Again OPEC + gave a surprise. OPEC + members tried for four days last week to agree on a further increase in oil production since August. It seems that the consensus was achieved: it was assumed that the cartel countries would collectively increase production each month from August to the end of the year by 0.4 million barrels in average daily terms. The OPEC + action agreement was planned to be extended until the end of 2022.
Unexpectedly the United Arab Emirates refused to sign agreement, if they do not get increase of the base level from which the parameters of production increase or decrease are calculated. In fact, the UAE demanded in such a weakly retouched form larger quotas for production.
On Monday, experts were negotiating all day, but they ended without results; the extended cartel ministers never met to reach a final verdict. However, there is still time until August.
In the meantime, oil has responded to the split in OPEC + with an increase above $77 per barrel. Just at the beginning of this year, oil at $75 per barrel seemed to be something from the field of fiction. Even at the end of April I asked a number of analysts to predict the cost of “black gold” for this summer. Most were inclined to think that quotes — if they manage to reach $70 — will quickly roll back, and we will face this summer oil quotes at $63-67 per barrel.
Now, many reputable experts are waiting for continued growth in oil prices. Bank of America and Goldman Sachs do not exclude that oil will rise to $100. Leaders of such world oil giants like Exxon, Shell and Total also agree with this view.
It may seem surprising, but OPEC + does not really need expensive oil. And now even Saudi Arabia, which previously sought to pick up oil quotes as much as possible, agrees to increase production. This was due to the fact that the country’s budget was calculated based on oil prices above $80. For this and next year, the Saudis adopted a more realistic fiscal policy, indicating the average annual oil prices, according to Goldman Sachs, about $50.
Most likely, in the near future a compromise will be found, and OPEC + will continue to increase production, trying to prevent price increases. The fact is that now in oil prices there is a significant share of the speculative component. Due to the huge volume of “extra” money in the global financial system, speculators began to buy not only shares, but also commodity futures.
The speculator is an unstable creature. Largely, he doesn’t care, if he earns on the growth or fall of quotes. Therefore, the stronger and faster will be the oil quotes’ growth, the return fall can be just as powerful. Real business prefers work in predictable conditions.
There is another danger of high oil prices — these are the risks of increasing oil production in the United States, which are not bound by any cartel agreements. So far, everything speaks in favor of the fact that the US will not be able to increase hydrocarbon production in the coming months. This is confirmed by the number of active rigs. In recent months, though it is growing, but at a slow pace, and the absolute number of drillers remains at about double lower than before the coronavirus pandemic.
This is partly due to the fact that in the early days of his presidency, Joe Biden banned a new drilling on federal lands, stating the need to develop “green energy.” The results of the increase in the share of renewable sources of electricity can be clearly seen on the example of Kansas, where frosts of -8 degrees (ridiculous by our standards) led to disaster.
However, at any time, investments in American production can begin to grow rapidly, and stopping this process will be difficult. Drilling shale wells is quite inexpensive and quick. At the same time, the profitability of this method of oil extraction is estimated at $30-35 per barrel.
By the way, it is quite difficult to answer, why American investors have not began to increase investments in the oil industry. Perhaps they are frightened by the previous oil quotes’ fall. There is such a version: now, investments in shares of diversified profile and the same commodity futures are more attractive.
Another risk to the global oil market is the increase in exports from Iran. It was expected that in June the so-called “nuclear deal” with the United States would be signed, according to which Iran will not develop nuclear weapons and their means of delivery. Instead, the US sanctions will be lifted from the country, and the Islamic Republic will be able by the end of the year to increase oil supplies to the global market, according to various estimates, from 0.5 million to 1.3 million barrels per day.
Recently, the process of negotiations has slowed down after on June 18 Ibrahim Raisi won presidential election in Iran. This figure, to put it mildly, causes irritation with the American authorities, which resulted in postponing negotiations. It is not clear when they will resume and whether they will resume at all.
It is difficult to give forecasts for the further price of oil — as we see, all of them do not come true. However, it is worth noting that almost none of the “leaders of opinions” of the oil market is waiting quotes to fall below $70 in the coming months. Therefore, the same point of view will be peculiar to the asset managers of the world’s largest investment funds, which determine weather on the market.
Technical analysis, which is guided by many exchange expert, speaks in favor of continued oil growth: the week chart clearly shows a strong upward trend.
In any case, oil prices above $60 per barrel are very comfortable for Russia, since they allow to fill the budget above the plan: both at the expense of high export duties, and as a result of an increase in the tax base of oil companies and the mass of medium and small companies serving them. Without a doubt, the federal authorities will be able to fulfill — and even exceeding plans — all social obligations. The government will be able to report on economy growth, however, in any case this growth will be half the global average.
Just the ruble can not enjoy oil quotes rising for a long time: almost all additional revenues from the rise in the price of hydrocarbons are withdrawn to the National Welfare Fund. However, with cheap oil, the situation would be even worse.
By Boris Soloviev, financial analyst