According to Money Morning Global Energy Strategist Dr. Kent Moors, this is a critical development for the energy industry.
Because if OPEC and Russia don’t solve the low oil price crisis, numerous global economies could be in danger…
Why OPEC and Russia Haven’t Joined Forces Yet
Saudi Arabia – the de facto leader of OPEC – has tried to establish relations with Russia for years. That’s because Saudi officials want in on Russia’s massive oil reserves and geopolitical dominance. After all, adding Russia to the 12-member cartel would boost OPEC’s market share by about 33%.
But Saudi Arabia and Russia have constantly fought over market share. Their main battleground in recent years has been Asian exports. Energy demand is expected to skyrocket through 2035 in Asia, and both countries are trying to increase their export numbers there.
The conflict between the two came to a head in November 2014, when Russia refused Saudi Arabia’s request to cut production. Russia declined in order to defend its own share of the oil market. OPEC followed suit by maintaining the cartel-wide output at 30 million barrels a day.
Since oil exports are its main source of revenue, the Russian economy has crumbled alongside oil prices in 2015. According to the IMF, Russia’s energy exports made up 65% of all exports, 52% of its federal budget, and 14.5% of its GDP last year.
But Russia isn’t the only major exporter suffering. Oil-rich OPEC members like Iraq, Libya, and Venezuela have been beaten down since their economies only prosper when oil costs above $100 a barrel.
If these countries don’t fight to revive oil prices within the next year, their citizens might start fighting back themselves. That’s why OPEC and Russia could team up.
“A transition of the crisis to the political realm would mark the beginning of a Latin American parallel to the Arab Spring,” Moors explained. “But investors might find that Russia’s new willingness to talk production cuts with OPEC provides a break in the weather.”
Here’s how the OPEC and Russia meeting could improve oil prices…
How the OPEC and Russia Meeting Will Help the Oil Market
Russia could boost crude oil prices by convincing Saudi Arabia to reduce its short-term production.
You see, overproduction has been a huge problem across the cartel this year. On Oct. 12, OPEC reported it produced 31.57 million barrels a day in September. That’s up 109,000 barrels a day from August and above the proposed cap of 30 million barrels a day. It was also the highest monthly output since April 2012.
Since other cartel members are oversupplying the market, the Saudis are boosting their output to maintain its revenue share.
“The convoluted rationale behind this tactic has strained credibility, but the real reason is simple: The Saudis cannot prevent other OPEC nations from raising volume in a desperate attempt to collect revenue,” Moors said. “So they need to appear to be leading the effort.”
At the OPEC and Russia meeting, Russia could persuade Saudi Arabia to lower production while Russia boosts production. Saudi Arabia cutting its production would ease the tensions of the other OPEC member countries on the brink of revolt.
It would also demonstrate Saudi Arabia’s efforts to improve oil prices and show its leadership abilities to other members.
The reduced output from OPEC’s largest producer would ease the glut and cause oil prices to bottom out. From there, they will start their long-term rebound as demand increases into 2016.
“The stage now seems set for a Russian-Saudi meeting to precede a broader OPEC session,” Moors said. “That should be enough for crude prices to find a floor and improve.”
The Bottom Line: As prices hover under $50 a barrel, OPEC and Russia are forced to determine a mutually beneficial way to strengthen the oil market. With the OPEC and Russia meeting in a couple weeks, investors are wondering if the sit-down will boost oil prices.
Russia will need to play nice in order to convince Saudi Arabia to cut production. If that happens, demand will outpace supply more quickly and start the long-term price rebound.
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