The limits of consent: why the oil exporters are forced to negotiate

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Reducing production, OPEC and partners are unable to achieve a sustained increase in oil prices, but go to even shorter few ready. The extension of the existing agreement was in these circumstances, the obvious compromise

The announcement of the agreement of Russia and Saudi Arabia to extend the agreement to reduce oil production a bit stirred up prices. However, expectations of extension of the agreement of OPEC countries and other oil producers have long been played out: everybody expected the extension at the OPEC meeting on 25 may.

Getting rid of excess

OPEC and its allies have managed to remove from the market excessive excess oil. If in the fourth quarter of 2016 had a significant excess of production over demand, now the situation is about balanced. However, stocks in oil-importing countries are at record levels, and some growth in oil prices spurred shale production in the United States. The international energy Agency (IEA) forecasts growth of American extraction on 500 thousand Barr. per day compared with the end of last year in this quarter and 800 million in the fourth quarter of this year. And the growth in global demand slows, the IEA believes that this year it will grow by only 1.3 million barrels. a day to 1.7 million barrels. in the past year.

Therefore, to achieve a breakthrough price situation, it is necessary to cut production, stronger than envisaged in the agreement of 1,7–1,8 million Barr. But, it seems, except the Saudis no one to do it seriously is not ready, and it is clear why. Because for six months significantly increase the price of oil has failed and they’re around level slightly higher than November’s, among oil producers, there is great dissatisfaction with the fact that the agreement OPEC is almost working. The manufacturers lose money. Yes, over the past few months, they have earned a little due to the increase in oil prices, but now this effect is virtually nullified, and if he was? Let’s look, for example, the report of “Rosneft” IFRS in the first quarter of this year. Compared with the fourth quarter of 2016, the price of Brent crude oil rose by 8.5% (from $49.5 to $53,7 per barrel.), but the revenue of “Rosneft” — only 2.9% (oil production during this same time fell by 35 thousand. a day). To be honest, especially no difference is that with the agreement with OPEC that without him.

The new status quo

Here the question arises: would the exporters of sea change in oil prices or just decided to clean the market from surplus and at least for some time to raise rates. It looks like a second, otherwise you have to go on a much more severe reduction of production.

It is not surprising that within OPEC there are big problems with the execution of the agreement on production cuts. Although the news headlines you read about the “fulfillment” of plans to reduce production, in fact, this is largely achieved through the fulfillment of its obligations by Saudi Arabia, which provided half of the production cuts by OPEC, despite the fact that its share in the production of the cartel is less than a third. Large manufacturers such as Iraq and UAE (together approximately 25% of OPEC production), perform the agreement of only two thirds, and clearly do not want to increase the reduction commitment. Given that Iran, Libya and Nigeria are exempt from the quota, in fact it turns out that the OPEC countries producing about 40% of the oil cartel, not willing to further cut production. Everything is clearly visible.

In fact, the execution of the agreement of OPEC came to a fairly predictable track — main strap have to pull the Saudis. In principle, they have played a similar game in the early 1980-ies, when reduced oil production from 1981 to 1985, almost three times, from 10.3 to 3.6 million barrels. a day, trying to keep the price. Not kept and as a result, in 1985, announced the termination of deter mining that led to a prolonged collapse in prices, with the known consequences. They remember this experience and are unlikely to enter into this river twice: it’s one thing to work a little harder and help to implement the current agreement, the other — to get involved in more large-scale production cuts, with unpredictable consequences.

Therefore, the outcome of the meeting of the oil exporters may 25 is likely predictable: agreement on maintaining production at current levels will be extended, but further reductions will be, and hence the market will remain balanced and special price hikes can be expected. However, special drops also: previous surplus on the market is already there, and to American mining of lower price levels will be uncomfortable, with a sharp drop in prices the trend in production growth will unfold. So, most likely, the decision of OPEC and their partners, including Russia, aimed more at maintaining the status quo and avoid the price collapse that will inevitably follow if the freeze of production is not extended, than a fundamental change in the current situation.

The authors ‘ point of view, articles which are published in the section “Opinions” may not coincide with ideas of editorial.

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