The Organization of the Petroleum Exporting Countries (OPEC) and other major producers led by Russia, a group known as OPEC+, have reportedly agreed to make further small cuts in oil production to boost crude oil prices.
Meeting in Vienna on 5 December, the cartel and Russia decided to deepen recurring cuts over the last three years by an additional 500,000 barrels a day through the end of March 2020. These would lead to total adjustments of 1.7 million barrels per day, OPEC said in a press release. In addition, several participating countries, mainly Saudi Arabia, will continue their additional voluntary contributions, leading to adjustments of more than 2.1 million barrels, OPEC said, adding that this additional adjustment would be effective as of 1 January 2020 and is subject to full conformity by every country participating in the Declaration of Cooperation (DoC) reached on 10 December 2016, between OPEC and non-OPEC producing countries.
Russian Energy Minister Alexander Novak said Moscow’s quota would be 300,000 barrels per day during the first three months of 2020. This measurement excludes gas condensate — a high-value light crude extracted as a by-product of gas production, Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, told New Europe by phone on 11 December.
“It was a surprise, to me at least it was a surprise, but it was a smart move in Russia’s part because Russia also got OPEC+ to agree that extra condensate volumes would be excluded from the quota so Russia’s extra cut would be very modest basically. I don’t know how much but it won’t be equal to the 70,000 barrels nominal cut. It would probably half that amount, even less,” Kokin said, adding the cost of this decision to Russia is modest and the benefit could be pretty large if price stays where it is for the next quarter, maybe half a year.
What’s probably surprising is that Russia got OPEC to agree to this condensate revision. Although it’s only fair because OPEC does not include condensate in its quotas,” the UralSib analyst explained. Russia has a lot of condensate. However, Kokin said, what it matters here is not the absolute amount but rather the change. “Basically, if you look at OPEC it also has quite a bit of condensate, we are talking roughly 5.5 million barrels according to the International Energy Agency (IEA). That’s quite a lot given that they are producing less than 30 million barrels of oil. So, we are talking close to 20 percent. But OPEC does not vary this amount much because the condensate is a byproduct of gas and apparently it is OPEC’s condensate amount it does not change very much but Russia’s amount which is much more modest, we’re talking about roughly less than one million per day, they happen to be increasing right now,” Kokin said, noting that Russia’s largest independent gas producer, Novatek, is increasing output at its Arctic Yamal liquified natural gas (LNG) project. “It’s not so much to exclude condensate altogether, it has to exclude these extra volumes so that Russia’s condensate volumes could grow whereas its crude volumes could more or less stay the same or as they used to be. Once you remove this extra condensate from the calculation of what Russia has to cut from the October 2018 level, then you get a reduced obligation to cut,” Kokin said.
“It’s a pretty good outcome for Russia for now at least in the short term,” Kokin said. The next OPEC and non-OPEC Ministerial Meeting will be held on 6 March 2020. “What happens in the next meeting will also be crucial for the rest of the year,” he said. He opined that in 2020, the second quarter in terms of demand-supply balance is going to be worse than the first quarter so tough decisions will have to be made probably. Asked if oil prices are going to increase, Kokin said, “We will see how it works out because everybody is hoping for the best, including obviously Russia and Saudi Arabia”.
Riyadh and Moscow have led OPEC+ agreements to voluntary reduce supply since 2017 to counter increasing US shale production, which has become the world’s biggest producer and is not taking part in cuts. Saudi Arabia and Russia are just hoping that the excess crude in demand won’t be that significant and America will grow relatively slowly and maybe there will be delays in new projects, Kokin said, adding: “Maybe this Norwegian field won’t grow very fast and maybe the Brazilian project won’t come on stream, that sort of thing, so basically is a way and see approach”.
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