertainty over Russia's participation in the upcoming OPEC production cut increases, oil prices fell by around 0.5% with WTI and Brent trading at $49.58 and $51.77, respectively, at the time this article was written. In my previous article, I clearly stated that the success of this OPEC deal depends on Russia. And, after Russia's Energy Minister Alexander Novak said that he might not sign a deal with OPEC in Istanbul, oil prices will remain volatile until a firm joint decision is made.

Will the Upcoming Output Cut by OPEC Really Matter?

"OPEC needs to make sure we don't crimp too tightly and create a shock to the market. We are going to be very responsible. Prices have dropped too low and that has impacted investment. Many companies and countries are hurting. We don't want to give the market the wrong signal and shock the market's prices," said Saudi Arabia's Energy Minister Khalid Al Falih while speaking at the World Energy Congress in Istanbul. The Energy Minister also added that he expected that OPEC and non-OPEC producers will agree to reduce their oil production by the end of November, and this could push oil prices to $60 a barrel by the end of 2016.

In my opinion, the latest statement issued by the Saudi energy minister will only act as speculation for the markets. It can be clearly seen that there is a growing disorder inside OPEC. According a recent report, even Iraq is planning to increase its oil production in the near future. This Sunday, Iraq's oil ministry revealed that its oil minister Jabar Ali al-Luaibi has asked oil and gas producers operating in Iraq to increase their output until 2017.

Does this mean that even Iraq (just like Iran, Nigeria and Libya) is now planning to defy the upcoming OPEC production cut? It should be noted that at 4.6 million barrels per day in August 2016, Iraq is OPEC's second biggest oil producer after Saudi Arabia. This situation will put even more pressure on Saudi Arabia as it is desperately looking to revive oil prices. So, a lot depends on how Russia responds to Saudi Arabia's call for a combined production cut.

Conclusion

Khalid Al Falih has already stated that he will meet Alexander Novak in the next few days in Istanbul. Russia's energy minister was not present when the decision to reduce oil production was made by OPEC in Algiers. It will be interesting to hear what the Saudi energy minister has to say after he meets his Russian counterpart. Khalid Al Falih has already declared that there will be another technical meeting between OPEC and non-OPEC members after two weeks from now.

In my opinion, Saudi Arabia will do whatever it takes to convince Russia for supporting the upcoming production cut. That's because if Russia refuses to cut its production, then the production cut proposed by Saudi Arabia (at around 400,000 barrels per day) will not have much impact on oil prices. Based on all of this, it's clear that Russia can end the current oil price rally. Investors must take note of this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.