Understanding Confusing Statements On Oil From Russian Officials

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Summary

Multiple signals on oil come from Russia.

President Vladimir Putin calls for an output freeze or even cut, while the head of the state-owned oil company Rosneft states he is ready to increase production.

I show how to make of contradictory statements from Russian officials.

Learn this trick once and save yourself time for the future.

I decided to write this article after reading the comments sections of my previous article on the topic titled "Russia Is Ready To Join The OPEC Production Deal - What Should We Expect?" and especially "Seadrill: John Fredriksen May Be Planning To Fight Fire With Fire, And It's Hard To Make Sense Of The Rumor," by fellow contributor Henrik Alex.

I found that readers are somewhat confused by conflicting messages sent from Russia regarding the country's desire and ability to join the OPEC production deal. Russia is a powerful force on the oil market, and a quasi-cartel comprised of OPEC and Russia might theoretically improve the prospects for oil prices.

Let's start by looking at conflicting messages from Russian officials.

1. The president of Russia Vladimir Putin says the country is ready to join the OPEC deal. According to Mr. Putin, a freeze or even a cut in production is necessary to balance the market.

2. Russia's energy minister, Alexander Novak, says that the country is only considering an output freeze. Oil production cut is not discussed.

3. Igor Sechin, head of the state-owned oil company Rosneft, says his company will not cut production and plans to raise production next year. He also adds that OPEC countries are unlikely to cut production.

4. Russian minister of finance Anton Siluanov does not believe that OPEC deal will lead to upside in oil prices. Russian three-year budget plan is based on the price of $40 per barrel, in stark contrast by mostly bullish statements by other Russian government officials.

It's easy to get lost in conflicting messages if you don't understand the realities of the Russian political and media life. However, it's not complicated and rather easy to explain. Here's my explanation.

It is widely believed in Russia that you can target a message to a certain audience and the rest of the audience will stay in the dark. You can speak to other government officials and interest groups, you can speak to local businesses and to citizens. The system works well when the government sends, for example, conflicting messages to citizens and to businesses. The average citizen does not read business press and businessmen do not care about what is shown on a state TV.

The system works wonderfully inside the country but backfires on the international front. International news agencies gather opinions from multiple speakers and the resulting message is absurd. However, if you know who is speaking to whom, you can easily get the signal.

1. President of Russia is talking to other oil producing countries. The signal is that Russia will continue supporting oil prices verbally and through real actions if it is possible.

2. The Energy Minister speaks to professionals, just like the absolute majority of Russian ministers. Oil production cut is plain impossible now due to the country's harsh climate. Oil production freeze is possible through project delays and, as Russia really needs higher oil prices, it is the most viable outcome.

3. The head of Rosneft speaks to competitors like Lukoil inside the country. The message is that if production freeze is negotiated, the burden will be on others, not on Rosneft.

4. Russian Minister of Finance speaks to the government. The message is that Russia has no money to spare on gigantic projects and that everyone should increase their efficiency and live within their means. Systematic calls from Ministry of Finance, Ministry of Economic Development and the Central Bank on $40 oil are not a view on oil prices, but a call for other decision makers for financial discipline.

You can call this Kremlinology but in fact it's pretty simple once you get accustomed to it. The custom of choosing the target audience and adjusting the message accordingly has backfired many times for Russia on the international front, but the habit lives on and will continue for the foreseeable future. As far as oil investors are concerned, the interpretations are simple and do not require any in-depth knowledge of Russian politics.

Russia is not a swing producer and has no intention to turn into a swing producer due to the climate. The country is certainly not happy with current oil prices, and will continue to support them through verbal interventions, as history shows that they work. Russia is pumping oil at a record pace and, most likely, has little room for more improvement, hence the production freeze is not a big concession for Russia. You can expect that Russia will join any freeze deal at current production levels but will likely never agree to a production cut. You can also save your time on reading various statements by Russian officials as most of them are targeted on groups inside the country.

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.