Konstantin Simonov: "Oil price to reach $65 per barrel"

The world oil market in anticipation of the implementation of the agreement between OPEC and 11 countries outside the cartel: yesterday oil prices have risen by 5% as Russia, Azerbaijan, Kazakhstan, Mexico, Oman, Bahrain, Brunei, Malaysia, Equatorial Guinea, Sudan and South Sudan decided to cut their oil production in total by 588 thousand barrels per day in addition to the 1.164 million barrels per day, which will be cut by OPEC countries. First Vice-Rector for International Cooperation and. External Communications of Financial University under the Government of the Russian Federation, CEO of the National Energy Security Fund, Konstantin Simonov, told Vestnik Kavkaza about the importance of agreements with OPEC for Russia.

- In your estimation, how sensitive is it for the the Russian oil industry to cut its oil output by 300 thousand barrels per day?

- Of course, it is sensitive, because 300 thousand barrels per day is 15 million tons of oil per year. The loss of 8-10 million tons of production per year, which we could achieve, also should be counted, because Russia has launched a number of new projects, such as the oil and gas field Filanovsky. That is, we remove 25 million tons from the market. Of course, the question is at what price they could be sold, if there were no agreement, because there is an effect already: the morning before the price of a barrel of Brent oil was about $57, which already allows us to make money every day. However, it is unclear for how long the prices will continue to grow. We are playing a risky game, let's see whether it would be proper and long-term.

In this respect, my view is that in the first quarter, it is desirable for Russia not to impose any restrictions on oil production. We should wait in January-February and then the seasonal well repairs will be stated and production will decline in any case. It is necessary to see how the OPEC countries will comply with this decision, because, for example, I have no confidence in Saudi Arabia. Riyadh has repeatedly lied to their partners, including us, it is enough to recall the failure of the Doha negotiations. It is very good that oil prices are rising due to the verbal intervention, we are making money on it, but then we have to be very careful in the decisions, which may have negative consequences for us.

- How, in your opinion, will the oil production cut be implemented in Russia?

- There are two options. The first way is simple: equable production cuts. 300 thousand barrels per day is 7.5 million tons in the six months. At the end of the year we look its percentage of total production, and, according to preliminary estimates, the share will be 2.5-2.7%, which is quite a lot, and also give companies orders to reduce production by 2.5% from the 2016 level. Most likely, it will be implemented through a meeting with President Vladimir Putin. Of course, there will be dissatisfied parties in such a situation, because someone's production increases, while others - declines, and this raises the question of whether it is a right thing to implement the reduction this way. Gazpromneft's growth was 7.5% in the three quarters, Bashneft had 8.6%, and Russneft had a decline of 8.4%. It will be easy for Russneft to implement the agreement with OPEC, it has the 2.5% cut anyway, but what should Gazpromneft do with its growth?

The second option is based on the country logic. It is necessary to create a country monitoring center, which would define companies, which output is already declining, and transfer an excess decline to growing companies. It is not so simple, there was nothing like this in Russia. The problem is that there can be conflicts between companies, because it turns out that some companies need to help others. A lot depends on the Ministry of Energy, which has to decide how to implement the mechanism to cut oil production.

- How is the total decline in oil output of 1.8 million barrels per day able to balance supply and demand on the world market?

- Now it is difficult to determine. The main problem of the OPEC deal, in my opinion, is that we believe someone else's analysis of the market: 2 million barrels per day, which should be reduced, were taken from the International Energy Agency's reports, which no one double-checked. We do not know whether it's true or not, so the future remains uncertain. Remember the failure of the summit in Doha - the prices had to decline, as oil surplus remained, but they increased. Then they decided that it was due to the strike in Kuwait, but the strike was over in three days, but prices increased again. After the fires in Canada prices also increased. That is, the explanation of oil prices through the balance of supply and demand does not work anymore: not just it forms the price, but also many other factors. There is no true understanding of the pricing in the market now. Personally, I think that the influence of the monetary factor is much more important: the amount of money spinning in the futures market, and the US dollar. But we cannot influence these things, so we should understand that a decline in oil production should lead to a stabilization, but we must assess its capabilities very carefully.

- In that case, what is the limit of rising oil prices in the agreement with OPEC?

- I believe that we should not expect prices above $ 65 per barrel. There are many traps here, whether the agreement will be actually implemented, whether there will be no conflict between the countries, which have signed the documents.

- Is it possible that the agreement to reduce oil production will be extended in half a year and in what case?

- It can be extended only if be the case if they perform it these six months. It is very difficult: there are problems between the Saudis, Iranians and Iraq, and all these countries should implement the agreement. OPEC has not fulfilled its obligations for many years, and we are anxious for the fate of the cartel deal. These are right steps in an attempt to affect the market, but it is too early to say that we defeated low prices.

- Can the oil price, which increased due to this decline in oil output, revive the US shale projects?

- Definitely there will be an increase in the US production against the backdrop of rising prices. Let me remind you, oil production in the US increased by 1.8 times under President Barack Obama, they were able to overtake the Russian output. The specificity of the US is that it is very flexible: if prices decline - they stop drilling, if prices increase - they start drilling. This is the power of the US economy - it responds quickly to all changes: it happens that in one month 300 thousand jobs are created, and in the other the number of jobs is reduced by the same 300 thousand. Therefore, the US will react on the increase in oil price rise much faster than we think. If the price is $60 per barrel, tomorrow they will start to increase production.