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Saturday, October 22, 2016

OPEC breathed life into the oil market

Verbal agreement on production cuts could lead to a real reduction of the surplus supply, and it pleases investors. In its decision of OPEC rehabilitated. However, the written agreement will be recorded at the meeting in November. Before that OPEC will try to keep it positive on the market close to $50-52 per barrel.

photo: pixabay.com

How to do it? Why Saudis to reduce production? The unofficial leader of OPEC is Saudi Arabia, and thanks to its position, the cartel decided to move from words to deeds. Let’s try to understand, and why. If OPEC tried to get rid of verbal intervention plans to cut production in the future, the markets would take it negatively. Too much in the last few months have been such statements from officials from Saudi Arabia, Russia, Iran, Venezuela.

Saudi Arabia currently it is important to increase dollar revenues. More than 70% of revenue in the budget of er-Riad income from the sale of oil, so the oil price is relevant. Saudi Arabia observed a large budget deficit, in 2015 reached $98 billion, proportionate expected this year. Reserve funds accumulated in the “fat” years and may be nearly $600 billion, but quickly began to melt. Discussed options for cuts in the salaries of officials, the public subsidies and placement of bonds for $15 billion (for the first time in history!). For the Saudis, accustomed to living in prosperity, this was a nonsense and could weaken the position of the ruling dynasty. In addition, now the Saudis are actively competing for leadership in the region with Shiite Iran and sponsor of the Sunnis in Yemen and also in Syria and other countries.

According to preliminary arrangements-Saudi Arabia agreed to reduce quotas by 4% relative to August levels, more than other countries. In any case, the peak of production in this country is in the summer, and in autumn the anticipated reduction in production due to the seasonal drop in consumption. What will be the final arrangements, who how much to cut production in the end — time will tell.

Roman TKACHUK, senior analyst “Alpari”,

Anna KOKOREVA, Director of the analytical Department of “Alpari”.



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