New year, same old market.
Only now we’ve finally got some momentum going in oil. Prices surged above $55 per barrel on the first trading day of the year on news that OPEC had not only agreed to a production output, but was actually going through with it.
If you’ve been watching the market the last few years, you’ll know those are two entirely different things. But the issue has finally come to a head; the group can’t afford to keep suppressing prices as it’s been doing since 2014.
By now I'm sure you've guessed that “the group” mainly means Saudi Arabia. The country’s income is tied a great deal to oil, though it’s working to reduce its reliance on the commodity as much as possible.
And the House of Saud isn’t the only oil royalty suffering at the hands of low prices...
Russia Takes a Hit
Late last year, we saw yet another OPEC meeting come and go, only this time it ended with a real decision: the group called for a global oil production cut.
For the first six months of 2017, 1.2 million barrels per day will be cut from various OPEC members’ production levels, not including Libya and Nigeria, which had already seen production decreases due to unrelated circumstances over the past year.
The vast majority of this is, predictably, coming out of Saudi Arabia’s share, and will still leave the country with production levels above 10 million barrels per day if it cuts from its record December numbers.
But it’s not just OPEC that’s participating in the cut. The group stated that it would only agree if other non-members were to join it in reducing output, and several countries hopped on board.
One of these was Russia, another top global oil producer. Putin has long been a supporter of a production cut and has been a notable part of many of the past year’s meetings on the subject.
Taking a look at his country’s finances, it’s no wonder why.
Russia’s economy, much like Saudi Arabia’s, is largely tied to oil exports. In 2014, the country’s export revenues amounted to $449 billion. That number dropped 33% to $331.5 billion in 2015.
More than half of the country’s exports are tied to oil, including crude oil and refined petroleum products.
When oil prices were cut to less than half of their 2014 highs, Russia lost a huge chunk of its income all at once. It’s been dealing with the effects of this loss ever since.
In 2015, the country ran on a budget deficit of nearly $25 billion, 2.5% of its GDP.
Even though earlier expectations called for the 2016 deficit to be smaller, the latest numbers are estimating that it grew to between 3.5% and 3.7% of GDP instead.
This was due to one major mathematical flaw:
"Our budget will be balanced when the price is $82 per barrel, so there are still a lot of decisions to be made when it comes to budget policy," said Russian Finance Minister Anton Siluanov in January last year.
With prices bouncing around $40 for most of the year, $82 was really a stretch. Even Business Insider’s recalculation that the country could at least break even at $68 per barrel was a bit much to hope for, considering we’re only just now entering the real recovery.
Will It Cut?