In fact, the alliance was forced to abandon a very modest production increase of 180,000 barrels per day (b/d), which affected only the eight countries participating in voluntary production cuts, and did not affect the official production quotas of all participants in the deal. But this did not help the market either. The price of Brent is now around $72 per barrel.
For Russia, the issue of reducing production at low oil prices is not an idle question. Our Ural oil, the price of which the industry pays taxes to the country’s budget, is exported at a discount to Brent. In August it was about $12 per barrel. That is, now the price of Ural oil is around $60 per barrel – the minimum for the planned filling of the Treasury.
Our country cannot compensate for low oil prices by increasing production volumes due to the terms of the agreement. In August, we came as close as possible to meeting OPEC+ quotas, cutting production to 8.983 million bpd, according to Bloomberg, just 5 thousand bpd above the target. They are reducing oil production by reducing the volume of supplies abroad. Supply to Russian oil refineries remains a priority. As a result, our exports of oil and oil products fell to the level of early 2021. Since there is currently no talk of fuel shortages in the world, it is highly likely that our raw materials have been replaced by raw materials from other suppliers.
We are not the only ones facing the problem of losing markets. In total, OPEC+ countries are reducing quota production by 3.66 million bpd from the October 2022 level. Another 2.2 million bpd comes from voluntary commitments by Algeria, Kuwait, Iraq, Saudi Arabia, the United Arab Emirates, Russia, Kazakhstan and Oman.
As energy expert Kirill Rodionov notes, global demand for oil and light hydrocarbons produced from oil (ethane, propane, butane) increased from 91.7 million bpd in 2020 to 102.6 million bpd in the first half of 2024, according to the Energy Information Administration (EIA). And the production of oil and light hydrocarbons in OPEC+ countries in August 2024 was 6.6 million bpd lower than in April 2020. The Alliance has significantly reduced production in an attempt to regulate the market. The share of OPEC+ in the structure of global oil supply decreased over the same period from 47% to 39%; its further reduction will increasingly run counter to economic viability.
According to Valery Andrianov, associate professor at the Financial University under the Government of the Russian Federation, the role of OPEC+ in regulating the oil market remains quite strong, but continues to decline. Today, the price environment is largely determined by two other factors: the dynamics of the Chinese economy and the geopolitical situation in the Middle East. And if other factors that put pressure on prices are added (for example, a recession in the United States or an increase in production outside of OPEC+), then the range of opportunities for OPEC+ will be small. Further production reduction may only be a temporary option, as such a measure will lead to the alliance losing market share, stimulate production in other countries and increase tension between the parties to the agreement. If oil prices remain below $70 per barrel, OPEC+ may resort to additional production cuts, but if this does not help to return prices to the $75-80 range, the effectiveness of the alliance will be in serious doubt. And, perhaps, there will be prerequisites for the completion of your work.
We are likely to face a new round of discussions on other parameters of the work of the OPEC+ alliance, says Konstantin Simonov, head of the National Energy Security Fund. The expert recalled that in the spring at the SPIEF, the head of Rosneft, Igor Sechin, openly said that OPEC+ does not play the same role in the oil market.
But Simonov stresses that hasty decisions on the OPEC+ issue are absolutely unacceptable. Everyone remembers what the collapse of the agreement in 2020 led to. It is clear that the OPEC+ market share is falling, and the cuts are being taken advantage of by the free riders of the agreement (countries that do not participate in it), primarily the United States. After all, production is growing not only in the United States itself, but also in Canada and Guyana, where mainly American companies operate. Production is also growing in Brazil and Norway, and we are actually opening the market for their oil. But this is only on the one hand, on the other hand, the collapse of the agreement can have very serious and negative consequences both for all OPEC+ participants and for Russia individually. We have already abruptly withdrawn from the agreement and we know how it ended, the expert says.
This agreement is beneficial for Russia, Andrianov believes. On the one hand, it allows to keep the price of Russian oil fairly high (even taking into account the discount). On the other hand, OPEC+ allows for a broader dialogue with Middle Eastern producers and thus avoids various price wars. We see that today the flows of oil raw materials have been redistributed: Middle Eastern oil is replacing Russian oil in Europe, while our country has taken a leading position in the markets of China and India. In other words, there are some tacit agreements that allow “distributing” the markets in this way.
The benefit for Russia from further cuts in oil production depends on how the market reacts. If this leads to a consolidation of quotes around $85, then it will certainly be profitable. If the “China factor” prevails and the new restrictions do not have the desired effect, then such a reduction could have a negative effect on the size of budget revenues from oil and gas, the expert notes.
