Why Russia voluntarily closes the oil tap

The initiators of another oil demarche are trying to stop the fall in world prices. So far without success. By the end of the week, the price of the benchmark Brent rose slightly by $3-4 per barrel on average, moving from the $70-75 corridor to the $76-77 range. But this is not enough. This year’s Russian budget is based on $70.1 per barrel of Urals. However, in June, according to the Ministry of Finance, the price of the Russian brand barely overcame the $55 bar (the sanctions discount affects it). As a result, according to Anton Siluanov’s department, oil and gas budget revenues collapsed in January-June by 47% compared to the same period last year and amounted to only 3.38 trillion rubles.

The Saudi budget will be deficit-free even at $80.

So what is a dead end? Hope is the last to disappear.

The global oil market is developing not so much according to its internal laws, but on the basis of the interweaving and interdependence of futures operations, the macroeconomic situation and geopolitical tensions, as well as the reliability of supply chains. It is no coincidence that on March 8, 2022, almost $130 per barrel was given for Brent. This quotation lasted, however, one day. But still, last spring the cost of oil was close to the records of 2008, including due to the fall in Russian exports.

However, now all global processes are playing to lower prices. Russian supplies abroad have recovered after the Western embargo on Russian oil and oil products, as well as the price ceiling, has fizzled out. Exports to the EU are almost completely redirected by Moscow to India. By July 1, they began to receive up to 2.2 million barrels per day. That is, global supply is generally stable.

On the other hand, demand is declining: firstly, due to the zeroing of economic growth in the EU and its significant slowdown in the US. Second, growth in China is not as encouraging as previously predicted. If we turn to the final indicators for the world oil market, then, taking into account all the circumstances, the price still primarily depends on the market balance – the ratio of supply and demand.

In the fourth quarter of last year, according to the calculations of the International Energy Agency (IEA), the supply surplus amounted to about 1 million barrels per day. At first glance, the figure is not very significant. But this is 1% of the total balance of supply and demand. So it is unlikely that even such an excess of supply over demand can play in the direction of raising prices or at least stabilizing them.

For this year, the IEA predicted about the same figure. In the March report, demand this year reached a record 102 million barrels per day. That is, about 2 million barrels were added. An increase in production and exports was predicted by non-OPEC+ countries by about 3 million barrels. True, IEA analysts believed back in January that Russia would cut production by 850,000 barrels. Total: to last year’s 101 million barrels of supply, another 2 million were added. And the surplus was again predicted in the volume of daily 1 million barrels.

But already this spring it became clear that the IEA forecast is collapsing. Global demand not only did not rise, but began to decline in May. Due to the macroeconomic problems already mentioned above in the main oil consuming countries.

Prices have steadily crept down.

In principle, they tried to prevent a price drop within the framework of OPEC + at the ministerial meeting in Vienna on October 5 last year. Then they agreed to cut production quotas by 2 million barrels per day for the whole of this year. On June 4, the agreement was extended to 2024. But the reduction turned out to be largely “paper”. Not all OPEC+ members reached the ceiling of their quotas. As a result, only 1 million was minus.

In February, as is known, Alexander Novak announced that since March, Russia has voluntarily reduced production by 500,000 barrels per day compared to the February level. True, it still remains unclear how much was actually produced in February (according to Novak – 9.8-9.9 million, OPEC – 10 million). And when, in fact, this promise was fulfilled – either in March, or in May … But, apparently, in fact, only in June. It is no coincidence that essentially verbal maneuvers did not have any deterrent effect on oil prices.

Saudi Arabia had to intervene. On April 2, this key oil exporter and 8 other members of OPEC + decided without any coercion to cut production in general by 1.16 million barrels per day from May 1 until the end of the year (500 thousand – specifically the Saudis). This agreement on June 4 at the Vienna ministerial meeting was extended to 2024. But again by.

Then the Saudis unilaterally reduced production by another 1 million barrels (now the country produces only 9 million barrels per day with a quota of 10.5 million). Initially only in July. But, having supported Novak, they extended the promise to August.

Thus, taking into account all the latest voluntary restrictions, compared to October 2022, OPEC + will reduce production by 3.66 million barrels per day in August. Here it is necessary to clarify that in this case we are talking about a decrease in exports by about the same amount. Moreover, Alexander Novak announced precisely the reduction of exports. He did not say anything about a new decline in production.

As a result of all these joint actions of suppliers, the oil balance has a chance to shift in their favor. If demand eventually this year remains approximately at last year’s level, and supply really decreases by the designated amount, then in September-October the surplus in the world oil market will be replaced by a deficit of 1-2 million barrels per day.

True, there are doubts that all oil-exporting countries will fulfill their obligations in full. Suffice it to recall Russia’s too slow implementation of previous promises to reduce production. Many experts also doubt that Russian oil companies will rush to turn off the export valve. There aren’t many legitimate ways for the government to get them to do this. In addition, in the conditions of the sanctions war, we do not publish official data on production and exports. Everyone gets by with evaluation mechanisms built on data from world oil agencies and the customs authorities of importing countries.

By the way, not all OPEC+ members cut production. For example, Nigeria and Iraq recently, on the contrary, have increased both production and export.

On the stock exchanges, the all-too-frequent announcements of voluntary production cuts take into account and are rather skeptical that all this will actually happen. In addition, commercial oil reserves remain quite high. So while prices have moved up very little. Market participants do not play massively to increase the price of a barrel. Expect further developments.

Most likely, this summer oil prices are unlikely to go beyond, even under favorable conditions, the corridor of $80-85 per barrel. But it is more likely that this will happen only in the third quarter.

So the situation for us and the Saudis is not going well. Even the notorious $80 per barrel seems more and more elusive. In my opinion, the only way out is to take advantage of the pandemic experience of 2020 and drastically reduce production throughout OPEC+ and, accordingly, supplies to the world market. For how much and for how long, it is necessary to decide no later than November 26, when the next oil summit in Vienna is scheduled.

However, the world oil market takes less and less into account the production and even financial steps of its participants. The preponderance is increasingly given to geopolitical factors. True, they can play in our favor. For example, if the West nevertheless abruptly cuts off Russian supply routes, this will not only hit our budget, but will also cause such a shortage of supply that prices will rise sharply.