The GERM Report

-Russia looks like it may balk on long-term OPEC+ tightening.

-IEA warns the energy sector may be behind the curve once recovery takes hold.

A hint in the Russian media that suggested the Kremlin might not be on board with extending the OPEC+ curtailments beyond June sent the price of crude oil lower in early Wednesday trading. Russian Energy Minister Alexander Novak vetted the stance among his peers recently, though there were few formal indications from the government on the direction of policy. That left it to some tea-leave reading on the road ahead. Meanwhile, the IEA warned that underinvestment in the energy sector would have a negative impact on the eventual economic recovery. The former could rekindle concerns about a glut, while the latter would leave resurfacing economies hungry for supplies. The tug-of-war could provide a level of balance, as the pricing structure has shown over the last few sessions. Gone are the days of double-digit swings in the price of oil.

The price for Brent crude oil was down 1.96% as of 8 a.m. ET to trade at $35.46 per barrel, erasing the gains from the previous session. The market focus on Tuesday was on robust holiday activity in the United States and heightened geopolitical tensions. The focus Wednesday is clearly on supply.

Novak met Tuesday with domestic energy companies to discuss OPEC+ restraint ahead of next month’s meeting of the production group in Vienna. A survey of Russian businesses taken from February to March showed about 70% of the respondents felt pessimistic about the economy as demand destruction set in. Russia’s central bank governor, however, said the emerging sense of optimism was growing contagious, but mood tends to run ahead of real-world developments. On Wednesday, Russian Minister of Economic Development Maxim Reshetnikov said economic activity in the country was about 80% of what it was before the coronavirus pandemic forced large-scale closures. Much of the economy, however, remains “frozen.”

“At the same time, the epidemiological situation is gradually improving,” he said. “This means that now there are opportunities to remove previously adopted restrictions in stages, and regions take advantage of these opportunities.”

The removal of “previously adopted restrictions” could in theory extend to OPEC+ commitments to sideline some 10 million barrels per day from the global market. Russia early this year balked on pandemic-driven decisions on production, but eventually acquiesced as crude oil prices tumbled into the mid-teens. As drafted, participants hold to the 10 million bpd mark through June and then ease back to 7.7 million bpd in restraint from July through December. While Novak was mum on the outcome of Tuesday’s discussions, Russian presidential spokesman Dmitry Peskov said the current arrangement was working because the worst fears for the market never materialized.

Given Russia’s influence, that would indicate OPEC+ producers may get the green light to ease back on restrictions by July, sending more oil into a recovering market. Most estimates see a gradual recovery emerging in the global economy during the second half of the year, with growth returning to positive territory by 2021. Balancing the return of production for OPEC+ members is word from the International Energy Agency that investments are well behind the level needed to ensure adequate supplies once economic recovery takes hold, which is expected to be U-shaped. Investments in oil and gas are expected to fall off by some 30% this year, opening the prospects for a tighter market once demand returns. Coupled with easing restraint from OPEC+, it could indicate the $30-something market will stick around.