OPEC + is preparing for a sharp reduction in oil production: what is the benefit to Russia

And how much will a barrel cost

World oil producers intend to again limit the production of “black gold” in order to stop the fall in energy prices. At the OPEC+ summit on October 5, which was held in person for the first time in the last two years, the option of a decision on an additional reduction in production by 2 million barrels per day is being discussed. At the time of this writing, there is no final decision from the OPEC+ energy ministers, but their monitoring committee recommended supporting such a cut, the highest since the pandemic 2020. Independent analysts believe that as a result, the growth of world prices for hydrocarbons will continue, which could hurt the already difficult energy situation in the importing countries from the European Union.

On the eve of the OPEC+ meeting, the situation on the planet’s oil market escalated to the limit. Quotes of a barrel, which went off scale for $125 back in the middle of summer, have fallen by almost 30% and are now barely balancing at $85-90. Naturally, the producing countries are not satisfied with such price dynamics, and therefore they raised the issue of reducing production in order to send the cost of a barrel up.

The alliance delegates considered several options for reducing production quotas: by one, by one and a half and by two million barrels per day. According to the Financial Times, the size of the reduction has not yet been officially agreed, but Saudi Arabia and Russia – the leading countries in production among all participants, are seeking the maximum reduction in production, even if the phased production cuts stretch for several months.

With oil production in Russia, even in the face of Western sanctions, so far everything is in order. Despite the seasonal slowdown in demand within the country, according to the results of three quarters, the production of raw materials in our country increased by 3% in annual terms and amounted to about 400 million tons (for comparison: for the whole of 2021 there were 525 million). Experts expect that by the end of the year, the production of liquid hydrocarbons by Russian companies may fall by 1%, which in general is not a serious blow for the industry in modern conditions.

At the same time, now the rate of domestic oil production is at the level of 10 million barrels per day (excluding condensate), which is about 10% less than the current Russian quota under the OPEC+ deal. The production of raw materials by Saudi Arabian enterprises is also far from the limit values. El Riyadh can significantly increase the capacity of its hydrocarbon fields only not earlier than 2027, when the kingdom decides on the costs of new mining projects, as well as on new energy markets. Under these conditions, the interests of the Russians and the Saudis coincided – both of them need a more expensive barrel for the current replenishment of their budgets.

The main problem is that in August, most of the OPEC + countries in aggregate lagged behind the implementation of the established quota by 3.5 million barrels per day. After the limitation of production, the surplus of raw materials promises to decrease by two million “barrels”.

However, an additional reduction in the quota is likely to have a rather noticeable effect on the total oil supply of the cartel countries. World Bank analysts believe that new sanctions against Russia “will have a long-term negative impact” on Russian hydrocarbon production. Restricting access to foreign technology will also exacerbate geopolitical divisions. According to the updated WB forecast, in 2022, the average price of a barrel of oil, given the decrease in investment and limited access to foreign equipment, may come close to $140, while the basic estimate of a “barrel” will remain at $100. If this forecast comes true, then Russia will easily be able to compensate for the likely (as a result of sanctions) decline in its oil sales by a noticeable increase in its price.

Sergei Pravosudov, Director General of the National Energy Institute, is confident that oil prices will rise in the coming winter as a result of the decision taken by the OPEC+ countries. “Therefore, consumers in the countries of the Old World need to prepare for a crazy increase in tariffs at gas stations and in monthly utility bills,” the analyst believes.