Experts called the conditions for a catastrophic collapse in oil prices

Russia reduces oil exports: why does Moscow need it

In August, Russia will voluntarily remove 500,000 barrels of oil from the world market. According to Deputy Prime Minister Alexander Novak, thus, an additional reduction in Russian exports under Moscow’s agreements with partners from OPEC + will exceed a million “barrels” per day. Saudi Arabia and other members of the alliance are cutting their production by more than 1 million barrels. So far, the organization’s efforts allow keeping the cost of raw materials at the level of $75-77. However, there are risks of a further collapse in oil prices almost twice to the current levels.

Half a million barrels is approximately the daily volume of Russian supplies of “black gold” to the world market. At the beginning of this year, Moscow decided to voluntarily cut its daily oil production by 500,000 barrels. At that time, such a decision was considered as short-term: Novak explained that this verdict “will contribute to the restoration of market relations.” The goals that Moscow intends to achieve by limiting production are quite obvious. Energy officials are trying in this way to keep the cost of hydrocarbons at least at the current level in order to prevent a continued fall in export revenues from raw materials to the treasury. From January to May 2023, our budget revenues from the oil and gas industry fell to 2.8 trillion rubles, which is 50% less than last year’s results.

The problem is that even against the background of a significant increase in hydrocarbon exports from our country to India and China (plus the first deliveries went to Pakistan, and then Bangladesh promises to buy our raw materials), there is an overabundance of domestic raw materials. At the very least, Western analysts argue that Europe’s refusal of energy cooperation with Russia has led to a surplus of domestic production capacities. Since our country does not have large storage facilities for raw materials, we have to gradually tighten the fuel valves.

The partners of our country in the OPEC + alliance – Saudi Arabia, the UAE, Kuwait, Oman, Algeria, Iraq, Kazakhstan, Gabon – are in solidarity in their position on reducing production: at the last meeting, they announced the extension of the deal to reduce the overall level of production of the organization by 1, 4 million barrels per day for 2024. However, as the experience of past years shows, the world commodity market is influenced by many circumstances and no one is immune from the collapse of quotations, which are now at a relatively high level. MK experts explained what consequences the actions of Russia and other members of the alliance could have and what challenges the producing countries may face in the very near future.

Igor YUSHKOV, expert of the Financial University under the Government of the Russian Federation:

“Oil quotes, as well as the cost of finished fuel on international commodity exchanges, are constantly and strictly monitored. The decline in production, including at Russian fields, is taken into account in the OPEC+ framework protocols. The production levels of each member of the alliance are regulated between sellers and buyers of energy resources. An additional voluntary reduction in exports by 500 thousand barrels from Russia, which is one of the largest suppliers of “black gold” to the world market, is most likely agreed with another leader of the alliance – Saudi Arabia. Theoretically, the cost of hydrocarbons should rise. However, the future demand for oil will be diagnosed by a significant number of accompanying factors. The threat of a global economic recession remains and threatens to reverse the trend. Appetites of the Federal Reserve System (FRS) of the USA can grow and the interest rate of the American, and accordingly all other world credit organizations, will increase. In this case, the demand and liquidity of oil will fall, which will entail the instability of market prices for “black gold”.

Sergey SUVEROV, investment strategist at Arikapital Management Company:

“The efforts of producing countries from OPEC + to keep the cost of a barrel at a relatively high level are opposed by the United States. The US government is primarily interested in reducing the cost of motor fuel at national gas stations. Coping with such a task, especially in connection with the reduction in the production capacities of the main world players, is still very difficult: in the vicinity of Washington, prices per gallon of gasoline reach $5, which is 10-20% higher than the usual level. The Americans also cannot influence OPEC +: their so-called Arab allies go to negotiations, but do not make unfavorable decisions for themselves under America’s dictation. Therefore, the US will look for other ways to put pressure on raw material exporters. The continued increase in the interest rate by the Fed is one of the most effective measures of economic pressure on producing countries. An increase in the rate will cause an increase in the value of the dollar, and, consequently, of debt obligations. Due to the rise in the cost of borrowed capital, European projects will suffer large losses, in many respects, also financially based on overseas subsidies. The European Union, whose countries are gradually abandoning Russian energy, will have no one to attract investments, since the printing press is in the hands of Washington. Such a policy can lead to the most deplorable result – due to a drop in demand, oil quotes will move to the opposite dynamics and risk falling to $30-40 per barrel.