BBC - Russia cut prompts oil price surge

Russia is the world's second largest crude oil exporter

Russia has agreed to cut its oil exports by 150,000 barrels per day from next year.

Crude oil prices at London's International Petroleum Exchange surged immediately after the news.

The benchmark Brent crude oil price gained over $0.80 to reach $20.25 a barrel shortly after the decision, but later fell back to close at about $19.20.

The oil producers' cartel Opec, the Organisation of Petroleum Exporting Countries, welcomed the decision as "really good news".

Russia's decision to increase its export cut, from a 50,000 barrel a day offer made earlier, is likely to trigger supply squeezes by Opec.

While Opec members had earlier agreed a cut of 1.5 million barrels per day, the implementation of the reductions was conditional on nations such as Russia and Norway also trimming output.

Key talks

Russia's export cut was agreed on Wednesday at talks between Russian Prime Minister Mikhail Kasyanov and the heads of the country's biggest oil companies.

The talks followed efforts by Opec to underpin crude oil prices, which in November hit a 29-month low.

The cartel has put considerable pressure on non-member countries to co-operate in combatting the price fall.

No-win situation

But while Norway and Mexico soon agreed to cut production by 150,000 barrels a day each, Russia held out for a smaller reduction.

The Russian state budget is hugely dependent on the oil price and loses up to $800m a year for every $1 fall in the price of a barrel of crude.

And Russian oil companies have proved keen to see returns on the invested billions of dollars invested improving and expanding facilities.

But with Russia's reluctance sending the oil price well below the $23.50 level the country had budgeted for, the Kremlin was left with little choice but to offer a compromise, observers said.

Scepticism remains as to the true nature of the Russian cut.

"Opec would really like a production cutback, they have been offered an export cutback... are they actual cutbacks or cutbacks from planned exports," Dresdner Kleinwort Wasserstein's Mehdi Varzi told the BBC's World Business Report.

He pointed out that Russian oil exports fall in winter anyway, as domestic demand rises.

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