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Page added on December 21, 2015
Russian Oil Production Hits Record As Saudi Gambit Fails
In late October, we noted that for the second time this year, Russia overtook Saudi Arabia as the biggest exporter of crude to China.
Russia also took the top spot in May, marking the first time in history that Moscow beat out Riyadh when it comes to crude exports to Beijing. “Moscow is wrestling with crippling Western economic sanctions and building closer ties with Beijing is key to mitigating the pain,” we said in October, on the way to explaining that closer ties between Russia and China as it relates to energy are part and parcel of a burgeoning relationship between the two countries who have voted together on the Security Council on matters of geopolitical significance. Here’s a look at the longer-term trend:
You may also recall that Gazprom Neft (which is the number three oil producer in Russia) began settling all sales to China in yuan starting in January. This, we said, is yet another sign of the petrodollar’s imminent demise.
On Monday, we learn that for the third time in 2015, Russia has once again bested the Saudis for the top spot on China’s crude suppliers list. “Russia overtook Saudi Arabia for the third time this year in November as China’s largest crude oil supplier,” Reuters writes, adding that “China brought in about 949,925 barrels per day (bpd) of Russian crude in November, compared with 886,950 bpd from Saudi Arabia.”
This is an annoyance for Riyadh. China was the world’s second-largest oil consumer in 2014 and closer ties between Moscow and Beijing not only represent a threat in terms of crude revenue, but also in terms of geopolitics as the last thing the Saudis need is for Xi to begin poking around militarily in the Arabian Peninsula on behalf of Moscow and Tehran.
As we documented in “Saudis Poke The Russian Bear, Start Oil War In Eastern Europe,” Riyadh has begun to encroach on Moscow’s markets in Poland. Here’s what Bloomberg wrote back in October:
Poland has long been a client of Russian oil companies. Last year, about three-quarters of its fuel imports came from Russia, with the rest from Kazakhstan and European countries. Poland, however, is at the center of efforts to reduce the European Union’s dependence on Russian energy.
A new and reliable supplier is a godsend. As for the Saudis, they need to expand outside Asia where demand is falling.
This could turn into a more active shoving match between the world’s two biggest oil exporters, which already are at odds over the Syrian conflict.
Indeed, one could plausibly argue that one of the reasons the Saudis moved to artificially suppress prices last year was to sqeeze Putin and ultimately force The Kremlin to give up their support for Assad. As The New York Times put it, a dramatic decline in crude prices has certain “ancillary diplomatic benefits.”
Unfortunately for Riyadh, the strategy hasn’t worked. In fact, it’s backfired in more ways than one.
First, Saudi Arabia is facing a fiscal crisis as Riyadh’s budget deficit balloons to 20% of GDP, forcing the kingdom to tap the debt market in order to offset the SAMA burn.
Second, Putin not only refused to give up his support for the government in Damascus, he actually doubled down by sending the Russian air force to Latakia. Meanwhile, Russia continued to pump even more oil, and as Bloomberg reports, Moscow is now producing at “the fastest pace since the collapse of the Soviet Union.”
“Russia’s unexpected oil bounty this year is the result not of a new Kremlin campaign but of dozens of modest productivity improvements across the sprawling sector. Even pressured by plunging prices, as well as U.S. and European Union sanctions that cut access to much foreign financing and technology, Russian companies have managed to squeeze more crude out of some of the country’s oldest fields,” Bloomberg writes, before noting that “Bashneft and other Russian companies working fields in the Volga River basin — some of the first to be discovered in Russia early in the last century — are benefiting from Soviet inefficiency as [the old motto was]: ‘whatever we don’t produce will be left for our children.'”
For analysts, Russia’s resiliency has come as a surprise. “I know of no one who had predicted that Russian production would rise in 2015, let alone to new record levels,” Edward Morse, Citigroup’s global head of commodities research said.
As for what it would take to curtail production, Mikhail Stavskiy, head of upstream at Bashneft PJSC which has been “the biggest single contributor to increased crude output this year,” says he doesn’t know. “I don’t know what the oil price would have to fall to for things to change dramatically. We’ve been through $9 a barrel and production continued, so if something like that happens, we know what to do.”
Indeed, thanks to the low cost of extracting crude from Russia’s oil fields in West Siberia and the devaluation of the ruble, production costs are rock bottom:
But not everyone agrees that this is sustainable. Some say efforts to improve efficiency have run their course and with financing for exploration scarce, further gains may be hard to come by. Interestingly, Bloomberg also notes that because Moscow takes “nearly everything above $30-$40 a barrel” on exports, producers won’t feel the impact of low prices until crude falls substantially below those levels.
“Russia will maintain its current oil production levels within the bandwidth of 525 million to 533 million tons next year, as the federal government’s budget is set on such production levels,” Stratfor’s Lauren Goodrich says, presaging more of the same in 2016.
The takeaway here is that the Saudi gambit failed to wrench market share away from the Russians and between the conflict in Syria, Moscow’s closer ties with Beijing, and Riyadh’s move to antagonize The Kremlin by encroaching on Russia’s eastern European market share, one shouldn’t expect Putin to back down any time soon. In short, if John Kerry and Riyadh did in fact plan to bankrupt the Russians by tanking crude prices, the effort was a miserable failure that resulted not only in a 20% fiscal deficit for the Saudis, but the destruction of American jobs in the oil patch.
We close with a bit of humor from Deputy Energy Minister Kirill Molodtsov:
“I will tell you when Russian companies are for sure going to decrease production — when oil costs $0.”
33 Comments on "Russian Oil Production Hits Record As Saudi Gambit Fails"
rockman on Mon, 21st Dec 2015 12:22 pm
“Russian Oil Production Hits Record As Saudi Gambit Fails”. And one could just as illogically say: Saudi Oil Production Hits Record As Russian Gambit Fails
Tom on Mon, 21st Dec 2015 1:23 pm
The long term consequences of the current trends may be that more and more of the Russian oil and gas goes permanently to China and the Europeans will be increasingly dependent on vulnerable to disruption Persian Gulf oil and gas. The Gulf region does not appear to be slated for long term stability. Will the Europeans ultimately brake with the U.S. and go with Russian oil and gas? A big, big game going on here.
Davy on Mon, 21st Dec 2015 1:51 pm
Tom, it is far from certain Europe and Russia will remain at odds. Putin is a man and men die or are pushed out. It is unclear where Russia would be without Putin. Who says Europe and the US will continue in the NATO alliance.
We are in a time of destructive change and these old 20th century arrangements and personalities are not defaults. They could change very quickly. Who knows where the US is heading. We are facing a recession and a potentially radical election. I do not think long term is the right word to use anymore. I am also not saying your view will not happen. My point is we are in uncharted waters.
JuanP on Mon, 21st Dec 2015 6:46 pm
I don’t make many mistakes, but I always like finding out when I do. In the forecasts that I made in 2014 about what would happen in 2015 I got two things wrong. I thought Russian oil production was going to fall slightly and instead it increased. The other thing I got wrong was that I thought the Kiev junta was going to attack Novorossiya again in the Summer and they didn’t because they had been beaten much worse than I thought in 2014. My bad!
I am open minded about next year’s Russian oil production. I think it will stay more or less where it is right now. It could increase or decrease slightly, but I don’t expect any big changes.
I think the USA will experience the largest fall in oil production of any country in the world in 2016, excluding any unforeseen, but possible, geopolitical events. I expect US oil production to fall as much or maybe even more than all the rest of the world put together.
JuanP on Mon, 21st Dec 2015 6:47 pm
Tom, I agree with your comment.
makati1 on Mon, 21st Dec 2015 8:15 pm
Russia is not hurting as much as the West would like and is probably going to come out of this a stronger, more self-sufficient country. Putin is going to run Russia for years to come and years are all that are left for the failing West. Not even a decade. Maybe only one year, or less. 2016 is going to be very exciting. Are you prepared?
JuanP on Mon, 21st Dec 2015 8:23 pm
I agree, Mak. I expect Putin to get reelected and remain Russia’s president until 2024. It will take a miracle for the USA, Japan, and Europe to remain solvent until then. The USA and the EU may not even exist by then.
GregT on Mon, 21st Dec 2015 8:43 pm
The US Oligarchy’s plans appear to be backfiring. Expect War. More, and bigger.
Pete Bauer on Mon, 21st Dec 2015 9:32 pm
Russia can sell Oil, Natgas, Coal, Steel, Aluminum, Gold and every commodity.
Saudi can sell only Oil.
Now Iraq is ramping up their Oil production and targeting 10 million b/d of Oil.
No matter how much Oil comes to the World market, Chinese and other developing countries will absorb it.
Its just a matter of time.
JuanP on Mon, 21st Dec 2015 9:57 pm
Pete, I agree that Russia has many resources to use and sell while KSA does not. Russia is the biggest country in the world and has more natural and mineral resources than any other country in the world, and could be completely self sufficient if it wanted.
I have been hearing about Iraq’s plans to increase its oil production for many years, and by now I believe they will never produce much more oil than they produce today. IMO, they will never produce anything like 10 mbpd, not even close.
GregT on Mon, 21st Dec 2015 10:18 pm
Don’t forget about the export land model Peter.
https://en.wikipedia.org/wiki/Export_Land_Model
makati1 on Mon, 21st Dec 2015 11:38 pm
JuanP, I have to agree on the ME situation. I see a religious war there that will make the current skirmish seem tame. Every ME country is buying arms like there is no tomorrow. The teams are forming up. The game is in play.
Europe will soon have a very unreliable source of ME petroleum or NG, as I see it. East Asia will turn to Russia, the Central Asian countries, Africa and Venezuela. China may also develop the South China Sea. We shall see.
Truth Has A Liberal Bias on Tue, 22nd Dec 2015 12:38 am
Russia forecasts a budget deficit of 3% of GDP in 2016. That’s not unmanageable. USA is 2.5% in 2015. It was double digits a few years ago. Russia will be just fine.
makati1 on Tue, 22nd Dec 2015 4:42 am
Truth, I question any GDP number but I would trust Russia’s to be closer to the truth than the US. I suspect that most Western nations are in the minus GDP if honest numbers were posted. They keep moving the goal posts to look like they are solvent when all obvious signs say different.
Davy on Tue, 22nd Dec 2015 5:14 am
Lots of wishful thinking on Russia along with Putin admiration. We shall see how a country so reliant on commodities survives this likely never ending demand destruction cycle. Oil and commodities require a functioning economy and today’s economy means a global economy. The global economy is in a tailspin of deflation and instability.
Russia is economically stressed and involved in military actions and build ups. I see little to be upbeat about. I see more the same old wishful thinking we saw with the Brics a year ago.
Russia of all the countries on my doom meter is the best prepared for a collapse of globalism status quo. In the global status quo Russia is in poor shape. Oil, gas, and commodities are now a handicap for Russia. The key for Russia is getting from here to there. Putin is a capable manager so I suspect they will transition well.
Davy on Tue, 22nd Dec 2015 5:44 am
Here is the country who’s GDP is to be most suspect of:
http://www.zerohedge.com/news/2015-12-21/china-suspends-another-unofficial-pmi-data-release-make-major-adjustment
GregT on Tue, 22nd Dec 2015 8:25 am
The eCONomists current definition of GDP, will become even more irrelevant as a useful indicator of wellbeing as globalism winds down. What will matter more will be the ‘gross domestic product’ of individual locales. Those locales with the most available resources left, especially oil, will fare much better than those without. Globalism is a dead man walking.
Those countries who currently enjoy an inflated standard of living by exploiting the labor and resources of countries who do not, have the farthest to fall when globalism comes to an end.
marmico on Tue, 22nd Dec 2015 11:25 am
Don’t forget about the export land model Peter.
The ELM is a giant nothing burger.
The Saudi ELM model and the Saudi ELM empirics, 10 years ex-post.
Now do Russia instead of being a bloviating blathering blowhard.
Anonymous on Tue, 22nd Dec 2015 3:43 pm
More accurate to say: Russian Oil Production Hits Record As American\Saudi Gambit Fails
Good on Russia.Instead of rolling over and letting the americans ‘win’, they have actually increased production. Both the ‘saud’s and their US masters are learning that oil-based economic warfare is a two way street. If the US wants to fight endless(shooting) wars and economic wars at the same time, let them pay the full cost for both. The empire has this idea that if something worked once, or the first time, it will work every single time. Yes, manipulating the price of oil proved nearly disastrous for Russia the first the US tried it. This time, Russia is a better prepared. This is not to say riding out this attack has been or will be easy for RUssia, it wont be, but it wont be a repeat of the drunken, Yeltsin years either.
makati1 on Tue, 22nd Dec 2015 7:56 pm
Anonymous, you are correct. I just read a comment from a high level Russian that Russia survived $9 oil and can do so again. I wonder how many other oily countries can say the same?
JuanP on Wed, 23rd Dec 2015 5:09 am
China invests in Russian energy projects, http://russia-insider.com/en/business/china-investing-big-russian-energy/ri11986
JuanP on Wed, 23rd Dec 2015 5:12 am
Mak, I agree that the ME is probably the most overpopulated and fucked up part of the world. I think Peak Oil will inflict more pain there than anywhere else. I expect civil wars and revolutions to pop up all over that area.
JuanP on Wed, 23rd Dec 2015 5:19 am
Greg, I agree that GDP is a fucked up way to measure a nation’s situation. I have traveled through several countries, some rich and some poor, I never saw any connection between GDP and the people’s happiness. Once your basic needs are satisfied, more money tends to make people less happy, IMO. Most of the happiest people I’ve met in my life where poor, and most of the middle and upper classes seem to be unhappy and neurotic. I think there is a mostly inverse relationship between how much money you got and your level of happiness and mental health. The richest people are the least happy of all
JuanP on Wed, 23rd Dec 2015 5:27 am
Truth, I believe Russia’s economy has some of the strongest fundamentals of any national economy in the world. While they have suffered from the resource curse, they are now rapidly making up for it thanks to the USA instigated illegal economic sanctions.
Russia is growing stronger, more independent, and self sufficient every day. Putin’s European food embargo and import substitution programs are having very positive effects. Also, in three years they will finish paying all their debts to the West, and will never again need us for anything. This is all thanks to the USA’s extremely moronic foreign policy.
Davy on Wed, 23rd Dec 2015 5:36 am
I see Russia surviving a low oil price but survival is pretty vague. Russia is part of a global world like the rest of the global world. Everyone has their comparative pain. It is obvious the Brics are no better than the develops west suffering decay in their own special way.
Russia was going to decouple and break away from the west through China. China was never going to decouple. How does the second biggest economy decouple from the other largest component of global trade? It doesn’t because China must have global trade to survive “as-is”.
Russia’s decouple was a Bric decouple and that is dead in the water. Russia is now much worse off with surviving low oil prices because of the Putin adventures. Putin has committed Russia to expensive military actions and economic support of allies. You don’t just survive and pay for these things.
Russia’s real survival advantage is post status quo collapse. I would peg Russia as well placed to adapt to a post global world. Will Russia be doing well in this post status quo world? No. Russia will be surviving when others are failed states.
onlooker on Wed, 23rd Dec 2015 7:06 am
Plus if we look at the fact that GDP measures all income and revenue then we in fact are measuring and including statistics which reflect on harm being done to the welfare of people and consequent expense of that harm. Examples, car accidents, more jails, more health care expenses, higher taxes, more police and attorneys, more sales of bad products like cigarettes or Big Macs, more pollution derived from growth etc etc. So this is truly one of the most fallacious tools of the elite. I read once a quote from a person that the economy exists for the well being and welfare of people. We do not exists for the welfare of the economy yet it seems that way.
Davy on Wed, 23rd Dec 2015 7:30 am
I see a lot of GDP criticism until it supports an argument then some people are all over it as the best thing since sliced bread. Ozark rednecks call that double standards.
GregT on Wed, 23rd Dec 2015 8:48 am
“I see a lot of GDP criticism until it supports an argument then some people are all over it as the best thing since sliced bread.”
Some people have their heads firmly shoved up their asses then. GDP has been manipulated far beyond the point of being a true indicator of economic, or societal wellbeing.
Davy on Wed, 23rd Dec 2015 8:55 am
GDP is a widespread overused and manipulated indicator of status quo economic activity as such it has a comparative value. Those without their heads firmly shoved up their asses and capable of balanced thought will use GDP as a marker indicator for the status quo activity. There are few other indicators so widely used. GDP must be considered. It can be useful if digested and applied properly.
GregT on Wed, 23rd Dec 2015 9:36 am
“It can be useful if digested and applied properly.”
Absolutely. It is an indicator of how quickly a society is hurtling itself towards a dead end. Infinite exponential growth in a finite environment is a physical and mathematical impossibility. The status quo is not sustainable.
JuanP on Wed, 23rd Dec 2015 3:29 pm
ConocoPhillips quits Russia. And the rift between East and West continues getting wider every day. https://www.rt.com/business/326873-conocophillips-rosneft-oil-russia/
JuanP on Wed, 23rd Dec 2015 7:26 pm
This is an excellent link to an article by Ben Aris on Russia’s economy, oil prices, and global geopolitics. It is a very interesting read. While I see the geopolitical issues differently, the economic analysis is very good, IMO, and the comments on oil are interesting, too. http://www.intellinews.com/another-tough-start-before-return-to-growth-87000/
JuanP on Wed, 23rd Dec 2015 7:30 pm
Link to article on Saudi Arabia. https://consortiumnews.com/2015/12/22/the-coming-saudi-crack-up/