18.06.2021

Russia faces a new oil war

The global oil market is in a fever again. At the upcoming OPEC + summit in mid-June, alliance members will determine whether it is time to lift a moratorium on oil production or whether it is worth the wait with the lifting of restrictions. The opinions of the two main market players – Saudi Arabia and Russia – are at risk again, as in March, when the previous agreement broke, to be diametrically opposed.

Riyadh insists on maintaining the existing production limits, as quotations of raw materials have not reached a stable position. Russia is in no hurry to agree with this opinion, preferring to postpone its final decision until a direct vote at the summit.

Saudi Arabia, which half a year ago with great reluctance agreed to moderate its production capacities, now itself is actively promoting a reduction in production. At the next summit of the OPEC + member countries, according to Reuters, the kingdom will insist on extending the terms of the memorandum concluded at the end of April this year and allowing to stop the rapid drop in prices. Riyadh urgently needs money: in the 1st quarter, the profit of the mining state concern Aramco fell by 25%, the budget revenues of Saudi Arabia decreased by 22%, and its deficit exceeded $ 9 billion.

Riyadh’s proposal is being discussed in Moscow, but our country is in no hurry to join the Saudis. According to Sergey Suverov, investment strategist at Arikapital Asset Management, extending the current terms of the agreement will guarantee the preservation of current quotes of “black gold” in the region of $ 35 per barrel. At the same time, the Russian budget is calculated on the basis of $ 42-43 “barrel”, so Moscow will have to search new incentives to raise oil prices.

The previous negotiations of the world’s major oil producers within the framework of OPEC +, which took place at the end of April and culminated in the conclusion of a new agreement, took several days. Its participants agreed to reduce production from May to July by 9.7 million barrels per day. From July 1, 2020, according to a plan agreed with all parties, the volume of production reduction should be cut to 8 million barrels, and then to 6 million barrels.

According to experts, at the upcoming OPEC + meeting on June 8-10, our country should wage a fierce debate not only over production quotas, but also propose a new principle for the operation of the agreement on limiting production.

The fact is that at present the level of reduction in oil production depends on the total volumes of production of raw materials of a particular state – the higher they are, the greater volumes of reduction in production will have to be reconciled. The use of such a model, according to Suverov, does not provide a clear formula by which it is possible to fairly calculate the specific volume by which each supplier should reduce production in order to maintain the existing cost. With almost the same size of production, Saudi Arabia’s export level is almost twice as high as in Russia. This is understandable: domestic energy consumption in the Middle East is relatively small, which makes it possible to maintain a high level of export.

According to experts, Moscow and Riyadh are now in a different situation. During the economic stagnation, which was observed in early May, the countries of the Middle East managed to accumulate significant reserves of raw materials. Now they can easily reduce the physical production of oil and sell exported raw materials manufactured in advance. But Russian companies do not have such an opportunity: their incomes plummeted along with the price of oil and they can only compensate for them by increasing production.

“So far, Russia is firmly determined to start increasing oil production, as provided for in the April agreement. As part of the deal, our country planned to increase production by 500 thousand barrels per day since July and the same since January 2021. However, if the parties do not agree, then already in June prices for “black gold” may again fall below $ 20, which will be a shock to the Russian budget and the national currency. The dollar may exceed 80 rubles. Therefore, it is likely that Russia will have to make concessions to OPEC + and agree to freeze the deadlines for lifting the moratorium on the production of “black gold,” said Alexander Razuvaev, head of IAC Alpari.

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