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The CEO of Rosneft presented Vladimir Putin with a bottle of oil during their talks on the situation on the market, which is overcome with pessimism connected to OPEC+ meeting on the progress of the agreement. The coronavirus made the investors believe the bottle of oil is half empty, not half full – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

The oil deal is being softened

Igor Sechin, the CEO of Rosneft, offered a nice gesture during his meeting with the Russian President Vladimir Putin. Sechin gave Putin a gift – a bottle of premium oil from the 31st well of the Wostok Oil extraction project in Siberia. That was the end of pleasantries, because the men moved on to discuss the state of the Russian oil sector and the oil market across the world. Sechin admitted that Rosneft was complying with the OPEC+ deal on cutting oil output, whose goal is to increase oil prices on the market, and thus hike profits from its sales in countries that depend on its production (petrostates), such as Russia.

The oil deal has been in force since May and it saw the group cut 9.7 million barrels by July and then by August. The agreement says that the cuts between September and December 2020 will be at 7.6 million barrels per day, and then 5.6 m until April 2022. According to Reuters’ sources, in July the compliance with the plan was at 95-97 percent. At that time the Brent oil price per barrel went over USD 45 and the WTI approached USD 43. In May, when the deal entered into force, the prices hovered around USD 30 per barrel. Since then the price per barrel has been steadily increasing, only to linger on during the summer holiday at around USD 45 per barrel. This still isn’t enough for those petrostates that depend on oil the most, and for those where the profitability of extraction is low and may not significantly go up because of the possible recovery of shale oil output in the US. Despite that, the situation seems to be stabilizing.

Coronavirus comeback on the horizon

So why are the investors pessimistic? In July the OPEC cartel published an oil demand forecast for 2020. It expects the demand to gradually rise after it plummeted due to the coronavirus. However, according to its careful assumptions the bounce back will take place as late as in 2021. Reuters conducted an anonymous survey among 500 economists across the world. The respondents are concerned that an increase in coronavirus cases may cause the return of social distancing regulations, which would put the economic recovery at risk. These fears are exacerbated by bad economic data from the US and Germany, which are experiencing record-breaking drops in industrial production. Whereas Rystad Energy wrote an analysis, which said that contrary to what the analysts had predicted earlier, the demand for oil would not recover quickly. Between August and October 2020, the demand for oil, petroleum condensate and other petroleum products will remain at about 90.5 m barrels a day, in November it is to increase to 92.9 m and in December to 94.6 m. At the same time supply will reach 91.2 m barrels per day in August, 92.9 m in October, 93.3 in November and 93.4 in December. The demand will exceed the supply thanks to the fact that the OPEC+ commitments will be softened.

A cooperation short of full conformity

A joint Committee that monitors OPEC+ verified how states, which failed to meet the cuts by July managed to make up the shortfall in August. Plans are already in place to improve the results. Unofficially, Nigeria wants to classify its Agambi oil field as a source of petroleum condensate, not oil. This will allow it to meet the required cuts (1.412 m barrels per day between June and July). Other countries that are facing difficulties with meeting their targets may follow suit, e.g. Iraq. The International Energy Agency has presented less optimistic data and claimed that in July the conformity was recorded at 89 percent, and that the previous shortfalls had not been compensated for, as Iraq met only 85 percent of its target cuts, the UAE – 77 percent, Kongo – 43 percent and Gabon – 40 percent. Equatorial Guinea and South Sudan failed to fulfill their obligations as well. However, the OPEC+ Committee cannot impose any sanctions to discipline the signatories of the agreement that are slacking. Additionally, some of the states that have failed to meet their commitments are members of the said Committee. Those are Iraq and the UEA, the remaining members are Algeria, Saudi Arabia, Kazakhstan, Kuwait, Russia and Venezuela.  

Before we wrap up, it is worth going back to the bottle of oil Sechin presented to Putin. Perhaps the Rosneft CEO wanted to sweeten the pill when he delivered the bad news from Russia’s oil sector. He told Putin that reducing the output forces cuts in jobs and makes the company choose which fields should be kept. Rosneft’s strategy is to first cut the output at fields that have low efficiency or are running out anyway. The company has also declared it would minimize the adverse socio-economic costs of the OPEC+ deal. This was a response to President Putin’s opinion who, before Sechin’s tirade, assured the CEO that the coronavirus would not weaken Russia’s economy as much as it would many other states, and that the situation would improve. „This will end sooner or later, and the global economy will start growing again. We will have to respond to that challenge,” Putin pontificated. The CEO, who was armed with data from analysts, was clearly less optimistic. Despite the fact that the oil prices are currently going up, the coronavirus made the investors believe that the bottle of oil is half empty, not half full.