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Monday, March 19, 2018

An unexpected move by OPEC, few believed

Announced on the eve of a sensational decision of OPEC to limit oil production – which previously no one expected – immediately raised oil prices and lowered dollar. But the next day was that the market reacted to this statement with a large grain of salt. And it is clear to the decision of OPEC experts have left too many questions.

OPEC yesterday evening, at an informal meeting in Algeria agreed on a restriction of output in the range of 32.5–33 million barrels of oil per day. This means a decline by 1-2% organization-wide and 0.4–0.8% in the world. The decision came as a big surprise – informed analysts of the extremely low estimated probability of such agreements.

“One desire of producers today are not sufficient to influence crude oil. The most important thing is the position of speculators”

Quotas for each member will coordinate a special Committee. For a number of countries will be determined by a separate quota. For example, in Iran, who wishes to return to pre-crisis production levels. Iraq, Libya and Nigeria also in recent years for various reasons, were forced to reduce their production and now want to increase, rather than decrease. So they also are likely to have special quotas.

The final decision will be announced at the OPEC summit on November 30 in Vienna. At the same time shall be announced by the date of entry into force of the agreement of OPEC.

As for Russia, energy Minister Alexander Novak took part in the meeting, but officially the Ministry of energy made a statement only by Thursday evening. Novak said that Russia is ready to consider participation in joint actions of members of OPEC and other producing countries in the oil market. “We have always taken a very flexible position, because we believe that the market is not balanced, investment dropped significantly, which poses risks in the future,” the Minister said.

According to him, oil producing countries may impose restrictions on oil production for six months plus or minus a few months. “If we took this decision early in the year probably would be more long term – up to one year,” he added. On the eve of the OPEC meeting, Novak said that Russia intends to maintain current production levels.

Nevertheless, to yesterday’s OPEC decision left a lot of questions. It is unclear who will take over the largest part of the reduction of production? Does Saudi Arabia go for it, risking to lose a share in the world oil market? And whether it is necessary to trust OPEC, which constantly violates its own quota? Finally, whether the decision of OPEC to influence prices? Whether it will lead to the opposite effect? And, of course, that Russia will decide to join the agreement or not?

The reaction of oil and the ruble

The overall market did not believe OPEC members, he doubts that they will be able to implement plans to limit production. Talking about it to the auction. The day before on news of the agreement, the price of oil for three hours jumped 6%, approaching $ 50 per barrel. However, to overcome an important psychological mark of $ 50 and failed. Moreover, on Thursday they began again to decline. Investors decided to fix profits, so the barrel and falls. So, to 13.13 MSK price of the December futures for North sea petroleum mix of mark Brent has decreased on 0,71% – to 48,89 dollars per barrel. The price of November futures for oil WTI were down 0.4% to 46,86 USD per barrel.

“Investors and traders are in doubt, and that’s perfectly reasonable. More skeptical traders raised the issue of the absence of details, including the potentially problematic question of which countries will cut production,” – told Reuters chief market strategist at CMC Markets, Michael McCarthy (Michael McCarthy).

“Lacked clarity and detail, so people lock in the profits”, – quotes Reuters an analyst with research firm Energy Aspects of Virendra of Chauhan (Virendra Chauhan).

The ruble against the dollar and Euro yesterday also soared to 5% on the background of growth of oil reached 63 against the dollar and 71 against the Euro (the lows from the end of July). But on Thursday, after oil, the ruble is also adjusted: the dollar and the Euro becoming more expensive day by 0.2–0.3% against the ruble. Geopolitical risks on the background of fundamental differences of positions of the Russian Federation and the United States on the issue of Syria, and after the report downed in 2014 the Malaysian Boeing over the Donetsk region are still being ignored by market participants, experts say.

“The most important psychological level of $ 50 failed. From a technical point of view only the steady output from the September Brent range ($45, $ 50) is able to determine the direction of a new trend in the oil market. So, in our opinion, it is too early to celebrate those who put in oil and the ruble. Our forecast concerning the latter we maintain our unchanged. In the fourth quarter we expect the return of the dollar in the range of 65-70 rubles. And the only thing that can prevent – the growth of Brent above $ 50 per barrel”, – said the head of analytical Department of company “Analyst Online” Gleb Zadoya.

If the oil will manage to overcome a mark in 50 dollars for barrel, it will mean a significant increase in production of shale oil in the United States and increased drilling around the world, says Tom Levinson of “Sberbank CIB”. “Thus, in the medium to long term, the reduction in OPEC production (and growth rates) will have the opposite effect, stimulating the increase of budgetary revenues oil-producing countries”, – said the expert. However, given the mood of the market, the oil may not go beyond the level of 50 dollars per barrel.

OPEC has lost its former glory and influence

“I don’t believe OPEC. They are many times violated quotas. OPEC members are extremely undisciplined, besides, the relations of Saudi Arabia and Iran difficult. Some Sheik can say that all this useless scrap of paper. Or the Arabs can say that comply, and in fact continue to produce as before. They have already accustomed us to the fact that this is not a serious organization, and some shop is not responsible for their words” – says the newspaper VIEW CEO of national energy security Fund Konstantin Simonov.

Russia faces a difficult choice – to join the agreement OPEC or not: especially after the Saudis “threw” her in Doha. Moreover, Russia is actively expanding production. So, in September, she set a historical record daily production of 11.65 million barrels, has launched a new Deposit. Simonov does not exclude decent production growth this year by 2-3%.

According to experts, Russia is quite satisfied with the commit for 2017 production level in mid-September. In this case, the production for the year will rise again. However, even if Moscow would agree to freeze production next year at the level of 2016, it will not mean the fall of Russian oil exports. “The agreement limits the production, not export. And since we have internal demand decreases, then we have the option to increase exports without increasing production,” – said Simonov.

OPEC’s decision will not affect prices. “To be Frank, the impact of production factor prices is overrated. The volume of production is not the most important in the formation of oil prices. The most important is the dollar and the position of speculators, who either throw money into the futures market or are removed,” explains Simonov.

Proof of this is the behavior of oil this year. “At first it was a sharp drop in prices. But when in may, oil prices have reached $ 50, no market prerequisites for this was not. Where did the price increase by 50%, when Iran increases production, Saudi Arabia – also, we are also? Falling production in the US, but in smaller volumes than expected. China is growing at a rate below last year (the demand for crude oil). That is, all negative market factors is preserved, but prices rose by 50%,” the source says.

“Everything is explained by the fact that the agreement in Doha. But the meeting in Doha failed, and the price of oil were to collapse. But this did not happen. Then begins the all anecdote: they tell us that prices are kept, because in Kuwait the strike. But it also ended in a few days. Then I started an outright notions – fires in Alberta, etc. Yes, there was a fire, but to say that they have removed from the market 2 million barrels per day – is ridiculous. They had long ago ended, and the prices are still spinning around 45-50 dollars per barrel”, – continues Konstantin Simonov.

“Therefore a desire of the manufacturers is not enough. The most important thing is the position of speculators. The question is, what game they’re going to want to play – on the decline or on the increase”, – the expert believes.

Only OPEC does not understand that is a little can do in this situation. “OPEC lives of its former glory. A nice story would be if created in Doha OPEC-2. OPEC is dissolved, the Russian with the Saudis sign the agreement, and around this formed the OPEC-2. This story would be a good verbal intervention. In this PR we could easily stretch another couple of years. But they have this idea failed, and within OPEC, any dish is not cook. And they soon will understand” – sums up the source.


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