“Pour in cheap oil”: OPEC + put an end to the plans of the West

MOSCOW, October 5 – PRIME, Oleg Krivoshapov. The intrigue in the world oil market is spinning due to the decision of the OPEC + countries to cut production and due to the sanctions activity of Western countries against Russia. “Prime” decided to figure out what it could turn into.

UNEXPECTED SOLUTION

Representatives of the OPEC + countries during the next meeting in Vienna on October 5 voted to reduce oil production by 2 million barrels per day. This did not come as a surprise – the willingness of the participants in the transaction to reduce production was discussed before, the question was only in volumes. A month ago, on September 5, the OPEC+ conglomerate also decided to reduce the quota for the production of “black gold”, despite the calls of the G7 to increase it.

This may well be due to the sanctions policy of the West, says Alexei Kokin, chief oil and gas analyst at Otkritie Investments. We are talking about a price ceiling for Russian oil sold to third countries, the draft of which was agreed upon by the European Union as part of a new package of anti-Russian sanctions.

In addition to restrictions already introduced in June on insurance and financial services necessary for the transportation of “black gold”, it is planned to ban sea deliveries of Russian oil, with the exception of volumes, the cost of which is limited by the coalition of the Big Seven (G7) and a number of other countries. This is the draft agreed proposals that Bloomberg refers to.

According to Kokin, the price ceiling is a challenge for the entire oil alliance. “Or rather, not the ceiling itself, but the cartel of buyers that is emerging to implement it,” he argues. “This is potentially a big danger for OPEC and OPEC +. The parties to the agreement are trying to send a signal that they see it and are ready to fight.”

SUPPORT PRICES AND EACH OTHER

Another reason is the desire of the alliance to influence the possible decline in oil prices caused by the deterioration of the global economy. The reduction in production under the OPEC + deal is already included in the quotes, which means that after the decision there may be a profit fixation, and not an increase in prices, as one might assume, says Ekaterina Krylova, managing expert of Promsvyazbank (PSB).

In reality, production will decline slightly due to chronic non-compliance with OPEC + quotas. According to the latest data, the backlog was 3.6 million barrels per day. That is, the effect on balance is expected to be much more modest, she added.

At the same time, the specialist warns: the risks of a further increase in refinancing rates and a recession in the global economy, and hence the demand for energy resources, have not gone away. All this limits the potential for higher oil prices.

Kokin of Otkritie Investments also doesn’t expect oil prices to rise to bring us back to mid-year levels. So far, this is just a downward trend reversal, he believes.

Vasily Koltashov, head of the Center for Political and Economic Research at the New Society Institute, believes that we should talk not so much about the impact on quotes as about the principled position of OPEC + in the new situation. “This position is different from the one that was within the organization in January-March 2020, when the alliance allowed prices to collapse, which, in turn, hit the supplier countries,” he explained.

The lesson has been learned thoroughly, and the OPEC + alliance has realized that it must fight for profitable oil prices, the expert claims. “And this also dictates a more solidarity behavior of the members of the organization,” he points out. “At least I expect it to be so, otherwise the United States will get its way, bring down oil prices, and the OPEC + countries will be left without sufficient benefits. Therefore, it is more profitable cut production.” Reducing production is the right strategy in the current conditions, Koltashov is sure.

OUTLOOK FOR THE ECONOMY

There are many reasons for a further fall in oil prices, analysts are sure. The US Federal Reserve System (FRS) raised the discount rate to 3.25%, the Bank of England – up to 2.25%, the European Central Bank – up to 1.25%. That is, Western central banks generally make loans more expensive. “This puts pressure on the oil market and destroys Western economies in terms of consumption. In such a situation, it is better for Russia, for OPEC + to cut production than to flood the West with cheap oil, and also at a loss simply because they resort to various tricks of the financial order,” says Koltashov.

He recalled the cyclical nature of the world economy – it is not obliged to grow all the time, each round of growth is followed by a natural decline, the same applies to production volumes. Now we are at the stage of its reduction, but there is nothing terrible in this.

“Back in the eighties, they were only talking about sustainable growth, because there was neither stability nor growth. And now it’s time to understand that the researchers of capitalism were right, pointing to peculiar rhythms,” the economist points out. “Let’s reduce today, increase tomorrow. The main thing is that prices should be at a sufficient level to protect exporting countries from losses.”

And if this policy turns out to be effective, then at some point oil prices will begin to recover or even grow, despite the policy of Western central banks, the expert concludes.