Disrupt and escalate

It was a black Friday for the oil market:

OPEC and non-OPEC allies failed on Friday to agree on how much oil production to cut amid the coronavirus outbreak, with Russia reportedly refusing to give the green light to the deepest supply cuts since the global financial crisis.

Worse than that:

Not only did OPEC and key partner Russia not agree to additional output curbs, but starting in April, current limits of 2.1 million barrels per day will no longer continue.

More details from the FT:

…Moscow’s refusal to agree deeper cuts was a deal-breaker this week, demolishing a Saudi plan to increase their size and prolong the curbs until the year-end…

…Moscow also eyed an opportunity to damage rival US shale producers and the wider American economy, said three people familiar with the discussions in Vienna.

“Russia has had enough of the shale guys living off Opec-plus,” said one person familiar with negotiations…

This outcome was unexpected and shocked the oil market. Why did Russia take this course? I wouldn’t rule out something seriously untoward, such as plans to seize the Baltics and/or Ukraine/Belarus, in which case the current state of the oil market wouldn’t be the Kremlin’s primary concern. But in this insane scenario, wouldn’t it be logical (madmen can be highly logical within their framework of reference) to avoid any warning signs to the world? Business as usual would make more sense than an advance bombshell.

Let’s hope this nightmare never materializes. Perhaps Russia merely wishes to stop the shale producers from free-riding on OPEC+ production cuts. It may expect US output growth to slow down or turn negative as a result, at least for a while. This is achievable although the potential cost to Russia may exceed the Kremlin’s estimates. Moscow may even hope for a collapse in the shale segment and a steep decline in US oil and gas output, which isn’t going to happen any time soon, as the Saudis have already found out for themselves.

The Kremlin may also be looking at this situation from the sanctions angle: “With flat production, we keep exporting more to China and less to the West. Others are adding production capacity while the prices are high. One day, they will have enough capacity to replace our exports to Europe and then the US would sanction us like they sanctioned Iran and cut us off that market for good. To remain irreplaceable, we need to grow our market share.”

At any rate, a risky, disruptive move to put it mildly.