Last Friday, the eighth meeting of the ministerial commission monitoring the OPEC + groups took place in Saudi Arabia. Manufacturers intend to continue to raise the price of crude oil, despite the risk of increased extraction from competitors from the USA. Will the market believe them? – wonders Wojciech Jakóbik, editor-in-chief of BiznesAlert.pl.
Oil diplomacy of press releases works
Producers of the OPEC oil cartel, Russia and other countries that are sides of the oil agreement, the OPEC + group, announced that they intend to abide by the end of 2018 and perhaps extend it to 2019.
The communiqué provoked a temporary rise in oil prices. US President Donald Trump said that in this way OPEC is trying to „artificially raise” the value of the barrel, as informed by BiznesAlert.pl. Oil got cheaper in response to Trump’s tweet.
An endless oil agreement?
The oil agreement has been in force since the end of 2016 and assumes a coordinated reduction in oil production by 1,8 million barrels per day. Despite the problems with the fulfillment of obligations by some of the signatory countries, the main shareholders, namely Saudi Arabia and Russia, declare their readiness to continue to comply with the agreement. However, Saudi minister of energy Khalid al-Falih warned that the potential of the agreement is not „inexhaustible”, and its possible extension for 2019 should not „shake up the market”. In turn, the Minister of Energy of Russia, Alexander Novak suggested that the arrangement in some form could be valid for an unlimited period. He added, however, that Russia could well withdraw from the system earlier.
Due to the fact that the oil agreement was implemented in March in 149 percent, some countries are considering reducing the reduction amounts allocated to each of them. In March this year, Russia did not meet its 300,000 barrel limit per day, reducing its production by 280,000 barrels compared to October 2016, explaining this with a one-off seasonal problem. It is to restore the limit in April 2018.
The sides of the oil agreement predict that the surplus of the market will disappear by the end of 2018. According to the International Energy Agency, the reserves of OECD countries in the first quarter of this year fell and exceed the average over the last five years by 30 million barrels. Since the beginning of the system, they have dropped by 300 million barrels to 2,83 billion barrels. The OPEC + report, which leaked to the media, shows that this surplus is smaller and amounts to 12 million barrels.
The devil is in the details
For this reason, the new arrangement may take into account lower limits for signatory countries. Periodic revision of the provisions is also possible. Manufacturers are concerned about the suspension of the system, which could cause a sharp drop in oil prices. For this reason, the agreement concluded in October 2016 was extended several times. They were concluded at the end of 2016 and were in force until mid-2017, then they were extended until the end of March 2018. In November 2017 OPEC + countries decided to extend it until the end of 2018.
The biggest challenge for the agreement will be the fate of mining in the USA. The Russians admitted that the extraction of independent producers in the United States gained from the oil agreement. The increase in the barrel price to around $ 75 increases the profitability of mining. The unofficial goal of the agreement is to raise the price of the barrel. Although the current level is acceptable to Russia, which has budgeted for 2018 a conservative average of $ 40 a barrel, Saudi Arabia preparing to announce a public offering for Saudi Aramco shares would like 100 dollars a barrel. Any increase in the price of a barrel reflects positively on the producers’ financial reserves.
Self-fulfilling prophecy
It is not known, however, how a permanent system to limit mining would function. With properly designed amounts, it could affect investors and raise the price of the raw material, and at the same time free the policy of exporters who want to bring more oil to the market to compete more effectively for clients, for example in China. Just believing in an eternal oil agreement raises barrel prices. In this way, the system becomes a self-fulfilling prophecy, and oil diplomacy of press information is a triumph.