Russia will significantly reduce oil production together with OPEC +

The largest oil producers continue to aggressively reduce production: the OPEC+ countries agreed to reduce it by another 1.4 million barrels per day (b / d) from 2024, and extend the deal itself until 2025. Russia has committed to significantly cut oil production – its formal quota will be reduced by 650,000 bpd to 9.8 million bpd, and beyond that, a voluntary cut of 500,000 bpd will remain. As a result, the real production of the Russian Federation next year should decrease to 9.3 million b/d against about 9.9 million b/d in 2022 (excluding condensate), and the quota will be lower than that of Saudi Arabia for the first time. However, Riyadh is going to voluntarily reduce production by 1 million b/d from July to 9 million b/d, although so far only for a month.

OPEC+ at a meeting on June 4 in Vienna decided to limit production by another 1.4 million barrels per day from 2024. The total target level of production of the participants in the transaction was fixed at 40.46 million bpd. The key outcome of the meeting was that the cooperation agreement between the OPEC+ countries was extended until at least 2025 (the deadline expired at the end of 2023), and the volume of cuts was increased. The next face-to-face ministerial meeting will take place on 26 November.

As part of the deal, Russia’s production quota will be reduced by about 6%, to 9.8 million b/d, starting in 2024. But in reality, the country undertakes to reduce production to 9.3 million b/d by extending the voluntary production cut by 500,000 b/d until 2025. In May, Russian production, according to OPEC, was about 9.8 million b/d, although UAE Oil Minister Suheil al-Mazrui reported “some inconsistencies” in Russian data, according to Reuters.

Many experts and analysts assumed, based on the dynamics of Russian exports, that the companies actually did not reach the volumes of production cuts announced in March. On June 4, Russian Deputy Prime Minister Alexander Novak assured otherwise, while Saudi Oil Minister Abdulaziz bin Salman confirmed that Russia is fulfilling its obligations.

Although Russian production in 2024 will be 9.3 million b/d, we are talking only about the volumes taken into account under the OPEC + deal, that is, without gas condensate. In 2022, Russia produced 41 million tons of condensate, while oil production amounted to 493 million tons. Thus, the total production of liquid hydrocarbons in 2024 may decrease by about 5.6% compared to 2022, to 504 million tons, if condensate production does not increase. The baseline forecast of the Ministry of Economy in autumn 2022 assumed production in 2024 in the amount of 495 million tons, and in the latest forecast, presented in April 2023, data on expected production are hidden.

Saudi Arabia in 2024 will maintain a quota of 10.5 million b/d, that is, for the first time it will be more than that of the Russian Federation. However, it is not clear how much Riyadh intends to use this, as the kingdom announced its intention to undertake a voluntary reduction in production by 1 million b/d, to 9 million b/d, from July. So far, the reduction has been undertaken for a month, but Abdelaziz bin Salman on June 4 avoided the question of whether it could be extended, explaining that he would like to “maintain uncertainty.”

Initially, before the June meeting, the market expected that the participants in the OPEC + deal would maintain their current parameters, but the day before, rumors began to appear about a deeper reduction in production amid falling oil prices over the past month. The meeting itself was held in secrecy: OPEC denied accreditation to Reuters, Bloomberg and WSJ journalists under the pretext that coverage of the negotiations leads to volatility in the market.

The negotiations themselves were difficult and lasted more than six hours: it was about the redistribution of the base level of quotas established in 2020, including their reduction for countries that are now unable to raise production in accordance with the permitted levels. Thus, quotas for Angola and Nigeria were reduced. The UAE, on the other hand, achieved an increase in the quota by 200,000 bpd.

On the eve of the meeting, the WSJ wrote about the existence of disagreements between Russia and Saudi Arabia, including the alleged dissatisfaction of Riyadh with the fact that Moscow did not cut production, as promised. “We didn’t have any disagreements. We always find a common solution,” Alexander Novak said on June 4. However, with the Russian Federation now hiding its oil production figures, such speculation will be hard to avoid in the future.

The decision to reduce quotas for 2024 is important in terms of shaping the expectations of market participants, said Sergey Kondratiev from the Institute of Energy and Finance. More important for oil prices now, however, will be Saudi Arabia’s voluntary curtailment of production from July 1. Brent prices are now likely to return to a comfortable level for most OPEC+ members above $80 per barrel, Mr. Kondratiev believes.

The expert considers it important that the Russian Federation since 2024 for the first time refused parity in the amount of the quota with Saudi Arabia. Production in Russia has been lagging behind the quota since the spring of 2022, but formally Moscow previously had the right to increase it. In addition, the analyst notes that there is a discussion, including among OPEC + members, about the reliability of data on oil production in Russia: “For the first time in a press release following the meeting, we see an indication that the production data of one of the parties to the agreement with independent agencies and subject to review.”

Dmitry Kozlov