Oil Markets Pay Scant Attention to Russia

Wall Street Journal features a recent article that looks closer on the oil situation in Russia. It concludes that oil markets may not be pricing in the extent of dwindling output in the world's biggest producer, Russia, a factor that could buoy prices later this year, traders and analysts said.

Last week, the Russian government predicted 2009 oil output of 9.68 million barrels a day, a 1.1% annual drop. But a Dow Jones Newswires survey of 12 analysts puts the decline at more than twice that rate, with the most pessimistic predicting a slump of 7%.

"We believe [Russia] will add to the growing global supply curtailment by the end of 2009, a factor which isn't fully appreciated by the market," said Oswald Clint, an analyst at Sanford C. Bernstein in London.

Since 2000, oil companies ramped up production at fields in West Siberia -- the source of most of Russia's oil -- by bringing in new technology.

But as output from those fields declines, big investments are required to tap new deposits in more difficult-to-access areas.

Moscow-based Alfa Bank reckons the annual rate of decline in production at Russian oil fields already in operation totals 15% to 17%, compared with a rate of 7% in 1998. The higher rate implies producers would need to bring 1.5 million barrels a day in new output on stream just for production to stay flat.

"That's just not going to happen," said Alfa's head of research, Ron Smith.

Read more: Wall Street Journal Online