Hans-Peter Siebenhaar (Hans-Peter Siebenhaar), Walter Blum (Blume Jakob)
When Vladimir Putin on Saturday appeared before the television and the camera in Osaka Japanese, he gave everyone to understand who is the main person in the global oil business. According to him, he agreed with the crown Prince of Saudi Arabia Mohammed bin Salman about the fact that the two countries will continue to limit oil production at current levels. “What time — about the same time we think six or nine months. Probably nine months,” — said the Russian President.
Putin and MBS, as briefly referred to as the crown Prince of Saudi Arabia, has independently made a decision that the Organization of countries-exporters of oil (OPEC) and countries outside of OPEC led by Russia, known as OPEC+, had intended to take Monday and Tuesday in Vienna. However, a confidant of Putin, the Russian Minister of energy Alexander Novak, said that only during the session of the OPEC, it will be decided whether to join this solution to the oil cartel and other States. However, the fact that other OPEC members will go against the two biggest oil exporters — Saudi Arabia and Russia — is unlikely. Options is possible only on the duration of the period of restriction of production, but in this question the Russian President has outlined a clear border.
Enclosed on G20 trade shows: once all-powerful group are at risk of becoming a shadow of itself. An important decision to take two of the most powerful member of OPEC, that is, Saudi Arabia and Russia, and they do so in recent years in the bilateral negotiations. OPEC is watching now, only to all other members of the organization adhered to the agreed limits.
In addition, the cartel because of diminishing market share is under tremendous pressure. For the first time since 1991, the share of OPEC in world oil production dropped below 30 %. The main reason for this boom in the shale oil industry in the USA. But together with Russia, Mexico and eight other States, United in the Alliance of OPEC, a cartel still comes out to share in the market by almost 50 %.
Back in December 2018 evident is how much OPEC needs Russia. Then OPEC States agree on reducing oil production. It was reduced to 1.2 million barrels of oil per day (one barrel equals 159 liters). OPEC accounted for two-thirds of the reduced amount, in countries that are not members of OPEC, one-third. The biggest reductions fell then to the share of Saudi Arabia and Russia. The only way the Alliance OPEC+ was able to stabilize the price of oil, which at that time much slid down.
At the end of June, the expiration period is over. Most market analysts had expected in advance that the limits of production will be extended. But at the same time, many experts expected that production limits will be valid only until the end of the year. And the fact that they demand of the Russian Minister of energy Novak will continue all winter, can spur the price of oil.
Since the beginning of this year the price of oil fluctuated. First, in the period from January to end of April, it rose from $ 55 to over $ 75. Then came the collapse to the level of almost $ 60. After the incident with the tankers in the Strait of Hormuz in mid-June she again went up. At the end of last week a barrel of mark Brent has stopped on a mark 66.55 USD.
The conflict between the US and Iran remains a risk factor
Further support the price of oil can have a rapprochement between the President of the United States Donald trump and his Chinese counterpart XI Jinping in the trade dispute between the two countries. After meeting both leaders on the sidelines of the G20 trump said that the duties on Chinese goods in the amount of 300 billion dollars will not be raised. Due to this reduced the risk that escalation of a trade war would put the world economy on the brink of recession and thus reduce the demand for oil.
The biggest risk in the oil market is fraught with from the point of view of many experts the military conflict in the Persian Gulf. However, Loacker Hannes (Hannes Loacker), commodities analyst at the Austrian “Raiffeisen Capital Management” (Raiffeisen Capital Management) believes that during the “war of words” the current risk premium in the price of oil will increase significantly. But the script can change quickly. “But if it came to military conflict or significant difficulties of navigation in the Strait of Hormuz, then everything would look completely different. Then it would have to rely on the price of oil at least $ 80 per barrel, “Brent”,” — said Looker the German newspaper “Handelsblatt” (Handelsblatt). Through this Strait is transported almost a fifth of the world’s oil.
In early June, in close proximity to this strategically important shipping artery, was attacked two oil tankers. The US blamed the attack on Iran; Iran denies his guilt. The risk of military escalation increased after Iran shot down a us drone. The bombing of Iran as retaliation, U.S. President trump canceled at the last minute. Tensions in the Persian Gulf was inappropriate for OPEC, because it reflects the confrontation between the two important countries-members of the cartel: Saudi Arabia and Iran. Traditionally, the Saudis are on the US side and accuse Iran of sabotaging important oil infrastructure.
However, Jon Anderson, head of raw materials Department in the “Vontobel asset Management” (Vontobel Asset Management), suggests that this topic is not going to play at session of the OPEC+ in Vienna any role. “OPEC will be to avoid it at any cost.” According to him, the cartel will make every effort to demonstrate to the world the unity of its ranks. Even if within OPEC and there is no consensus, then, according to Helima Croft (Helima Croft), commodity expert “RBS capital markets” (RBC Capital Markets), its members have every reason to reduce production to maintain oil prices. “The chain that links the majority of OPEC producers is the need to generate additional revenue so as not to endanger the living standards of its citizens,” said the experienced expert Croft. Thus, Saudi Arabia needs the oil price in the range of 80 to 85 dollars a barrel for a balanced budget and the financing of many subsidies. A similar situation in Nigeria.
Until recently, it was unknown whether Russia would continue to support the restriction of output. Putin has repeatedly stressed in the past that its price is about 60 dollars per barrel is quite comfortable. But from the point of view of Paul Sheldon (Paul Sheldon), the chief geopolitical expert and analytical company “S&P global Platts” (S&P Global Platts), the benefits of cooperation are oil producers in this case will prevail. “Russia sees that the price of oil fell below $ 60.” This country fears that the price could fall to $ 40, if the agreement within OPEC+ will not be updated. Therefore, the main attention at the session of OPEC+ is likely to be focused on how to exert pressure on members of the organization do not adhere to limits on production, says analyst “Vontobel” Andersson.
Not all members of OPEC comply with the limits
Formally, the goal of reducing production was achieved — these are the findings of the International energy Agency (IEA). This is primarily due to the fact that Saudi Arabia does not exhaust their quota of production cuts. In may and June, the Kingdom was producing less than the 9.7 million barrels per day. This is the lowest figure for the last four years. And some other OPEC countries such as the United Arab Emirates and Angola, last year the average was extracted less.
But Iraq has produced more systematically than was agreed. This country is at risk of incurring the wrath of other members of the cartel that have reduced their production, reduced turnover and worsened their position in the market to stabilize prices. The example of Iraq can be revealing, said Cyrus de La Rubia (Cyrus de la Rubia), chief economist at the Hamburg “commercial Bank” (Hamburg Commercial Bank). “We expect that the discipline in the coming months will be significantly weaker than it was until now. The reason is that the cartels simply unstable,” — said the expert of oil to our request.
Another factor of instability is the President of the United States. The volatility of trump and his protectionist economic policies make market forecasts are much less reliable than in the past. Demonstrated in Osaka rapprochement between trump and si can be negated with one single tweet the American President. And then we might have a fear of weakening global economy, which will lead to lower oil prices. In the case of reduction of the proceeds from the sale of oil because of falling prices of the OPEC members can return to the policy of uncontrolled production. In this case, the Alliance OPEC+ risks becoming a paper tiger.