Opec member countries reached an agreement to cap oil output for another nine months until March 2018, Bloomberg and the Financial Times reported on May 25, citing unnamed sources close to the cartel’s negotiations in Vienna.
The move comes amid a global glut of crude after prices halved and revenues fell sharply in the past three years.
Earlier that day Brent oil prices slipped from $54.4 to $53.4 per barrel on comments by Saudi Energy Minister Khalid Al-Falih that a nine-month deal is unlikely to be reached. Prices slipped more to $52.3 as of 2pm Moscow time after other early unofficial comments to that effect, according to Vedomosti daily.
Analysts surveyed by the Wall Street Journal expected Brent to remain in the $50-$60 per barrel range should the 1.8mn barrels a day cut be prolonged, while Wood Mackenzie said that prolonging the deal to March 2018 would not change its outlook of $55 per barrel in 2017.
Citigroup believes that should the “Opec+” measures (adopted by Opec cartel states and some non-Opec producers, notably Russia) remain in place, the Brent price could rise above $60 by the end of the year.
Meanwhile, positions on the deal are split in the Russian government, Vedomosti reported on March 24.
The Russian Ministry of Energy is supporting the prolongation of the oil output cuts, to which Russia contributes most of the non-Opec producers’ share. At the same time, the Russian Finance Ministry argues in internal memos cited by the daily that the deal “has practically no sense”.
The finance ministry reportedly believes that prolonging output caps into the second half of 2017 would increase excess reserves of oil in Organisation for Economic Co-operation and Development (OECD) states by 250mn barrels, pushing the demand beyond supply by 1.9mn barrels daily. This, in turn, will spur the Shale Revolution 2.0 in the US, it argues.
“The payout [for freezing output] will be a significant surplus of 0.7mn barrels daily in the first half of 2018, stocking up reserves, and a plunge in oil prices,” the finance ministry warns, taking an alarmist position and not excluding a drop in prices to $30 per barrel.
Notably, such a development would erase recent across-the-board revisions of the short-term outlook in Russia, which is expected to bounce from recession in 2014-2016 to close to its potential growth of 1-2% in 2017-2019.
The government’s policy response to the double shock of collapsing oil prices and and Western sanctions in 2014-2015 helped maintain “macro stability, but the recovery of oil prices brought about by the original Opec deal in November 2016 is still the factor driving the recovery”, the Word Bank recently said.
The Russian economy will grow by 1.3% in 2017 and by 1.4% in 2018 and 2019, the bank projects in its latest Russia Economic Report “From Recession to Recovery” presented on May 23. The outlook is in line with the recent update of Russia’s GDP growth outlook to the 1.2-1.5% range by international observers such as Moody’s, the EBRD, and the IMF.
Domestic forecasts are more optimistic, with Economic Development Minister Maxim Oreshkin saying this month that GDP growth in the second half of the year may exceed 2% in annual terms.
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