OPEC deal does not save oil - oil prices hit bottom

Read on the website Vestnik Kavkaza

The cost of the July futures of Brent crude oil on London's ICE trading decreased by 2.8% to $46.63 per barrel, breaking the minimum of November 29, 2016.

For the first time since November 30, 2016 the oil price declined below the level of $48, reaching $47.85 per barrel, as of 06:24 am (MSK), TASS reported.

The futures for WTI oil decreased by 2% to $44.55 per barrel at the New York Mercantile Exchange (NYMEX).

The euro rose above 64 rubles for the first time since February 3, 2017 and the dollar rose above 58 rubles for the first time since March 22, 2017.

Earlier, OPEC Secretary-General Mohammad Barkindo said the oil market was moving towards a balance between supply and demand with the help of the agreement. 

Russia's Energy Minister Alexander Novak said that Russia is leaning toward a six-month extension to an agreement among major producers to cut oil production. "We are now holding final negotiations on this subject with our partners and are leaning toward the expediency of an extension," he said.

OPEC will meet May 25 in Vienna to decide whether to extend supply cuts through the second half.

The deputy director of energy policy of the Institute of Energy and Finances, Alexey Belogoriev, speaking to Vestnik Kavkaza, noted that, despite the decline in prices, it fits into market volatility within the expected range of fluctuations of $46-55 per barrel.

"Such fluctuations will not affect either average annual or even average monthly values, because these are just speculative games. The behavior of the oil quotations in the future will depend on the decision made by OPEC and Russia in late May. If the agreement is extended until the end of the year, the average monthly prices will not fall below $50 per barrel, and if they do not agree, the average monthly prices are likely to go down to $45 per barrel and even slightly lower," Alexei Belogoriev said.

Such volatility, in his estimation, will not have a decisive influence on the OPEC deal. "Of course, the dynamics of prices is important, but the decision on the agreement will be made not on its basis, but on the basis of a balance of supply and demand. In fact, the main objection to the extension of the deal is the growth of oil production in the US. It is believed among other things that even without the extension of the agreement it will be possible to balance the market, and therefore they no longer need to cut production," the deputy director of energy policy of the Institute of Energy and Finances assured.

Sberbank CIB analyst Valery Nesterov, in turn, explained the drop in the Brent price with too high rates of growth of US shale oil production. "There are other factors, in particular, a slow reduction in oil stocks or the spring repair at refineries. Despite the fact that markets are showing some signs of improvement, they are not enough to keep the price at $55 per barrel," the economist said.

The current level of $46 per barrel of Brent crude is overestimated, because it is held by waiting for the extension of the OPEC deal. "There are allegations that the price may drop to $40-45 per barrel. If the agreement is extended, there is hope that prices may increase to at least $55 per barrel. Even if the price is $50 per barrel, the Russian budget will receive an additional revenue of about $11 billion," Valery Nesterov noted.

According to him, such volatility in oil prices makes the extension of the deal with OPEC unavoidable. "It is possible that they will also consider the possibility of increasing the scale of cuts. A good prerequisite is the unity of the countries parties to the agreement. If it was previously expected that the issue will be in limbo until May 25, now many are supporting the extension of the agreement. Experts say that the agreement can be extended for the first half of next year, or even the whole of 2018, to keep prices in the range of $50-60 per barrel," Sberbank CIB analyst warned.