Wednesday, December 17, 2008

Strange bedfellows...

Russia and OPEC in coordinated production cuts.

Very interesting, and most likely very temporary. With both countries reeling from the collapse in oil prices (and the corresponding collapse in their investment portfolios magnified by greater domestic spending commitments made when oil was well over $100 per barrel), an opening of the cartel to new membership was inevitable.

However look at the incentive to "cheat" here...offering a lower price product to gain market share would be a rational move as well. This "coordination" will not last.

The Kremlin will risk throwing away its membership of the G8 group of leading economies by acting with the cartel in reducing supplies.
Russian leaders have sent strong signals that they will agree the unprecedented move at the same time as Opec convenes an emergency meeting in Algeria on Wednesday.
Russia has been under pressure from Opec to cut as many as 300,000 of the 9.75 million barrels it produces each day to help maintain prices.
Dmitry Medvedev, the Russian president, has even hinted that his country – the world's largest oil producer and second largest exporter – could join Opec despite the potential political fall out.
In an attempt to arrest a 66 per cent slide in the price of oil, the cartel could this week announce a record cut of 2.5 million barrels per day. A barrel of oil was trading at $50 on Monday, nearly $100 off July's record high.
Russia, which has always resisted joint action with Opec in the past, risks incurring the wrath of the United States if it goes ahead. Analysts warn that Congress could lead a campaign to have Russia thrown out of the G8.

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