The oil price is approaching USD 70 per Brent barrel. Banks are speculating that the shareholders of the oil agreement may end it prematurely, so as not to encourage competition. However, so far more expensive oil will give Vladimir Putin funds for the election campaign – writes Wojciech Jakóbik, editor-in-chief of BiznesAlert.pl.
Competition does not sleep
Representatives of CitiGroup and JPMorgan Chase, in talks with Bloomberg, argue that producers can opt out of the agreement for a total of 1.8 million barrels per day if the price of oil rises above their acceptable level. A too expensive barrel will reward production from competitors, i.e. in the USA, where record-breaking volumes of new wells are recorded. The Goldman Sachs bank is of the same opinion as it expects that OPEC will not allow the price to rise above USD 70 per barrel.
According to Ed Morse, this could mean that there will be a summer revision of the agreement between OPEC and eleven producers from outside the organisation, i.e. a group called OPEC+. It warns that oil at a price of approx. USD 70 allows us to reach new fields, not only shale deposits, but also submarine deposits and oil sands in Canada. In this context, it is worth mentioning that President Donald Trump has removed the moratorium from the offshore wells within the territorial waters of the United States. Whereas last week, the number of drills in the USA rose by 10 to 752 facilities. This is the biggest increase since September last year, and you can read more about it in the text by Dorota Sierakowska.
However, for the time being, producers, including Saudi Arabia and Russia, which produce the most oil, have declared their readiness to comply with the cuts and believe that an exit from the agreement would have to be gradual so as not to lead to price depression on the market. However, the International Energy Agency claims that the agreement will not remove oversupply as expected by its shareholders. The Bank of America argues that an exit from the agreement is possible in 2019 by slowly raising the level of production.
Increase in expenditure rather than cuts
A more expensive barrel allows for spending more. This can be seen in Russia, which plans to increase investments in the sector. Vedomosti suggest that spending on education, health, and infrastructure will increase on the eve of the presidential elections in 2018. According to the newspaper, this will happen at President Vladimir Putin’s request. The idea is to be supported by the advisor Andrey Belousov, Elvira Nabiullina, Head of the Russian Central Bank, as well as Alexei Kudrin, Chairman of the Center for Strategic Research, responsible for Russia’s electoral programme. I wrote about such a possibility on BiznesAlert.pl.
The Kudrin Centre is proposing an increase in spending by 0.8 per cent in education by 2024, 0.7 per cent in health care and 0.8 per cent in infrastructure compared to 2017. In the meantime, in 2015, at a time when oil prices reached USD 40 per barrel, the Russians were forced to use up reserves to keep the budget unadjusted to such a cheap raw material. More expensive oil allows Russia to regain its strength.
IEA looking ahead
According to the 2017 Energy Outlook of the International Energy Agency, oil production at OPEC will fall by several hundred thousand barrels per day between 2015 and 2020, and will rise by more than 3 million barrels outside the cartel. The trend is expected to change between 2020 and 2025, when OPEC countries will be responsible for most of the growth. In the years 2025 and 2030, the cartel’s output is expected to increase by more than 2 million barrels per day and fall by almost 2 million barrels outside of this period. Thus, the organisation expects a medium-term success of the shale revolution, but in a long-term perspective foresees the return of the mining capacity in the cartel. This means that there will be no need for a oil agreement in the long term.