Russia increases oil production, offsetting OPEC's cuts

Russia, which was initially expected to cut production in 2009, in conjunction with slack global oil demand, has actually increased production, and thus profited from a gap created by OPEC production cuts.

Russia's exports of crude and refined product increased to about 7.4 million barrels per day (bpd) in the second quarter, according to data released by Russia's Energy Ministry, Bloomberg News reported Tuesday.Oil traded up $2.02 to $70.02 per barrel on talk OPEC will maintain current production quotas, which institutional investors interpret as bullish for prices, given likely rising global demand next year.

Investors and oil market analysts had expected Russia's production to decline this year after Prime Minister Vladimir Putin's deputy, Igor Sechin, told OPEC in December 2008 that Russia was ready to limit production to support prices, Bloomberg News reported.

Russia's oil production unexpectedly rises

However, Russia's total oil production, which includes oil consumed domestically and exports, in fact has risen in 2009 after years of under-performing results, RIA Novosti reported. During the fist six months of 2009, total oil production increased to an average of 9.51 million bpd.

OPEC cut production three times, or by 4.2 million bpd, to reduce excess supply in oil markets, due to reduced demand stemming from the global recession, the world's worst economic slowdown since the end of World War II. Saudi Arabia, OPEC's largest producer, is currently pumping about 7 million bpd and has about 2.75 million bpd in spare capacity.

OPEC is meeting in Vienna this week to discuss oil market conditions and the group is expected to keep production quotas the same, The Associated Press reported Tuesday. Comments by Saudi Arabia's Oil Minister Ali Naimi that oil markets were "in good shape" were echoed by Kuwaiti Oil Minister Ahmed Al Abdullah Al Sabah, suggesting that OPEC is, at minimum comfortable with oil prices at this level, about $65-70 per barrel.

During the leveraging boom, oil hit a record high of $147.27 per barrel in the summer of 2008, then plummeted to $35 per barrel this winter. Oil's price rise to more than $65 in the second half of 2009 largely discounts a U.S. and global economic recovery; any sign of a delayed recovery in either economy would result in falling prices, oil analysts generally agree.

Further, although some OPEC members have voiced displeasure over low production quotas, OPEC's cutbacks during this recession have held, with members maintaining production discipline. That's in stark contrast to previous recessions, when weak demand and lower prices resulted in "cheating" by some OPEC members -- pumping more oil than the agreed-to quota, in order to reap more revenue; that practice ultimately lowered oil prices even more, as it increased the amount of oil in global markets. Conversely, during the 2008-2009 demand downturn, OPEC's production discipline has been strong.

Oil Analysis: Russia needs the dough, so oil from the north will flow. Russia, not a member of OPEC, needs the additional hard currency money from increased oil production to help rebuild government coffers hurt by the slowdown in Russia's economy. Earlier in 2008, the nation had signaled it would cooperate with global oil producers regarding production cuts, but the recession proved to be too severe. Numerous social programs and other operations in Russia are dependent on oil revenue; for example, the revenue is also funding the modernization of Russia's infrastructure -- a critical system upgrade in the nation's effort to diversify its economy.

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