Commodity compromise: Russia may agree to reduce oil production

Russia is ready to reduce oil production under the transaction of OPEC + and other energy producers by 14% from the level of the first quarter of 2020, or by 1.6 million barrels per day. This was reported by TASS with reference to the representative of the Ministry of Energy.

“Yes, we are ready to reduce by 1.6 million barrels per day,” the source said.

On Thursday, April 9, hydrocarbon exporter countries via video conferencing will discuss the possibility of a new reduction in oil production. It is expected that states can again agree to extend cooperation in the format of the OPEC + agreement after the unexpected collapse of the alliance in March.

Recall that the OPEC + agreement was created at the end of 2016. The largest hydrocarbon exporters, including Russia, have agreed to simultaneously limit oil production to restore the balance of supply and demand in the global energy market. The actions of the parties to the transaction were to keep the price of oil from sharp fluctuations.

States have repeatedly extended the duration of the transaction and increased the volume of production cuts. The last time such a decision was made in December 2019. The parties agreed to reduce oil production from January 1 to March 31, 2020 by 1.7 million barrels per day relative to the level of October 2018. The main volumes of reduction were undertaken by Russia and Saudi Arabia.

However, since the beginning of 2020, energy consumption in the world began to fall sharply against the backdrop of the spread of coronavirus, and oil began to gradually become cheaper. As expected, members of the OPEC + alliance were supposed to further reduce production and thereby stabilize the market situation. Meanwhile, on March 6, following the results of the meeting, the parties did not reach consensus and decided to completely abandon all previously undertaken obligations.

Since April 1, the deal ceased to exist, and oil exporters began to increase production. For example, Saudi Arabia has increased production to 12 million barrels per day and at the same time announced the provision of record discounts for raw material buyers over 20 years. Following Saudi Arabia, Iraq, Bahrain and the UAE also announced a reduction in the cost of their products for customers.

The collapse of the OPEC + partnership and increased production provoked the largest collapse in oil prices in recent years. So, over the past month, the cost of Brent raw materials on the ICE exchange in London almost doubled and at the moment fell below $ 22 per barrel - for the first time since March 2002. At the same time, quotes of the Russian grade Urals fell to $ 10.5 per barrel. The last time a similar value could be observed in the spring of 1999.

At the same time, news on the spread of coronavirus still exerts significant pressure on quotes. According to the latest data, the total number of infected in the world exceeded 1.4 million, more than 81 thousand infected died. The spread of the disease and quarantine measures provoked a massive reduction in trade, passenger traffic and fuel demand. As a result of the drop in energy consumption, the cost of oil also decreases.

Note that in 2019, global oil demand averaged about 100 million barrels per day. According to the International Energy Agency (IEA), almost 60% of this volume was for fuel for vehicles. As the head of the organization Fatih Birol previously stated, due to restrictions on air travel and quarantine measures, global energy consumption could be reduced by almost 20 million barrels per day.

Transaction revival

According to experts, a sharp drop in quotes led to significant budget losses for Russia and Saudi Arabia, and also led to the bankruptcy of shale producers in the United States. As a result, analysts highly appreciate the likelihood of resuming cooperation in the framework of the OPEC + deal and expect Washington to join the agreement.

“The contract will be beneficial for each of the parties. The budget of Russia and Saudi Arabia depends on oil and gas revenues by 30% and 80%, respectively. In the United States, this dependence is lower, but the bankruptcy of an entire industry can cause a chain reaction and draw other industries into the crisis, in particular banking, which generously lends to shale. In a pandemic and upcoming elections, Trump may be quite accommodating with the rest of the players, ”said Ivan Kapustyansky, Forex Optimum lead analyst, RT.

By joint efforts, leading hydrocarbon exporters can reduce oil production by 10 million barrels per day. This was announced on April 4 by Russian President Vladimir Putin.

“Russia considers it necessary to combine efforts. We were not the initiators of the OPEC + deal break. And we are ready for agreements with partners and within the framework of this mechanism - OPEC + - and are ready to cooperate with the United States on this issue. I believe that it is necessary to join efforts to balance the market, ”Putin stressed.

Note that global investors positively assess the upcoming negotiations on April 9. So, at the auction on Thursday, the Brent barrel rose in price by almost 4% - up to $ 34 per barrel.

“Saudi Arabia is likely to reduce production by 3 million barrels and return to levels in early March. Other countries included in OPEC +, and a number of invited participants in total, will be able to reduce production by another 5-5.5 million barrels per day. Given the reduction in Russian production by 1.6 million barrels per day, the cut-off threshold of 10 million barrels will be reached, ”said Artem Deev, head of the AMarkets analytical department, to RT.

According to Anton Pokatovich, the chief analyst of BCS Premier, the parties to the new agreement can extend the deal either by one quarter, or immediately until the end of 2020. As the expert noted in an interview with RT, depending on the outcome of the negotiations, oil prices may rush to levels of $ 35-40 per barrel, and by the end of the year reach $ 44-48.