What's going on?
The oil price has collapsed by 70% in the past 18 months and that’s putting a serious strain on governments that rely on the oil sector for much of their funding. Russia is one such country and on Thursday it suggested that it wants to agree with other oil producers to reduce the amount of oil they collectively drill – and thus try to boost the oil price.
What does this mean?
The likelihood of there being a pact to cut oil production seems, at this stage, fairly unlikely. So, the news itself perhaps isn’t that important. However, it shows how difficult things have become for Russia due to the low oil price: its currency has fallen more than 50% versus the US dollar since the oil selloff began. The government is expected to lose about $38 billion in 2016 – a figure which could easily increase if oil stays this low. Russia’s economy appears to be unsustainable and that means that either the oil price needs to rebound or the economy needs substantial reforms (which is not an easy process).
Why should I care?
The bigger picture: Russia is not the only country to face such pressures. Saudi Arabia, which was the chief architect of the decision to produce more oil, is another such country. But Saudi Arabia, presumably, thinks that the oil price will eventually rise as a result of other, higher-cost producers being forced to shut down their operations (because the low oil price makes them go out of business). And it expects that this will happen before the pressure on its own finances become too great.
For markets: Oil is up 30% in the past week – that shows how many investors were betting on it going down! A lot of the oil price rebound has occurred because of ‘short-covering’. This is when traders initially bet on something, like oil, declining in price, but then realize the price is actually going up and frantically buy oil in order to minimize their losses. However, that doesn’t mean that oil can’t go back down.