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Oil Rises: Price Of Crude Jumps After Russia Hints OPEC Is Up To Its Old Tricks

By Alap Naik Desai
Published on: 04:36 PST, Feb 13, 2016

Oil usually jumps in international market when OPEC, the Middle Eastern cartel controlling world’s bulk oil supply, decides to make the black gold a little dearer. With Russia implying Saudi Arabia could agree that oil-producing countries cut output to stem the free-fall, global oil prices jumped substantially.

Global oil prices jumped 12 percent within a single day, riding high on the alleged news that OPEC could soon rein in production and arrest a massive supply glut in the world market. The rapid surge in stock markets fueled perceptual risk calculations. Interestingly, though the oil prices jumped 12 percent within a single day, they are poised to end the week on a bleaker note, by being down as much as 5 percent, reported Yahoo.

For a year and half, oil prices have been plummeting as OPEC refused to take any action. However, a report indicates Russian officials have decided they will soon talk with Saudi Arabia and other members of OPEC about reducing output to stop the downward spiral of oil prices. The report adds that Russia’s energy ministry conducted a meeting with the country’s top industry leaders. The ministry wanted to know their opinion about having a joint discussion and possible cooperation with OPEC countries.

While Russia remains a large oil producing nation, American oil producers have been pumping increasing quantities of shale oil and this has put tremendous pressure on the prices that have continually fallen for more than a year. OPEC members had strongly remained committed to producing even higher amounts of oil despite falling prices. Their strategy seemed simple – drive out competition. As prices remained low, OPEC’s competitors couldn’t sustain operations for prolonged periods of time and would back out, reasoned the countries.

Interestingly, while it appears Russia showed interest in taking the first step, it is Saudi Arabia who might need the oil prices to stop falling and rise again, reported La-Kabylie. Saudi Arabia, the leading country in OPEC (Organization of the Petroleum Exporting Countries) reported a record state budget deficit of around $100 billion. The budget is heavily dependent on the oil exports and the falling prices have put a tremendous pressure on the country’s foreign exchange. On the other hand, The United Arab Emirates’ energy minister said OPEC was willing to cooperate on an output cut, reported The Wall Street Journal.

Since mid-2014, the oil prices have fallen almost 75 percent. Within just a year and a half, crude prices have reached record 12-year lows. Such an unprecedented free fall may not last long, reasoned Frankfurt-based Commerzbank,

“We expect declining U.S. oil production, in particular, to drive the oil price back up to $50 per barrel by the end of the year.”

With the current scenario, the once rivals could be forced to unite to fight the market glut. Saudi Arabia had so far remained adamant and refused to lower its production, forcing the oil prices to fall to $27 a barrel. However, according to FGE Chairman Fereidun Fesharaki, global oil production in the next 12 months could fall as much as 1.5 million barrels a day. Incidentally, Fesharaki thinks majority of that reduction could come from American shale oil producers.

Besides Russia, countries like Venezuela and Nigeria have long pleaded with OPEC to reduce output to stop oil prices from falling to such lows; it becomes difficult to stay in the market, reported Reuters. But OPEC showed no signs of budging, until now.

Oil prices have already shattered predictions and are way below than their normal levels. This has even forced many companies to scale back their projects to increase dependency on renewable energy resources like solar and wind as oil is much cheaper.

[Photo by Ken James/Bloomberg/Getty Images]

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