Vyacheslav Kulagin: "Oil will stay at $55-65 level"

By Vestnik Kavkaza
Vyacheslav Kulagin: "Oil will stay at $55-65 level"

OPEC and 11 non-OPEC countries agreed on a coordinated oil production cut by a total of 1.752 million barrels per day, 1.164 million barrels of which accounted for OPEC countries, 588 thousand barrels - other oil exporters. According to the agreement, Russia promised one of the biggest oil production cuts - up to 300 thousand barrels per day. Head of the Center for International Energy Markets Studies Vyacheslav Kulagin discussed the effects of oil production cut in an interview with Vestnik Kavkaza.

- How will 300 thousand barrels per day production cut affect Russia?

- There are two main factors here. Firstly, 300 thousand barrels per day cut will be made based on the current production level, which means that, as our Energy Ministry stated erlier, Russia's production levels were supposed to raise even higher, which means that the actual cut is more than 300 thousand barrels per day. It will certainly affect Russia, since it can't decommission its oil fields as easier as OPEC countries. That is why it was stated that this cut will happen gradually from January to May, so that we could achieve declared volumes of oil production within a few months. 

However, if we talk about Russia's production next year, in comparison with this year, decline is not expected, because we cut production based on volumes we just achieved. Over this year we actively increased oil production, so next year average production level should approximately be at current year's level. In the end, I believe we can fulfill our obligations. Companies will have to work a little bit harder, perhaps quotas will be somewhat uneven due to different factors: someone puts new projects into operation, someone has natural difficulties with production. I think Energy Ministry's main task is to correctly adjust everything and agree on all details with companies, so that this process would be organized efficiently. Of course, there is also the issue of will these agreements be adhered to or not, all participants of the agreement will closely monitor this. Situation on the market, supply and demand balance and compliance with the agreement will depend on this. If someone starts to violate it and especially if many countries will do it, other countries will also decide that they shouldn't be the only one who suffers from this.

- Will total production cut of 1.8 million barrels per day help to balance supply and demand in the world market?

- This balance will definitely be achieved for several reasons. The first reason is that today's excess of supply over demand is less than before. According to OPEC, oil surplus amounts to about 600 thousand barrels per day. The IEA overproduction amounts to about 1 million barrels per day, but it's still lower than 1.7-1.8 million barrels per day, discussed in Vienna. It should be considered that due to this situation with low prices, demand for oil in the world continues to grow, especially in developing countries. Accordingly, we expect further demand growth, while supply will be cut coordinatedly, which will help to achieve balance of supply and demand even before all countries' commitments will be fulfilled. 

At the same time, countries outside of OPEC that are not involved in the agreement don't have enough potential to significantly increase production. The United States have potential, but they currently worry about stopping oil production recession, which we observe recently. From April 2015 US production fell by more than 1 million barrels per day. Higher prices may adjust US companies' plans and balance production. Other countries may slightly increase their production, but they will still remain at approximately same level. We just have to achieve balance, but it's important for everyone to fulfill their obligations. 

- What is the possible limit of oil prices growth, which can be reached with the help of OPEC agreement?

- We can already see positive results of these agreements, even though they didn't even start working. Their implementation will begin in January, but prices have already grown - market has prepared for the situation. It is likely that in the near future oil will stay at the level of $55-65 per barrel, and then everything will depend on how the agreements will adhered to. Sudden jump to $100 per barrel should not be expected. Demand is not growing as fast as it grew before. It is also necessary to understand that a number of fields are starting to work after prices increase: shale fields in the United States, oil sands in Canada, deepwater offshores around the world, including in Europe. A number of expensive projects will be revived, expanding current demand, and it will limit prices.

But there is no reason to believe that prices will fall to $30-40 per barrel due to these projects. We reach the level favorable for major market players, so they will stick to it. By the way, if oil prices headed for $100 per barrel, the participants of this agreement would just decide that their task is completed, so there is no reason to fulfill obligations they made, and they would immediately try to exceed those quotas that are currently set. 

- Will they extend this agreement in six months? What are the possible reasons for its extension?

- It's possible if they won't achieve all goals they set. If six months later it turns out that there is still disbalance, that the price still does not match production situation, then participants will be able to discuss how to fix it in the future and what steps must be taken. If market will return to normal state and prices will reflect real costs of production and balance of interests, then there will be no interest in such agreements. Perhaps there will be some framework agreements and consultation between countries. This way, after agreement will end it will help to prevent market disbalance, so that there would be no sudden increase in production and so on.

Previous years experience of such agreements shows that they are not always adhered to, so right now many experts have serious doubts whether they will be implemented. Agreement itself is already great, because in just a few days exporters earned a lot of money, since prices grew, but it is unknown whether they will be able to achieve discussed production level. It should be understood that all participants of the agreement do not bear any financial responsibility for its implementation. Everyone promised to cut oil production, so it just a gentlemen's agreement, we shall soon see whether they will really implement it or not.