A new extension of OPEC+ deal and its promises / News / News agency Inforos
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A new extension of OPEC+ deal and its promises

The point is to avoid price shocks

A new extension of OPEC+ deal and its promises
Context:

The geopolitical storm around the U.S.-Iran tensions, which made global oil prices highly volatile, has slightly abated. In late June-early July it was the future of the OPEC+ deal that sparked great interest – will they extend oil production restriction agreement from the mid of the year and for how long?

 The denouement came on July 2: OPEC+ (energy alliance between OPEC and non-OPEC oil producing countries) agreed to extend the agreement on oil production cuts (initially signed in 2016) for another nine months - until March 2020.  The consolidated oil production of the countries participating in OPEC+ agreement has been limited to 43.9 mln barrels per day. OPEC+ deal involves 21 states including Russia and Saudi Arabia. Three OPEC countries – Libya, Venezuela and Iran have been released from obligations as they are now facing difficult political and economic circumstances.

At the recent meeting OPEC+ states adopted a Charter on cooperation between oil producing countries.  According to the document, its goal is “to facilitate dialogue” and “further strengthen the collaboration in the formulation of policies aimed at promoting oil market stability.” The states that signed the Charter pledged to develop the exchange of information on factors that affect the oil market, to improve interaction with consumers and to pursue energy policy to uphold oil priority in the changing global energy balance. These agreements were closed for at least one year.

In fact, it was already clear that the OPEC+ deal would be extended on June 29, after Russia’s President Vladimir Putin and Saudi Crown Prince Mohammed Bin Salman met on the sidelines of the G20 summit in Osaka. “We have agreed: we will continue our agreements. In any event we will support the continuation of agreements, both Russia and Saudi Arabia, in the volumes previously agreed. As far as the length of the extension is concerned, we have yet to decide whether it will be six or nine months. Maybe it will be nine months,” the Russian leader said in Osaka.

Actually, all OPEC+ participants were interested in the extension of oil production cuts because it is a kind of insurance against price shocks on the global oil market. Meanwhile, the views of Russian oil producers are becoming more and more liberal with regard to production restrictions. The big profits they made in 2018 and in the first half of 2019 allow them to invest more funds in production, but Russia’s participation in OPEC+ hampers it. Therefore, Russian oil companies have a strong desire to loosen the restrictions. But the national regulators are against it, as well as the entire OPEC+. For Russia it is of fundamental importance to maintain a consolidated position with Saudi Arabia on this issue.

In fact, everyone involved in the deal would not mind loosening the restrictions.  Especially now, when the difficulties with oil production in Venezuela and Iran provoke the replacement of their shares by other OPEC+ producers. Besides that, the United States, which is outside the agreement, is also building up its oil production.

But the deal has been extended and now it the turn of the monitoring mission to act. It will inspect how the participants comply with the terms of the deal on a monthly basis adding fresh news to the global oil market. Sometimes, the monitors fix quite shocking figures of compliance with the terms of the deal: for example, in May the participants fulfilled their obligations by 163%, and in April - by 168%.

The extension of OPEC+ production restrictions significantly offset the risks of oversupply on the oil market amid the production weakness of Venezuela and Iran. The new nine month period for limiting the production, which covers the first quarter of 2020, is also an important step for Russia and Saudi Arabia that are planning to reach a strategic format for their cooperation in the OPEC + format.

The extension of production restrictions is also good for oil prices. One can expect Brent crude price to stabilize at around $65-70 per barrel until the end of the year. Sharp declines in oil prices are now unlikely, while oil price hikes are quite possible due to geopolitical bifurcations, especially amid growing confrontation between the US and Iran. As for the shares of Russian oil and gas companies, the news about the extension of the OPEC+ deal is still moderately positive – the national companies are ready and want to produce more, but they are now limited due to Russia’s involvement in OPEC+. This is holding back their natural growth, and as a result – their market capitalization.  

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