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Energy 18 June, 2018 11:00 am   

A game of the oil market

Russia won the game against Saudi Arabia during the World Cup and scored 5:0. What was more important, however, was the behind-the-scenes talk about the future of the oil agreement – writes Wojciech Jakóbik, editor-in-chief of BiznesAlert.pl.

The loosening of the oil agreement by 300 million barrels?

Before the game, the spokesperson of the President of the Russian Federation stipulated that during his event, Russia’s departure from the oil agreement will not be discussed. Moscow still considers the pact to be useful, although the shortage of oil caused by the decline in extraction in several countries that signed it, headed by Venezuela, necessitates the correction of the system.

The match ended with the victory of the Russian team and the declaration of the Russian minister of energy that the countries involved in the oil agreement will consider a possible loosening of the agreement at the Vienna summit planned for 22-23 June. Alexander Novak revealed that the scale of cuts in the oil agreement from 1,8 million to 1,5 million barrels will be considered. He stipulated that the sides of the arrangement still had to protect the market from the surplus in order to maintain its balance. Probably for this reason, the Russians did not claim a greater reduction of cuts, which could be respected by the current prince Mohamed bin Salman.

The December 2016 agreement, in force from the beginning of 2017 to the end of 2018, assumed that from a cut of 1,8 million barrels, countries outside the OPEC oil cartel would reduce output by 600 million barrels, of which 300 million went to Russia. The reduction of the limitations to 1,5 million barrels means a rise in production by just 300 million. Novak did not reveal, however, who and when he would increase the output by a loosened amount.

Price war on the horizon

The oil agreement was supposed to halt the crisis in oil prices, which in mid-2014 began to fall from over $ 100 to reach $ 40 at the beginning of 2015. They have now returned to a level above $ 70. Saudi Arabia is interested in maximizing the price to improve the budget and value of Saudi Aramco before the privatization planned for 2019. Russia is worried that higher oil prices will support oil production in the US.

Declarations after the match that Arabia and Russia will continue to coordinate the oil policy means that the sides want to convince the world that loosening the oil agreement will not mean a return to the price war. This is the state before the deal, when Arabia and Russia competed, mainly on the Chinese market, maximizing mining and exports without looking at the supply on the market. This was the reason for a significant oversupply which ended with a price crisis.

Although Saudi Arabia and Russia want to ease the oil agreement, it is not clear whether they will coordinate their mining policy in full. They are already increasing its level, although there is no agreement of all signatories to change the reduction amounts. Iraq and Iran, who are afraid of losing profits from the sale of more expensive oil, have protested against unilateral actions.

Sanctions and provocations

On the occasion of the talks at the football game, head of Rosneft Igor Sechin found the culprit of high oil prices, which was once again accused of the OPEC cartel on Twitter by US President Donald Trump. According to Sechin, the sanctions (which included his company) introduce a “permanent bonus” to the price of oil, which in the future should take into account the emergence of a “new price record”.

Meanwhile, the Black Sea Fleet has been put in a state of readiness in the event of Ukraine’s efforts to prevent the World Cup match. Reuters sources argue that Russia is afraid of Ukrainian provocation during the World Cup near Crimea, which remains under Russian occupation. This does not prevent fans from around the world from watching the propaganda spectacle, and Vladimir Putin and Mohammad bin Salman – to play a match for the future of the oil market.



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