Russia will face a tough choice in talks with OPEC next month as an increasing number of its valuable oil wells lie idle.
Almost 4 percent of Russian production capacity isn’t being used, Citigroup Inc. said in a report on Wednesday. That raises questions about how the country will approach its June summit with OPEC amid growing signals of a tighter market, including shrinking global inventories and possible supply losses from Iran.
“The Kremlin faces the dilemma of either continuing to extend” output cuts or allowing companies to boost production, Citi analysts said. “Either way, Moscow is flexing its muscles globally with oil as an instrument of strategic policy.”
Russia will meet its OPEC allies next month in Vienna, where the signatories to 2016’s landmark deal to cut production will discuss the future of the accord. Several Russian companies have in the past questioned the wisdom of prolonging output curbs when oil prices are rising.
The country has about 11.3 million barrels a day of production capacity, of which an estimated 408,000 barrels a day are idle, according to Citigroup, which cited growth in new oilfield startups. That puts it in second place behind Saudi Arabia, which has 2.12 million barrels a day of spare capacity, according to the International Energy Agency.
The Organization of the Petroleum Exporting Countries and its partners have succeeded in their 16-month campaign to clear a global glut, with inventories now below the five-year average for the first time since 2014, the IEA said Wednesday. The involvement of Russia has been crucial to the effectiveness of the cuts, which helped end a three-year price rout.
While the curbs are formally in force through the end of 2018, acting Russian Energy Minister Alexander Novak said last month he wouldn’t rule out some easing of the cuts this year, depending on the market.
The biggest unknown for the market now is the impact of renewed U.S. sanctions on Iran’s crude supplies, after President Donald Trump pulled out of a global nuclear accord with the country last week. Saudi Arabia has indicated it could make up for potential losses in Iranian output, although any decision requires talks with its partners.
Citigroup’s estimate of Russian spare capacity is higher than that of Renaissance Capital, which judged it to be about 215,000 barrels a day last month. Rosneft PJSC, which pumps more than 40 percent of Russia’s oil, has said its spare capacity exceeded 100,000 barrels a day at the end of March, while Citi estimates it’s around 220,000. That’s despite growth in drilling, which Citi describes as “robust.”
Russia’s Energy Ministry declined to comment on the position it’ll take at the June meeting. Novak said this month the country remains “fully committed” to bringing balance to the market, even though ministry data showed two months of overproducing, breaching the country’s target under the OPEC deal.
Novak will meet his Saudi counterpart Khalid Al-Falih in St. Petersburg next week.