DEALING FOR RISE

The oil market was quite optimistic in December last year, when the OPEC member-states and eleven non-members made a deal to cut the oil production until mid-2017. Majority of analytical centers and banks have urgently updated their forecasts expecting that the joint agreement would remove surplus oil from the market and raise the prices to acceptable levels. According to forecasts, the average oil price would exceed $60 and be at least close to $70 per barrel in 2017 and 2018, respectively. Indeed, during the first months of 2017, the prices increased to $55 per barrel. However, by the spring, the trend reversed back to normal and the prices have fallen to $50. In general, the oil prices have dropped by 16% since the beginning of 2017.

As a result, the oil cuts by OPEC member and non-member-states to 1.8 million barrels per day has only stabilized the prices at $45-50 per barrel during a half-year period. At the same time, the planned level of production decline could only be achieved by the end of this period, in May 2017, mainly because of the slow rates of oil cuts by Russia. Therefore, at the meeting held in May 2017, the parties decided to extend the agreement for another nine months, namely until March 2018. But this decision also could not restore the optimism in the market, as many analysts believed that it was necessary to expand the number of participants involved in the reduction process and to increase the reduction volumes accordingly.

As a result, the oil prices fell even below $45. Furthermore, the restoration of oil production in Libya and Nigeria, which are not limited by the above agreement despite membership in OPEC, as well as the increased levels of shale oil production in the US have had a negative influence of the market.

According to Bloomberg, cumulative daily volume of oil production by the cartel in June (390,000 barrels) exceeded the target level fixed in the agreement. Libya and Nigeria made a significant contribution to overproduction, although other OPEC members did not lag behind: Saudi Arabia increased production by 90,000 compared with May, and the UAE by 40,000 barrels.

All these issues were the subject of discussions at the meeting of the committee to monitor the implementation of the agreement on the reduction of oil production held on July 24 in St. Petersburg.

Although the committee sees problems in the oil market as the supply increases, it assesses the overall situation positively. According to the final communique released after the meeting, the terms of the agreement for the first half of 2017 were fulfilled by 98%. According to Alexander Novak, Russian Minister of Energy, if all the participants fulfill their obligations in full, this will ensure an additional reduction in oil production by another 200 thousand bpd.

Khalid al-Falih, Saudi Minister of Energy, promised to urge those who violated the quotas: "Several countries are behind, and we talked with them. We communicated with the ministers of these countries. They promised to improve the situation and ensure implementation in full. If the situation does not improve, I will speak with the heads of these countries."

At the same time, no decisions were taken regarding Libya and Nigeria: they are still exempt from quotas and may continue to increase production, although many analysts and market participants expected that quotas would also be established for these countries. Incidentally, Libya declares its plans to increase production to 1.2 million, while Nigeria - to 1.8 million bpd, after which they will be ready to join the agreement on oil reduction.

However, the Saudi minister al-Falih believes that these countries cannot reach the cumulative maximum level of oil production even at 2.8 million bpd.

"In fact, they indicated that they had many technical and financial problems that complicate the conservation of production at the current level. We think that the total production of both Libya and Nigeria is somewhat limited. I wish them all the best, but I think that 2.8 million barrels per day is something that is unlikely to be supported, given the discussions that I had with these two delegations, as well as the evaluation of third parties and the technical committee, " said H. Al-Falih.

In any case, the implementation of the agreement on oil cuts has removed 350 million barrels from the market in half a year. Although the oil reserves in developed countries dropped by 90 million barrels for the first time in three years, they still remain above the average for the last five years at 250 million barrels.

However, OPEC does not lose optimism, expecting that in the second half of 2017 the growth rate of demand will be higher than in the first half of the year. In particular, according to al-Falih, in the third quarter, oil demand will grow by 1.5 million barrels per day, compared with one million in the first quarter, which will help accelerate the reduction of stocks.

At the same time, the OPEC countries finally thought about not only reducing oil production, but also regulating exports. At least Saudi Arabia, the United Arab Emirates and Kuwait said about the reduction of exports. In particular, the Saudis have promised to limit exports by 1 million barrels - down to 6.6 million bpd starting from August.

Russia was cautious about the idea of ​​export control. Minister Alexander Novak said that it was necessary to take into account the export of petroleum products and domestic consumption.

The idea with export control would be a priority for the parties to the agreement on production reduction. Most large oil producers have reserves to reduce production, which may not affect exports at all. This is exactly the situation that has been observed for the past six months on the market, when efforts to reduce production have been very poorly reflected at the level of oil entering the market. But then it will be very difficult to agree on a common position, since it is the export that provides the lion's share of the currency earnings of the majority of oil-producing countries, and it is quite difficult to force them to abandon it under the existing conditions of lower incomes.

Another important decision of the monitoring committee may be a proposal to consider the possibility of extending the agreement for an extended period. Saudi Arabia, Iran, Venezuela and Russia are ready for this step, if necessary. Mechanisms for withdrawing from the agreement are not yet on the agenda, since the goal to achieve a reduction in reserves to an average of five years is still not achieved.

On the contrary, the signatory states are thinking about expanding the number of countries to the agreement. According to OPEC Secretary General Mohammed Barkindo, the organization has already started discussions with the shale oil producers in the United States.

"Last year, for the first time in the history of OPEC, we began a dialogue with the U.S. manufacturers. I must say that I was surprised how warm the level of acceptation of our initiative was. They urged us to continue this dialogue," said Barkindo in his interview with RBC television channel. He added that they expect to continue the dialogue in the fourth quarter of 2017, as well as to attract new American companies.

"We hope that American manufacturers will eventually join us in these joint efforts to restore the stability in the industry, which has been declining in the past two years," said Barkindo. He also noted that he did not expect production growth by the countries of the cartel by the end of 2017.

Many analysts are rather skeptical about the U.S. involvement in the deal. On the one hand, rising oil prices are profitable for shale oil producers, but on the other hand, most of the production is concentrated in the hands of small companies, for which momentary profits are important, and not general trends in the development of the oil market. Thus, it is difficult to indicate individual quotas. In addition, the development of technology constantly leads to a reduction in the cost of shale oil, which contributes to the growth of production. Although the rate of drilling new wells in the U.S. has declined slightly in recent months, the trend is still in the direction of increasing production growth. In addition, it is impossible to neglect the policy of the new U.S. administration, which supports free competition and the absence of administrative barriers in the energy sector.

In principle, the market has responded quite adequately to the statements of the monitoring committee members of the agreement. As a result of trades on July 27, the price of oil increased to $51.5 per barrel versus $47 a week earlier. At this stage, support for price increases is also the decline in the U.S. inventories, which fell to the level of January 2017.

But in any case, analysts are very cautious about the prospects of rising oil prices. In particular, the IMF lowered the forecast for oil prices for the current and future years by an average of $3 per barrel in comparison with the April data (up to $52 for a barrel of Brent). Even more pessimistic about the prices is the Energy Information Administration of the U.S. Department of Energy. In July, the organization lowered its own forecast for 2017 by $2 for Brent (down to $50.8) in 2017, and just $4 (down to $51.6) in 2018.

At the same time, IMF still predicts an unprecedented rise in the world economy over the past ten years. "The latest data shows that the world economy will have the biggest synchronized recovery of the decade," write the economists of IMF in the "World Economic Outlook". The organization raised the forecast for economic growth in almost all regions of the world - in Europe, Japan, China, in the developing countries of Asia, Russia, Brazil, India, etc. IMF is concerned only with the growth rate in the U.S., which hampers the uncertain policy of Donald Trump, as well as the growth of the U.K. economy due to Brexit.

Meanwhile, the global growth of the economy ultimately results in increased demand for energy resources, including oil, and coupled with the concerted actions of the producers, this may lead to such a long-awaited rise in oil prices.