Russia and OPEC+ agreed to reduce oil production. How long?
The beginning of April 2020 turned out to be turbulent. The global coronavirus pandemic has exacerbated the ongoing economic crisis.
Due to quarantine measures introduced by states, human and logistic mobility has sharply decreased, leading to an excess of oil on the “black gold” market, and, as a result, to a collapse in hydrocarbon prices.
The fall in oil prices has spurred Saudi Arabia and a number of other Arab countries to begin irresponsibly dumping oil.
Moreover, Saudi Arabia has quietly begun to finally crush
US shale project, launched to reduce America's dependence on Arab hydrocarbon suppliers.
All these actions have led to the fact that it has become unprofitable to transport and process oil of any grade, and the volume of empty oil storage facilities and tankers is decreasing at an alarming rate.
The only way out of the situation is to agree to reduce oil production by at least 10 million barrels per day (12% of world production).
This was understood not only by members of the OPEC+ cartel - even by the United States. The only hitch at the implementation stage of the new agreement was the quotas for each country. Nobody wanted to give in.
drop in prices for Russian oil URALS for the first half of the year
On the eve of the online negotiations on April 9, the situation on the oil market was very interesting. Saudi Arabia and some other “gas stations” that increased oil production agreed to reduce their production to pre-crisis levels, but at the same time demanded that Russia, which complied with the terms of the old OPEC+ agreement, halve the daily production of “black gold.”
The United States, at the same time, took the most advantageous position for itself, demanding that Russia and Saudi Arabia turn the valves to a minimum under the threat of introducing oil sanctions, despite the fact that they themselves refused to participate in the OPEC+ cartel.
According to REUTERS' own sources, the negotiations, which started on the evening of April 9, were very difficult and lasted 10 hours.
drop in the price of BRENT oil over the last six months
The parties announced that they had reached some kind of interim agreement to reduce oil production, with Moscow and Riyadh taking on the lion's share of the obligations.
The deal stipulated that the production reduction would not begin immediately, but only in May-June, by 10 million barrels per day until the end of this year, and from January to April next year - by 6 million barrels per day.
The parties did not reach a final agreement due to the position of Mexico, which refused to squeeze in together with other OPEC+ participants.
And only on April 10, at the G20 energy conference, Mexico was able to obtain an agreement to reduce production by 100 thousand barrels per day instead of the proposed 400 thousand.
It must be said that at the G20 energy conference, they managed to convince countries outside the OPEC+ cartel to remove 5 million oil barrels from the market, which ultimately gives minus 15 million barrels.
abandoned oil well
Saudi Energy Minister Abdulaziz bin Salman al Saud said after the conference that his country is ready to further reduce oil production, provided that other countries follow suit.
And, although the market immediately reacted with an increase in oil prices, observers almost unanimously came to the conclusion that the agreement was short-lived: it was extremely unprofitable for Russia and beneficial for those cartel participants who maintained the previous rates of oil production.
Russian analysts were very critical of Energy Minister Novak’s ability to conduct complex negotiations, who agreed to an equal share of oil production cuts with the Saudis despite Moscow’s better negotiating position. Washington would force Riyadh to conclude a deal under any (almost) Russian conditions.
Russian football tycoon Leonid Fedun also received his share of arrows, simultaneously serving as one of the main shareholders of the Lukoil company, who actively advocated reducing oil production in Russia at any cost. Experts even claim that Fedun and Alekperov are lobbyists for American shale.
On the eve of the next round of OPEC+ negotiations on the evening of April 12, US President Trump made a statement, supporting Mexico’s position and promising that the United States would reduce daily production by 250 thousand barrels, taking over most of the Mexican quota, but in return demanding compensation from Mexico for this decision .
It is also known that a meeting of Texas oil workers will be held on April 13, also dedicated to the topic of reducing oil production.
Surprisingly, but true: by applying pressure on Saudi Arabia, the United States saved the OPEC+ cartel.
What's next?
The main conditions reflected in the new preliminary OPEC+ deal are as follows: Saudi Arabia and Russia will cut oil production by 2,5 million barrels per day each. The agreement stipulates that their daily production level of “black gold” will be 8,5 million barrels.
who sells oil to whom
Moscow and Riyadh made the biggest concessions. In total, OPEC+ countries will reduce production by 10 million barrels per day during May-June. Then, from July to December inclusive, the total volume of reduction will drop to 8 million barrels per day, and from January 2021 to the end of April 2022 - to 6 million.
Observers believe that if OPEC+, the United States and non-cartel oil-producing countries adhere to their obligations, the price of BRENT oil will soon rise to $40-45 per barrel, which will suit Russia, whose budget is based on oil prices are $42 per barrel.
However, according to analysts, a serious factor of uncertainty remains in the pricing mechanism, since the parties have not developed a control and liability mechanism for violators.
If the agreements fail, the oil market will face a rollback to the current price level of $20-25 per barrel.
There is another bad news. Despite the work carried out, as a result of which 10+5 million barrels of oil per day were removed from the market, approximately 10 million “extra” barrels remain on the market, affecting crude oil packaging. Therefore, further drastic decisions cannot be avoided in the near future.
Again, mothballing existing wells in Russia is associated with significant difficulties and will require additional considerable costs associated with the solidification of oil in wells or the formation of paraffin plugs, which Saudi Arabia is spared from. US shale oil fields do not have these same shortcomings.
abandoned oil mine near Ukhta
It should also be understood that the missing 2,5 million barrels is almost half of the country’s oil exports, creating a huge hole in the budget and the economy as a whole.
Thus, questions about the price at which the deal was reached, as well as the severity and duration of the resulting negative consequences, remain open...
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