OPEC and Russia cannot influence reality. The change has come

01.12.2017 11:05 | Marcin Lipka

“On Thursday, in Vienna, 24 countries decided that they will continue the limit on oil production until the end of 2018. How will this affect the main energy source's quotation and will it increase fuel prices?” writes Marcin Lipka, Conotoxia Senior Analyst.

Marcin Lipka, główny analityk Cinkciarz.pl

As expected on November 30th, the OPEC countries and ten other oil exporters (including Russia) extended the agreement to reduce "black gold" production until the end of next year.

Last month, there were speculations that Moscow could be sceptical about such a long period of cut extensions due to the fear of an extremely large increase in supply from the USA, but finally, Russia also agreed to continue the reduction in output.

For OPEC and Russia stocks are most important

By analysing the producers' activities through crude oil quotations, it can be stated that they have achieved short-term success. Production reduction by approximately 4% by OPEC and other countries (approximately 1.5% globally) contributed to a price increase of about 25-30%. This means that exporters' revenues increased, in spite of lower production.

However, it should be remembered that this is not the only effect of cartel’s actions. First of all, the drop in oil prices in 2015-2016 resulted in a significant reduction in US shale production (by more than 10% from highs; globally, around 1%). Firstly, it allowed to stop the trend of stock increases and then, together with OPEC activities, to significantly limit them.

According to the IEA (International Energy Agency) report from November, at the end of September, the stocks for oil and oil products in the OECD countries fell to 2-year lows and amounted to 2.97 billion barrels. In addition, another measure of stocks (the difference between their 5-year average) also decreased considerably. At the beginning of the year, current stocks exceeded the average value of the last 5 years by more than 300 million barrels, the surplus has now decreased to 119 million.

Oil producers are especially focused on ensuring that the market does not have too many reserves, as this prevents them from obtaining additional gratuities in the case of sudden supply decreases (weather, geopolitical, riots, breakdowns, etc.) or increased demand. Filled warehouses mean that even a small reduction in demand or an increase in supply would result in sudden price drops.

As a result, oil stocks and its products are consequential for OPEC and Russia. If they fall and their average levels are reached over many years, then the risk of a significant "black gold" price reduction will be significantly reduced. However, there will be an increased possibility of at least short-term price increases if the conditions are favourable.

More positive than negative information for drivers

The shale revolution in the US caused a huge transformation of the oil market. For decades, the cartel managed the raw material's price in order to maximise its financial benefits, but at the same time not cause a serious disturbance in supply or a disastrous explosion in "black gold" prices.

This whole concept collapsed when it turned out that average daily production in the USA was growing by about 1 million barrels per day and is sufficient in the case of global demand, and that the US is starting to reach the production level of Saudi Arabia or Russia. Investments in other countries (Canada, Brazil) have also led to the situation where OPEC's impact on prices has been clearly limited and the market price of crude oil for consumers has fallen noticeably as a result of the real, non-membership in the cartel competitions.

Currently, OPEC or Russia are really dependent on the average relation of shale oil extraction costs to the current price. Now, it is likely that the profitability of production in the United States is in the range of 50-60 USD per barrel. It is this value that represents a level of balance for the oil market. The IEA estimates that daily production in the US will increase next year by 1.1 million barrels YOY, which will largely satisfy growth demand. This should keep the annual average prices close to current levels, which also means that the average cost for drivers in 2018 is not likely to differ significantly from those currently observed.


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