OPEC continues to make progress on cooperation as they close in on an agreement to extend their production cuts for another six months. On April 20, several top OPEC officials voiced their most definitive statements yet on the extension, even as they caution that more work needs to be done.
“There is consensus building but it’s not done yet,” Saudi energy minister Khalid al-Falih told reporters on the sidelines of a conference in the United Arab Emirates. “We are talking to all countries,” al-Falih added, referring to the key role that Russia will play in whether or not an extension can be sealed. “We have not reached an agreement for sure, but the consensus is building.”
On top of that, OPEC’s Secretary-General Mohammed Barkindo said the deal is working – it just needs more time. “We are optimistic the policy measures have already placed us on the path of recovery,” Barkindo said in a speech. “Our collective action will continue to prove effective.” Barkindo told CNBC on the sidelines of the event that OPEC’s “credibility is at stake.”
The comments are so aggressive that it is hard to imagine an extension falling apart. But as suggested, Russia, will be essential to the success of the negotiations over the next few weeks. Russia has taken a bit longer than the rest of the participants in meeting its promised 300,000 bpd in cuts, although Russian officials said that production would trend downwards over the six-month period.
Nothing is for certain, but Russia has a lot more to gain from an extension than it would by going it alone, which would likely lead to the deal falling apart. Bloomberg reported that Russian government revenues from oil sales have shot up since the deal was announced in late November. Monthly revenues in February surged above 500 billion rubles, the largest monthly total since August 2015. The OPEC deal has been an inarguable boon to the Russian economy, with GDP expected to expand for the first time after several years of contraction.
Moreover, Russia is benefitting from the higher oil prices that the OPEC deal sparked, while not having to sacrifice too much in the way of production. “Russia has been a big financial winner from the output reduction agreed last year,” Giovanni Staunovo of UBS Group told Bloomberg.
“The agreement on the whole has been working,” said Ildar Davletshin, an analyst at Renaissance Capital, in a Bloomberg interview. “Russia’s reserves are picking up faster, increasing its economic resilience.”
RBC Capital Markets chief commodities strategist, Helima Croft, said that she expects Russia to agree to an extension, “especially with elections in 2018,” which gives President Putin every incentive to keep oil prices from falling.
The OPEC meeting in late May will be without a doubt the most pivotal factor for crude oil prices for the remainder of the year. Oil could shoot up to $60 per barrel if the deal is rolled over for another six months, but prices could fall well into the $40s if it isn’t.
So will Russia sign on to an extension? Things are looking good on that front. “Russia is on board preliminarily … Compliance from Russia is very good. Everyone will continue on the same level,” Kuwait’s oil minister Essam al-Marzouq said at the UAE event this week. Marzouq even offered a teaser to reporters, hinting that an unnamed African country could join their production cuts after June, bolstering the agreement. The outlook from top OPEC officials seems more confident than ever.
Still, it is not a done deal. Russia’s Rosneft said in March that the resurgence of U.S. shale poses “significant risks” to the OPEC deal, since cuts from OPEC and non-OPEC countries would merely cede market share to shale drillers.
Meanwhile, Russia’s energy minister put out an outlook for the second half of the year, which shows Russian oil production rising to 11.02 million barrels per day. Also, Russia’s Deputy Prime Minister Arkady Dvorkovich said earlier this month that the oil prices gains from the OPEC deal have been disappointing.
But other than that, all signs from Moscow appear to be positive. Former Russian energy minister Igor Yusufov recently told Oilprice.com in an interview that the “deal seems very productive,” and an extension “would contribute to the sustainable stability of international markets.”
We’ll find out more next month.
By Nick Cunningham of Oilprice.com