A PREVALENCE OF PRAGMATISM

The oil market is shaken again. Despite reduction efforts launched this year, oil prices fell below $50 in the first decade of March, in just a week time.

Frankly, before March, the expectations of oil producing countries, which agreed on an aggregate reduction of production by 1.8 million barrels of oil per day, have become true. Initially, the price has remained almost unchanged, $55-57 per barrel. The implementation of the agreement on production cut did not cause any criticism. According to the Russian Minister of Energy, Alexander Novak, in general, the agreement was fulfilled by 93%. Meanwhile, OPEC countries have fulfilled their obligation by 106% by cutting off oil production by 1.2 million barrels. Eleven non-member countries of the cartel, which joined the agreement, were able to meet their obligations by 64%. In general, the complete implementation of the agreement is hindered by the slow decline in production in Russia, where by March 2017 it decreased by 185 thousand barrels instead of 300 thousand barrels. On the other hand, Azerbaijan achieved impressive results, according to the Ministry of Energy. It reduced production by 214% of the agreed quota of 35 thousand barrels per day, providing 20% ​​of the total reduction in production of non-OPEC countries. These volumes are quite enough for the market to fix the price level acceptable for producers.

The following events were expected but the producers did not have enough time to prepare well for it. Producers of shale oil in the US decided to take advantage of a favorable market situation and began to increase production actively. As a result, in early March, oil production in the US exceeded 9 million barrels per day for the first time in a year. As a result, the US oil reserves in the first week of March increased by 8.2 million barrels, which is four times more than forecasts, and reached 528.4 million barrels. In the following weeks, stocks increased by another 5 million barrels hitting the historic maximum. Along with the increase in production, the seasonal decrease in oil consumption in the US was also influenced by the increase in reserves due to preventive maintenance at oil refineries. All these factors resulted in drastic fall of oil prices (3-5% per day), and dropped to $50 for Brent and $47 for the American WTI.

It is interesting, however, that most analysts are not pessimistic about the current drop in prices, noting that the agreement of 24 oil-producing countries to reduce production contributes to a reduction in world oil reserves that have reached record levels. According to the International Energy Agency (IEA), with the current volumes of oil production and consumption remaining, the excess of supply over demand in the world oil market will be replaced by a deficit of about 500 thousand barrels per day until June 2017. Under these conditions, it is important that OPEC prevents excessive strengthening of the shale oil producers, which may well occupy the niche of the cartel, and first of all Saudi Arabia. That is why at the conference in Houston, the Saudi Energy Minister Khalid al-Falih warned that there would be no "freebies" for shale oil producers.

According to Reuters, in a closed meeting with the heads of several American oil companies involved in shale oil projects, one of the advisers of the Saudi minister noted that OPEC did not intend to make sacrifices in order to increase the production of shale oil in the US.

But the companies are still very optimistic about the future growth. According to Reuters, companies such as Hess, Chesapeake Energy, Continental Resources and Anglo-Dutch Royal Dutch Shell have made statements about the revitalization of the market. The announced projects will allow enterprises to create necessary conditions for ensuring stable supplies of American oil for export in the next decade.

As a result, the Energy Information Administration of the US Department of Energy reports that in 2018, oil production in the US will exceed the record volume noted in 1970, and will grow by 10%, or 10 million bpd.

Saudi Arabia has already indicated its ability to react quickly enough to the situation on the market. After a massive decline in January, the kingdom increased production but stayed within the agreed quotas. Plus, the Saudis reduced oil supplies to the US by 300,000 bpd. In fact, this was a warning to shale oil producers not to aggravate the situation in the oil market and allow prices to stay within $60, which satisfies most of the manufacturers.

In many respects, the oil price will depend on the ability of OPEC and other oil producers to extend semi-annual oil cut.

The meeting of the OPEC Monitoring Committee held on the last Sunday of March in Kuwait, which discussed the progress with the implementation of the agreement, was expected to answer this question. Although the oil-producing countries demonstrate their intention to achieve 100% fulfillment of the obligations on production cut, the meeting in Kuwait did not give an answer to the question of the possibility of prolongation of the agreement.

The final statement of the Monitoring Committee indicates that proposals for the extension of the agreement should be submitted in April by the OPEC Secretariat, and the final decision can be taken at the summit of the organization scheduled on May 25 in Vienna.

The current decline in oil prices was not a topic of concern for participants of the meeting in Kuwait. "Some seasonal factors, such as a seasonal decline in demand, repairs of refining capacity and increased production by non-OPEC countries, have resulted in some increase in crude oil reserves. Meanwhile, we have observed the liquidation of the positions of financial actors in the oil market. The end of seasonal repairs in oil refining industry, a noticeable slowdown in the growth of the US reserves, as well as the reduction in the number of floating oil storage facilities will support the positive efforts undertaken to stabilize the market," says the statement issued by the Monitoring Committee.

Kuwait's Oil Minister, Assam al-Marzuk, said that if all countries fulfill their obligations regarding production cuts in full, the market will stabilize by the third quarter of 2017.

In general, most forecasts suggest that the average oil price will remain at $55-57 during 2017. So, the consensus forecast of representatives of 15 investment banks participating in the survey of The Wall Street Journal suggests that the average price of Brent in 2017 will be $57 per barrel, and in 2018 - $65.

The Bank of Russia made a less optimistic forecast of the average price for the current year - $50 with a conservative scenario of price reduction by the end of the year to $40. But this is almost the only such a low forecast for this year.

For example, the European Central Bank has forecast a higher average price of Brent crude this year ($56.4) from the expected $49.3 in December. The US energy industry has also slightly raised its forecast for Brent to $54.6. IMF believes that prices in 2017 will vary in the range of $55-58. Given the price of $55, the British BP planned its investments, as announced by its head Robert Dudley.

So, despite a sharp drop in oil prices since March 8, almost all market participants evaluate positively the results of production cut and believe in stabilization and gradual increase in prices. To consolidate this trend, it would be practical to extend the agreement at least until the end of 2017. However, the last word will be said by Saudi Arabia and Russia, as well as the US shale oil projects. Anyway, both sides acknowledge the severity of price wars when too cheap oil harms everyone. This offers hope for a pragmatic approach in future decisions.