Russia and Saudi Arabia have agreed to extend oil production cuts made in an alliance known as OPEC+, according to Russian president Vladimir Putin, who added that the agreement would likely be extended by six to nine months.
The Organization of Petroleum Exporting Countries (OPEC) is set to meet this week in Vienna with the purpose of managing the stability in the oil market.
176th Meeting of the OPEC Conference
1 July 2019
Vienna, Austria pic.twitter.com/nch89VqLb3
— OPEC (@OPECSecretariat) June 19, 2019
In practice, energy ministries of the world’s most powerful oil producing nations will seek an agreement to limit the amount of crude that flows to the global market and prevent the fall of oil prices.
Putin told the press that the deal will be extended in its current form and with the same volumes.
Seeking to reach an agreement
The agreement is expected to extend an important deal between the OPEC and a group of non-OPEC producers led by Russia; as a result of the oil price drop.
The coalition, known as OPEC+, agreed to cut production by 1.2 million oil barrels per day to boost prices. Now, with the support of Saudi Arabia, Iraq, and the United Arab Emirates, the group will likely maintain a firm grip on oil supplies.
— President of Russia (@KremlinRussia_E) June 29, 2019
Influence put to the test
In reality, any pretence that the oil market will bend at the OPEC’s will has become a fragile hope. Influence on oil prices depends on geopolitics, which is beyond the organization’s control.
The cartel is divided by regional rivalries and under the threat of growing U.S. production, as it moves forward with the rise of shale oil.
According to the International Energy Agency, the OPEC’s efforts to control global oil output are undermined by the relentless rise of fracking in the U.S.
Our June oil market report contains our first outlook for 2020:
2019 global oil demand growth estimate cut for 2nd straight month
Global oil demand growth to rise to 1.4 mb/d in 2020
Non-OPEC supply growth to accelerate to 2.3 mb/d in 2020
— IEA (@IEA) June 29, 2019
By next year, demand for OPEC crude will amount to 29.3 million barrels per day, around 600,000 bpd less than the cartel’s nations pumped last month.
The strategy to reduce production has had an adverse secondary effect for the OPEC: its market share has been reduced. The decision to raise prices by lowering output has opened the door for the United States. Now, some OPEC members and allies are wondering if it is time to change course.
A nine-month extension would mean that the agreement expires in March 2020.
Effect on oil prices
Kirill Dmitriev, chief executive of the Russian Direct Investment Fund who helped design the OPEC-Russia deal; said the pact in place since 2017 had lifted Russian budget revenues by more than 7 trillion rubles (€88 billion).
“The strategic partnership within OPEC+ has led to the stabilization of oil markets and allows both to reduce and increase production depending on the market demand conditions; which contributes to the predictability and growth of investments in the industry,” Dmitriev said.
Benchmark Brent crude has climbed more than 25% since the start of 2019. But prices could stall as a slowing global economy squeezes demand and U.S. oil floods the market.
Sanctions on sight
The OPEC meeting in Vienna is scheduled to take place a few days after the G20 summit, which could end the trade war between the United States and China. The end of this dispute could prevent the imminent risk of a recession.
A conciliatory move from U.S. President Donald Trump would have a significant influence on global oil demand. Oil supplies are in the hands of the American leader.
His sanctions against Iran and Venezuela have already reduced supplies in the market, more so than the OPEC’s agreed production cut. Meanwhile, U.S. shale producers are gaining ground in the market as the cartel and its allies continue to limit oil output.
For more information, check Energía16