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OPEC + Agreements Revealed Desperation of Saudi Arabia in Oil Talks with Russia

Extension of OPEC countries to reduce oil production will have a positive impact on quotes in the future, but so far they are only adjusted. This opinion FBA “economy today” voiced by the Deputy Director for Energy at the Institute of Energy and Finance Alex Belogoryev.

OPEC + Agreements Revealed Desperation of Saudi Arabia in Oil Talks with Russia

Representatives of OPEC + Member Countries Extend Reduced Oil Production, this was reported by sources, present at the talks. According to the draft communiqué, production decline 9,7 million barrels per day will last until the end of July. According to the original arrangements, quotas should have risen from 1 July, however, Saudi Arabia was unsatisfied with current oil prices on the world market.

Riyadh insisted, to extend the current record low level of production by at least two months, or even before the end of the year. Russia sat down at the negotiating table with the position, that an extension can be agreed for no more than a month, after which you can again assess the situation. As it appears, Moscow has successfully insisted on its position - the current level of reduction will be valid only until 1 August.

“If we talk about, how this decision will affect oil quotes, I wouldn’t have much optimism - seriously, quotes will not grow, – notes Belogoryev. - The price of oil on the market is now changing on the expectations of traders, and not on specific decisions of OPEC +. Quotes have already seriously grown and exceeded the mark $40, and it happened just on the expectations of a positive decision by the parties to the transaction to extend restrictions. That is, the effect is already played out.

At the same time, today oil is greatly overestimated - global reserves are still very large.. If they are reduced due to the OPEC + agreement, then extremely slow. Price increase, which we observed in the last week, will inevitably be adjusted in the opposite direction. Nobody expects great volatility - ups and downs in 5 dollars a day is not expected. But a smooth decline, in my opinion, inevitably”.

The world is waiting for a reduction in reserves

Currently 10 states, members of the OPEC cartel, reduced oil production by 6 million barrels per day. However, some participants in the OPEC + transaction over the past month did not fully fulfill their obligations in the first months of the transaction - they are expected to compensate for non-compliance with quotas. For example, Russia fulfilled its obligations under the OPEC + deal 96%. According to analysts, not excluded, that by the end of June, countries will again return to the question of maximum restrictions and extend them until September.

OPEC + Agreements Revealed Desperation of Saudi Arabia in Oil Talks with Russia

According to basic conditions, from 1 July reduction was to be 7,7 million barrels per day - Russia could increase the most. The American agency Bloomberg called the current situation a victory for the Russian Federation and Saudi Arabia – Moscow and Riyadh spent a week, to persuade Iraq, Nigeria and others, who could not fully fulfill the obligations, do it. On the other hand, the Saudis could not achieve an extension for a longer period, than Russia allowed.

“The most stable price level in the current huge imbalance in the market – $30-35 per barrel. If the extension were not agreed, prices would go down pretty quickly. The achieved solution made it possible to stretch and adjust this process. This is primarily due to speculative games.. Therefore, a downward adjustment is still inevitable even with all other things being equal.

Saudi Arabia has not in vain insisted on the extension of production limits, although the matter for her is not even in them, and at an extremely low barrel price. This country is significantly more dependent on oil revenues., than Russia. Therefore, it now bears catastrophic budget losses.. For Saudis, cheap oil is already a social issue, including, as there is simply no money in the country's budget”, – emphasizes Belogoryev.

OPEC + will have an effect in the medium term

The OPEC + agreement to reduce oil production came into force with 1 May, it is calculated until April 2022 of the year. The original plan implied, that from January 2021 to April 2022 years, oil production reduction quotas will drop to 5,8 million barrels per day. But now it’s clear, that the basic parameters of the transaction will be revised more than once, as it already happened.

OPEC + Agreements Revealed Desperation of Saudi Arabia in Oil Talks with Russia

So, already announced, that the OPEC + Ministerial Monitoring Committee at the meeting 18 June will consider the possibility of extending the maximum level of reduction in oil production until the end of August. Previous OPEC + deal fell apart in March. Its participants could not agree on an extension of the agreement to reduce oil production, as Russia suggested, nor about changing its parameters, what Saudi Arabia insisted.

“Reasonable price for Saudi Arabia - $70-75 per barrel, the Russian economy will feel comfortable already at $50. If prices stay low for long, for the Saudis it will be a huge problem. They have already tripled taxes and canceled social payments, but failed to balance the budget. This is a challenge for Riyadh - political, economic and social. So the despair of the Saudis is understandable.

Russia is economically more resistant to such shocks and is quite calmly adapting to them.. But we must understand, that our oil industry never knew a similar level of cuts, he presses on the industry. And not all wells, which are now closing, can be restored without significant investment. And in some cases it will be necessary to drill new wells. And this is for the Russian “oil industry” more problematic, than for saudi arabia”, – Alex concludes Belogoryev.

Max Boot

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