OPEC + further reduced oil production: the decision is not in favor of Russia

The expert outlined non-obvious risks

On May 1, the decision of a number of OPEC+ countries (Organization of Petroleum Exporters) to voluntarily reduce oil production, which will total 1.6 million barrels per day, came into force. The world market reacted to this with a moderate increase in quotations – up to $79.5 per barrel of Brent. Theoretically, the situation due to reduced supply should have a beneficial effect on Russian oil exports, the price of the domestic brand Urals and budget revenues. In reality, everything is not so clear.

Recall that some OPEC+ countries, including the largest oil producer, Saudi Arabia, unexpectedly announced a voluntary cut in production from May to the end of 2023 the day before the meeting of the ministerial monitoring committee of the alliance (held on April 3). Preventive measures aimed at maintaining the stability of the oil market supplemented the OPEC + plan, which has been in force since November 2022, to reduce oil production by 2 million barrels per day.

Nine OPEC+ countries have joined the initiative. Saudi Arabia will voluntarily reduce production by 500 thousand barrels per day, Iraq – by 211 thousand, the United Arab Emirates – by 144 thousand, Kuwait – by 128 thousand, Kazakhstan – by 78 thousand, Algeria – by 48 thousand, Oman – by 40 thousand, Gabon – for 8 thousand.

Russia has extended until the end of the year the obligation to reduce production by 500,000 barrels per day from the February average, which was in effect until the end of June. As the cartel forecasts a global recession and falling demand, OPEC+ may discuss similar measures at its next meeting on May 5.

“For Russia, from the point of view of general industrial dynamics and the situation with GDP, there is little good here,” says Nikita Maslennikov, a leading expert at the Center for Political Technologies. – According to macroeconomists, the reduction of its production by 500,000 barrels per day is pulling down both the extractive industries and oil refining. Moreover, the Ministry of Economic Development predicts a symbolic, literally tenths of a percent, annual growth in industrial output. As for the prospects related to oil prices, there are clearly more uncertainties here.”

On the one hand, an additional reduction in production by OPEC+ countries by 1.6 million barrels per day evens out the balance of supply and demand and forms an equilibrium price. What level will she be? Here the forecasts are extremely contradictory: they all “walk” from $84 to $90 per barrel of Brent. Taking into account the fact that for the next six months the discount for the Russian grade Urals is set at $25 per barrel, its price will most likely stabilize near the price ceiling (at $60 per barrel). So in this case, Russia has nothing to fear.

Much more worrying is that the world’s largest economies are falling into recession: from January to March 2023, US GDP growth slowed from 2.6% to 1.1%, and in the eurozone, quarterly GDP dynamics have been balancing around zero for several months. All this is transferred along the chain to China, whose total trade turnover with America and the EU exceeds $1.5 trillion. In general, Maslennikov concludes, the main risk for Russia is associated with a high probability of a decrease in demand for its raw material exports from its main trading partners, primarily China and India.