Dire warning: is the oil market in danger of collapse due to OPEC+ decisions
Global oil prices dropped to their lowest level in four years this week. For a while, the Brent brand fell below the $60 per barrel mark. The decline occurred against the background of OPEC+'s decision to increase production by 411,000 barrels per day for the second month in a row. The decline may be even more severe if the group members continue to implement their planned production growth plans. Moreover, the decision itself could be related to Saudi Arabia's displeasure about meeting current quotas. Whether a conflict within OPEC+ can lead to a collapse in prices and what this means for Russia is in the Izvestia article.
There are plenty of reserves
The decision made last weekend to increase production against the background of objectively weak demand in the world caused discussions. Representatives of Saudi Arabia, the largest member of the OPEC cartel, have repeatedly complained on the sidelines about the constant excess of their quotas by several major parties to the agreement. There were particularly serious questions about Kazakhstan, which was ahead of its quota by 350-400 thousand barrels per day in March-April. The UAE and Iraq acted in a similar way. In fact, the strictness of the implementation of the agreement, fixed in 2020 against the background of the pandemic, fell on the shoulders of the main players — Saudi Arabia and Russia, which voluntarily limited their production in addition to quotas.
The current situation is quite dangerous from the point of view of the oil market. OPEC+ has huge reserve capacities that can enter the market very quickly — up to 5 million barrels per day. Something similar already happened in 2014, when Saudi Arabia began to dramatically increase production, causing oil prices to fall threefold within a few months. As a result, prices remained at extremely low levels for the next year. It was only in 2016 that the main exporters managed to find modus vivendi and agree on joint steps to limit production. For this purpose, for the first time, external participants who were not part of the cartel, but received the right to vote, in particular, Russia and Kazakhstan, were connected to OPEC.
With the help of intervention, Saudi Arabia hoped to overcome a sharp increase in production from American shale deposits. The success was partial: many companies in the United States experienced an unpleasant effect, dozens went bankrupt or were sold, production fell. But by the end of the 2010s, it began to grow again.
In 2020, the situation was repeated against the backdrop of a pandemic — the kingdom increased production again at a time when it seemed that the global economy was heading into the abyss. This time, an agreement was reached fairly quickly — the fears of a market collapse were more than convincing. Since then, OPEC+ has been working like clockwork, ensuring the stability of the situation and prices in the range of $ 60-100 per barrel. For this, however, sacrifices had to be made, including a significant reduction in production.
For the time being, the agreements have been implemented and even exceeded, but, apparently, the time is coming when the patience of some countries has run out. Moreover, if in the case of Kazakhstan this can be explained by the fiscal situation and technical factors (the launch of the long-promised expansion of Tengizchevronoil), then with other players (UAE, Iraq) everything does not look so simple.
The oil war in addition to the tariff war
The probability of a new oil war is non-zero. Given the problems with demand — the parallel slowdown in China's economy and the tariff war between the United States and much of the rest of the world - the situation is becoming doubly dangerous. Since March, OPEC+ countries have agreed to increase production by almost one million barrels per day. This is about 40% of all reductions adopted since 2022. If the production growth does not stop, then all the restrictions adopted in the last decade will be at risk. Thus, the situation of 2014 will repeat itself, which for many oil powers was, if not catastrophic, then very difficult.
How likely is this scenario? According to Finam analyst Alexander Potavin, the market's desire for balance is still being taken into account, because the June increase in production will occur against the background of an increase in seasonal demand for fuel.
— All this should balance the global oil market and should not bring down oil prices too much. If we take into account the remaining uncertainties with the supply of raw materials from Iran and Venezuela (against the background of American pressure), as well as difficulties with oil transportation through the Caspian Pipeline (CPC), then additional volumes of oil supply on the market, in theory, can compensate for these risks, the expert concluded.
He added that lower oil prices resulting from the actions of OPEC+ will eventually lead to a drop in production from those with the highest production costs. Apparently, this will cause the greatest damage to American oil companies.
— The average cost of oil production in the US shale fields varies from about $35 to $58 per barrel, depending on the operator and the specific basin. For comparison, now the quotations of Texas WTI light oil are in the region of $ 56.5 per barrel, that is, prices have dropped to the cost levels of its production. Therefore, a drop in prices to $45-50 per barrel is possible, if possible, for a very short time.
As Ivan Timonin, project manager at Implementation, noted, an exact repeat of the 2014-2015 "price war", when Saudi Arabia single-handedly sharply increased production in order to undermine the competitiveness of partners and shale producers, seems unlikely.
— Firstly, since the creation of the OPEC+ coalition, key decisions have been made collectively, and with a serious collapse in quotations, an operational revision of quotas and an adjusted rate of production increase are possible. Secondly, the scale of the increase in supply in 2014-2015 was much more dramatic — the current balance, even with demand weakened by trade friction, looks much more stable.
Finally, over the past decade, the storage infrastructure for oil and petroleum products has expanded significantly, which reduces the risks of local surpluses and, consequently, sharp price spikes.
Regaining market share
According to Kirill Bakhtin, senior analyst at BCS World Investments, Saudi Arabia primarily aims to restore its own market share, which has been gradually declining since the beginning of 2024 due to voluntary restrictions.
— We believe that the oil producing country is confident that it has one of the lowest production costs on the cost curve, which means that in the medium and long term its increased market share will be protected from competitors. By the end of 2026, due to OPEC+'s policy of restoring production, the market will be in surplus, prompting the withdrawal of expensive producers. From this point of view, oil prices may remain low in the next year and a half compared to the quotations of 2023-2024," the analyst points out.
Timonin, in turn, believes that OPEC+'s decision to increase production is being imposed on limited demand growth amid subdued economic growth and trade barriers. This increases the pressure on the quotes, and it is likely that Brent will fall into the range of $ 50-55 per barrel.
For Russia, oil prices have always been the most important indicator of the economic situation. In a situation of sharp price declines, the question usually arises: how will our budget survive this? Nevertheless, in the coming months and even years, the National Welfare Fund should be enough to close potential holes, Potavin believes.
— At the Urals price of about $ 50 per barrel, oil and gas budget revenues may decrease by about 15-20% from the projected 10-11 trillion rubles, that is, revenues may fall by 1.5–2 trillion rubles. Currently, the missing oil and gas budget revenues for Urals oil below $60 per barrel are being replenished from the National Welfare Fund (NWF), and the deficit will have to be covered through reserves or borrowings. A drop in the price to $50 per barrel will lead to more active spending of funds from the NWF. At this price, the NWF reserves can last for about two years.
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