The agreement OPEC+ has outlived its usefulness: what will happen to oil prices?

neft torgi 600x400 - The agreement OPEC+ has outlived its usefulness: what will happen to oil prices?

Saudi Arabia enters the saving mode. November 1, the Finance Ministry announced that 3 times lowers forecast for GDP growth for this year (from 2.6% to 0.9%). It is also expected drop in revenue of 9%. Therefore, in 2020, the monarchy begins to cut the budget.

In particular, under the “knife” of the Ministry of Finance gets the number of articles included in a special programme to diversify the economy. Its estimated cost was estimated at $425 billion initially, But the expenditure budget was based on the cost of a barrel in the area of 80-86 dollars.

However, such prices in the market from September 2018

Revenues from oil exports provide 90% of the budget revenue of Saudi Arabia. Therefore, the reduction of budget expenditures suggests that the Saudis no longer hope to return in the near future oil prices to $ 80.

OPEC+ did not help

Meanwhile, Saudi Arabia has made more efforts to growth of cost of oil. This country was one of the main ideologists of the Treaty OPEC+, according to which the countries-exporters of oil should limit production, and thus the supply on the world market. Its quota for the reduction of the Saudis was sometimes exceeded with a large margin. That is here mined even less raw material than was provided for by the terms of the contract. But

in recent months, oil prices have managed only to maintain, but not increase

Only in April and early may the price of Brent crude rose above $ 70 by the end of summer down to 60.

Contractual visibility

OPEC+ in the form in which it exists today, the Saudis simply unprofitable. Do not cherish any special illusions about the contract and other parties.

In the words of many countries talk about the importance of quotas, but in practice not all observe them. For example, Iraq never lowered production to an agreed level. But much more serious is the fact that the requirements ignores and Russia.

According to “Interfax”, the average production for October stood at 11.23 million barrels per day. Relative to October of 2018 production fell by 168 thousand barrels per day instead of the 226. Thus, the transaction was performed only by 73%. Compared to September, production increased by 32 thousand barrels per day.

Since the beginning of 2019 Russia only twice have reduced production in the framework of quotas, and forced in June and July, when idled the pipeline “Druzhba”, providing 20% of Russian oil exports.

Russia OPEC+ is not needed

At the same time Russia has increasingly said that the agreement is not so necessary. The head of “Rosneft” Igor Sechin openly tried to dissuade Vladimir Putin from the extension of the agreement, emphasizing the fact that the decline leads to the loss of market share.

The President of Russia said that the state budget is drawn up based on the cost of oil at $ 40 per barrel. The head of the Ministry Maxim Oreshkin called Saudi Arabia the “weakest link” in the oil market.

“If in the mid 80-ies of the last century, Saudi Arabia was satisfied with the relatively low price of oil, the Soviet Union needed high. The USSR was the weak link and got all the problems, when the oil market reacted downwards. Now the situation is mirrored, in the oil market we with the Saudis reversed.

They need $ 70 per barrel, and we’ll do it on 40″,

he said in an interview in early September.

To be or not to be OPEC+ this will be addressed at the next meeting, which will take place in December. But while external background formed in such a way that particularly insist on the agreement, no one will.

The price of oil: the decline likely growth

Even if the contract is revised and extended, this is unlikely to have any significant impact on oil prices. “Drop down” because of the quota barrels compensate countries that the agreement did not participate.

Primarily talking about the United States, whose shale companies are becoming stronger players in the global market. In addition,

global economic growth is slowing, this is reflected in the oversupply of the commodity

And he continues, even if the US and China suddenly stop the trade war. To somehow restrain the excess allow the sanctions against Iran, as well as the almost complete collapse of oil production of Venezuela.

But in this case, the termination of the agreement, OPEC+ will be followed by the uncontrolled growth of oil production by the countries of cartel. And primarily Saudi Arabia. Now the monarchy is ready to increase supply on hundreds of thousands of barrels per day.

In September, Saudi Arabia had replaced the Minister of energy. This may signal a change in policies of the Saudis in international trade. It is called by increasing the production and dumping prices ready to win maximum market share.

This practice had already taken place in the mid 1980-ies. Then it led to a threefold drop in world oil prices. The current refusal of the high costs in SA shows that this scenario is possible today.

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