REBOUND: Oil Prices Have Stabilized, Investment Has Increased, Russia’s Prepares to Drill in 2018
1,700,000,000 rubles was the sum the Russian budget acquired after the deal with OPEC+ regarding the reduction of oil production. By the end of 2017, a Brent barrel cost $65. How did the reduced production affect the Russian and global economy?
Alexandra Suvorova with the details.
Every meeting of the OPEC members and the states that are not part of the cartel is awaited by the market, experts, and press because the decisions made there directly influence the economies of all oil producers. Thanks to the deal with OPEC+, the market stabilized during the last two years, the Russian budget acquired an additional 1,700,000,000 rubles. The oil and gas sector also benefited from the deal.
Russian refineries stopped working at a loss, as they used to when the price was $40 per barrel, which means there's no risk in selling oil on the internal market. The Ministry of Energy pointed out that our oil production is receiving new investments.
Alexander Novak, Minister of Energy: "We reduced the amount of surplus on the market from 340 million barrels on January 1st, 2017 to 140 million barrels by the end of 2017. Prices at the higher levels have stabilized. And we have observed a 30% increase in prices compared to the previous year. We see the reduction of volatility and the return on investments. For the first time in three years, foreign investments increased by 5%".
What else has made the agreement on reducing oil production so useful? In 2017, prices reached $60 per barrel, which means Russia will retain its high investment ratings. Today’s estimates of the Big Trio are either stable or positive.
It improves the investment climate and the mood of those who invest in our economy. The high oil prices help to replenish the Russian foreign exchange reserves, maintaining economic stability, and not just the Russian one but the stability of all the countries that signed the agreement.
Andrew Critchlow, S&P Global Platts: "When we speak about OPEC+ we mean Russia and Saudi Arabia. These countries are the two dominant forces in the oil market. We must bear in mind that OPEC controls about 50% of the world's oil supply. But actually, Russia and non-member countries of OPEC are dynamically changing the situation. Now, there's a group of countries that control 45% of the world's oil supply. It's a powerful bloc in terms of politics and pricing".
The agreement is aimed at reducing the global oil surplus. Currently, the OPEC countries have collectively liquidated about 2 million BOPD. The growth of commercial oil supplies has been stopped. Since the beginning of the year, it was lowered by 60% to 140 million barrels. If production wasn't frozen, growth would have continued, and the surplus could have exceeded 650 million by the end of 2017. According to the experts' estimates, that would have made a barrel cost $30.
Neil Atkinson, Head of Oil Industry and Markets Division of IEA: "We see the market being slightly oversupplied in the first half of 2018. In the second half, the market will be balanced with a possible slight deficit. This agreement has brought stability to the market".
The deal was also beneficial in terms of investments. The global attractiveness of the oil sector is gradually recovering. In 2017, the number of investments increased by 3-4%, and it can increase even more. Most experts believe that until 2020, a barrel will cost about $60.
The agreement on reducing oil production was reached in late 2016 and was signed by the members of OPEC and some non-member countries. The alliance was called OPEC+. At first, the duration of the agreement was supposed to last until the first half of 2017, but it was extended twice — at first until March 2018, and now, until the end of the year.
Governments had to lower their joint production by 1,800,000 BOPD. Russia and Saudi Arabia had the largest quota. The rates of October 2016 were taken as a starting point. In May 2017, our county managed to reach the required level and has been sticking to it since then. In November, Russia lowered its production by 303,000 BOPD.
Russian oil companies support the OPEC+ decision and are gradually lowering oil production.
Alexander Dyukov, Chairman of the Management Board of Gazprom Neft: "This year, investments into oil exploration and extraction have increased, which is important because the number of investments rapidly decreased in 2015 and 2016, and if this cycle had lasted a bit longer, in several years, we would have faced a deficit in the oil market and a rapid increase in prices".
Whether the agreement gets prolonged is still unclear. The ministers of OPEC+ countries are trying to be non-committal. Everything depends on the market. Whether a prolongation is necessary, will be revealed in June 2018 at the next OPEC+ meeting.