In an effort to reduce a global crude oil glut and boost prices, Members of the Organization of Petroleum Exporting Countries and non-OPEC countries, especially Russia, reportedly decided on May 25 to extend cuts in oil production by 1.8 million barrels per day by nine months to March 2018.

However, oil prices dropped as the market had been hoping oil producers could reach a last-minute deal to deepen the cuts or extend them further, until mid-2018, Reuters reported. In New York, the price of crude fell to $48.75 per barrel, a fall more than 5% while the price of Brent in London was at 51,41, falling by 4.71%.

An OPEC and non-OPEC agreement in December to cut production has helped to push oil back above $50 a barrel in 2017. Low oil prices have affected the economies of many oil-producing countries whose budgets depend on oil revenues, including Saudi Arabia.

This year’s rise in oil prices, however, has prompted US shale producers to restart or boost production thus contributing to the global oil glut. “We considered various scenarios, from six to nine to 12 months, and we even considered options for a higher cut. But all indications discovered that a nine-month extension is the optimum,” Saudi Energy Minister Khalid al-Falih said, telling a press conference that he was confident oil prices would recover as global inventories shrink, including because of declining Saudi exports to the US, according to Reuters.

Chris Weafer, co-founder of Macro-Advisory in Moscow, wrote in a note to investors on May 25 that the ruble collapse saved the Russian oil sector. Costs are largely in rubles while revenues remained in US dollars, Weafer explained, adding that sanctions and the lower oil price also pushed oil companies to reduce costs and improve operational efficiency.

The Russian government’s Fiscal Plan aims to reduce reliance, and vulnerability, to oil. The target is to cut the breakeven oil price to $40 per barrel by 2020 and to reduce oil and gas taxes to 35% of the budget total. In 2013, the budget needed $115 per barrel to balance and oil and gas taxes exceed 50% of the total, Weafer wrote.

Output has grown despite sanctions and low oil price, Weafer wrote. In August 2014, the average daily output was 10.84 million barrels. At last November’s pre-OPEC deal peak, the daily average was 11.58 million barrels.

Russia’s cooperation with OPEC has improved. Russia has cut 210,000 barrels day of the 300,000 barrels day agreed with OPEC, according to Weafer. The oil majors, initially opposed to the deal, now support an extension into 2018.

Energy and politics are aligned, Weafer wrote, noting that one of the Kremlin’s core priorities is to diversify political, trade and investment relationships.

“Many of the political deals will likely involve energy deals to cement the closer ties. This was the case recently with Qatar and previously with India and China,” wrote, adding that he expects to see more such deals with Japan and Saudi Arabia, for example, as Moscow’s ties with those countries improve.

Localisation in the oil sector is about national security and building a domestic capability in equipment supply and services, Weafer wrote.

He also noted that Russian oil majors are looking for diversification and expansion in international markets. Many will be via joint ventures with international companies and that too will open up the possibility of joint ventures with the Russian partner in the domestic market.

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