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Saturday, October 22, 2016

In the Russian-Saudi oil agreement “won everything”

Russia and Saudi Arabia have made a historical statement of willingness to work together to improve the situation on the oil market. The two largest oil producers, which are the major competitors and have geopolitical differences, suddenly decided to play together. What is the result – from the point of view of oil prices and the ruble exchange rate?

Russia and Saudi Arabia on the sidelines of the summit signed a joint statement. They agreed to act together or in cooperation with other oil producers to maintain stability in the oil market and ensure a sustainable level of investment in the long term.

Alexander Novak called the statement of the two countries historic moment in the relations between OPEC and countries outside the organization”

The statement was signed by energy Minister of Russia Alexander Novak and Minister of energy, industry and mineral resources of the Kingdom of Saudi Arabia Khaled bin Abdul Aziz al-Faleh.

In their statement, the Ministers noted the presence of the countries-providers of long-term challenges in the global oil market. Them includes a significant reduction of worldwide capital expenditures for oil production, as well as mass cancellation and postponement to a later date of investment projects that, in General, has led to an unstable situation on the oil market.

The parties agreed to create a group for consultations on the situation in the market of black gold and make recommendations in accordance with the fundamental picture of the market. Will be created Russian-Saudi working group, which will deal with the issues of oil and gas. The first meeting is scheduled for October.

In addition, Russia and Saudi Arabia can establish a joint data Bank of promising technologies in the energy sector.

Historical statement

Cooperation between Saudi Arabia and Russia in the oil sector for the first time reached such a high level, said the Saudi Minister. Russian energy Minister Alexander Novak, in turn, called the statement of the two countries historic moment in the relations between OPEC and the countries not members of the organization.

Novak justifiably calls it a historic event. Because the agreements reached by two countries between which still remain significant geopolitical differences. For example, Russia supports Syrian President Bashar al-Assad, while Saudi Arabia does not agree with this. Besides, all the famous friendships of the Saudis with the United States.

“Secondly, Russia and Saudi Arabia – the largest producers and exporters of oil in the world, and competitors to each other, each of which is interested in increasing its own market share, overcoming these differences, after all, agreed to cooperate in the field of balancing supply and demand in the oil market. To this decision they were pushed by low oil prices, which despite the bravado of Saudi Arabia and the declarative statement that it is able to withstand a price drop to at least 20, at least up to $ 10 per barrel, still remain unprofitable to her,” – says the newspaper VIEW Deputy Director of the analytical Department of “Alpari” Natalia Milchakova.

Russia recently successfully entered the new market, Asian, including Chinese. And this has traditionally been the fiefdom of Saudi Arabia. In the end, Russia’s share in the Chinese market is increasing, and the Saudis reduced. On the other hand, Arab countries have not sat idly by and began to actively break traditional for the Russian market of oil and oil products – European.

Apparently, recent opponents have decided to stop. And as if to confirm these words, Saudi Arabia has raised prices for the supply of oil to Asia and the United States in October due to growing demand. Until now, the main strategy of the Saudis were dumping with the aim of preserving their own market share.

“From the perspective of economic theory two competitors have agreed to cooperate on the basis of mathematical “zero-sum game”, where each of the two players, trying to predict in advance the actions of the opposite side, compromise with an opponent, so how to evaluate such an effect of an opponent as most likely. The result is that both sides for the sake of compromise waive his vested interests, but there is no one who would win only at the expense of the opposite side. In short, everyone wins, no hard feelings,” explains Milchakova.

The market reaction

The market reacted to flown in from the G20 summit news quite interesting. First, oil prices jumped more than 5% on expectations of the joint statement of Russia and Saudi Arabia. However, immediately after the application of oil slowed growth to 4% to 12.45 GMT and up to 2% to 14.30 GMT (Brent – 47,82 per barrel).

The ruble on the background of rising oil prices were also in positive territory. On Monday morning, the dollar fell to 64,51 of the ruble, the lowest level since August 26, the Euro dropped to 72.1 rubles for the first time since August 18. However, after the slowdown in oil topics the fall of the dollar and the Euro also declined. By 14.30 GMT, the dollar was worth 64,87 ruble (plus 0.33 percent), the Euro – 72,41 rubles (plus 0.26%).

Thus, in General, the market believes the news is positive, but its positive impact is not so obvious.

Does the joint statement of the willingness of Russia and Saudi Arabia to finally take real steps that will lead to an increase in world oil prices? And what parties can do in current situation? Or is it all nothing more than words that won’t reach reality?

The statement of the Moscow and Riyadh can mean several options of the situation.

“Beyond words is unlikely to go”

One of the most common views on the market is that the convergence of the two countries does not mean that OPEC and Russia will come to real agreement about freezing of oil production at the OPEC meeting, which will be held in late September in Algeria. “Cooperation of the second and third largest oil producers in the world – a significant event, but it should not be overstated. To sign the statement in this case is to declare to the world: Yes, we look the same on the problem and are willing to discuss it further. However, beyond words, both Russia and Saudi Arabia. OPEC is unlikely to go,” says Anna Bodrova of Alpari.

“Registering a domestic production, Russian and Saudi oil companies have nothing to gain, because the market with low competition will earn more nimble and agile. Sell oil want, who produces, and is present more or less stable demand, significant shifts in the issue of freezing of production will not be”, – explains the expert.

According to Bodrova, the readiness of Russia and Saudi Arabia will not work if they are not persuaded Iran, which is against the freezing of oil production. A meeting of OPEC oil producers will end up accustomed to no avail, if in three weeks you will not find arguments to convince Iran to play for a common goal, he said.

This understanding of the market situation may explain the fact that a barrel of Brent already by 14 o’clock has lost about half of their daily growth.

The freeze will take place without Iran, but quick will have no effect

The second option is a cooperation of the Saudis with Russia still means that Saudi Arabia agreed to freeze production even without taking into account the position of Iran. And this is not surprising, since the Islamic Republic has, in effect, restored the pre-sanctions production levels, says Valery Polkhovsky from Forex Club.

“Until the end of the year, expect price growth to $ 60 per barrel. The ruble will reach its “fair value” 60 rubles per dollar and below 70 rubles per Euro”

“Attracting investment to Iran yet is difficult to increase production on quickly, it was unlikely. While its market share it has returned. Therefore, to require Iran’s participation in the agreement in principle is meaningless. Then you can play only in price wars but they are a massive damage to get all sides. When you consider that the budget of Iran is in a more balanced state than Saudi Arabia, then this game is for Riyadh in General is becoming more expensive,” – says Polkhovsky.

Therefore, the freezing of oil production will finally happen at the end of September. “I believe that oil production will not be reduced, both in 2009 and 1999 during a similar crisis in the oil market, and frozen at current levels, not much to infringe upon the interests of Iran,” – said the Deputy Director of analytical Department of “Alpari” Natalia Milchakova. Plus before the end of the year it does not expect significant upheavals in the global economy, which could reverse the results and of this agreement, and the future of OPEC meeting.

Why, then, the market reacted cautiously to the statement? Because I do not believe that the freeze will have a significant impact on the state of supply and demand, at least in the short term.

“The OPEC meeting in late September had a strong effect on the price of oil must be removed from the market not less than 3 million “excess” barrels,” says Natalia Milchakova. For that, OPEC should be involved in the agreement, except Russia, and other players. The US is unlikely to agree, but Norway can join the freeze. “Support for the OPEC decision will have and the difficult economic situation in Venezuela and Nigeria, leading to reduction of oil production in these countries, the OPEC members. Producers of shale oil from the US can in the short term to benefit from price growth, but in the long lose, since competing producers from OPEC as the oil above, it is not the fact that the United States will rely on self-sufficiency in oil, and will import,” – said Milchakova.

However, if not immediately, then in the long term, the effect of the freeze will be in any case. “The pace of demand growth in the world amount to 1.5 million barrels per day annually, and this trend will continue at least until 2020. Therefore, frost within a year or two will turn a surplus into a deficit,” – says Polkhovsky. That is the market I understand that oil futures will rise.

“Such positive news background Brent can successfully overcome $ 50 per barrel and move to the area of $ 55 per barrel,” – said Valery Polkhovsky.

“Brent is in the hallway with a strong level of support for approximately 44.5 USD per barrel and strong resistance at $ 50 per barrel. Punters today after the statements of Russia and Saudi Arabia began to “sell the fact”, so the price of oil rose above $ 50 per barrel. Expect that by the end of the month the oil will be traded in this corridor, and to the end of the year expect growth of the price to 60 dollars per barrel,” predicts Milchakova from Alpari.

Despite the fact that between the ruble and the oil is not always a direct correlation, the ruble is also expected to strengthen. “Until the end of the year we expect that the ruble will reach its “fair value” 60 rubles per dollar and below 70 rubles per Euro,” – said Milchakova.

“The true meaning was not recognized”

Finally, there are experts, who saw in these agreements a new, broader message. Perhaps they relate not only to the tactical decision to suspend oil production at the upcoming meeting in Algeria.

“The words about cooperation with other key players of the energy market in the headline, were not immediately recognized the true meaning. The agreements focus more on long term challenges, namely mitigating the supply shock, which the market may face in the coming years due to lack in recent years of investment in drilling and exploration. In other words, Saudi Arabia and Russia are ready to balance the market by increasing capital investment now to replace those which now fall from other countries-oil producers. And that this interpretation became the main some time after the appearance of this information in mass media”, – said the managing Director of IFC Financial Center Ilya Sigachev.

Actually, this also explains the decrease in the growth rate of oil from 5% to 1.5%. In the coming weeks such significant fluctuations are likely to become commonplace until the meeting in Algeria, said Sikachev.

“On the one hand, will affect fundamental data on production and demand – seasonal decline in consumption is exacerbated further by increased production. On the other hand, we probably will witness the verbal intervention that will occur every time the price of oil will get to the bottom line over the past few months,” – said the expert. According to his forecast, oil will gravitate to equilibrium is now 45 dollars per barrel or slightly lower, and the dollar will continue to adhere to the course to increase to 67 to 70 rubles. Against the ruble will play well as domestic factors, particularly the uncertainty of the sources of financing the budget deficit.


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