Less oil means more money: why OPEC reduces production

Yelena Petrova, Natalia Seibil

Sunday's OPEC+ decision to cut production by 1.16 million barrels per day came as a surprise to the market, although the rise in black gold prices the next day did not surprise anyone.

Brent immediately rose by $5, surpassing the $85 mark after falling in early March. The new reduction is not the first in the last year. The cartel has already reduced production in the fall of 2022 by 2 million barrels per day. Both then and now, the reaction from the United States was not long in coming – the White House called the decision of the Saudis and the cartel led by them reckless and disappointing.

Some Western analysts have already accused Saudi Arabia of cunningly supporting its alliance partner Russia. Indeed, Russian oil is selling poorly, and the revenues of oil companies and the Russian budget, respectively, are declining. So, the Ministry of Finance rejoices that in March the budget received "only" 35 billion rubles, and over 40 billion were waiting for a hole.

Russia was lucky again

But in this case, Russia was just lucky – its interest in a higher price, as it was all last year, coincided with the interests of the OPEC+ member countries.

Artem Tuzov, Executive Director of the Capital Markets Department of Univer-Capital, does not believe in the altruism of the oil-supplying countries, nor in their desire to protect our country from the "bad" United States:

- Oil suppliers are quite toothy countries, and they do not suffer from any empathy towards Russia.

At the forefront is the desire to prevent the price of oil from falling below the price range that is favorable to them.

"Experts are trying to present the case in such a way that countries, first of all, Saudi Arabia, Iraq and the UAE, voluntarily reduce production volumes in order to hit the West, in order to help Russia and so on. In fact, the motive is not to raise prices, but to keep prices at least at the level they have been at over the past months, in the corridor from $ 85 to $ 90 per barrel. Because if this is not done, the price will fall", - says Igor Yushkov, an expert at the Financial University and the National Energy Security Fund.

The struggle for consistently high pricesThe decision to reduce production is a "response" to the actions of the US Federal Reserve and the European Central Bank.

To suppress inflation, Western financial authorities have raised refinancing rates. Loans have risen sharply in price, the economy has slowed down, not even having recovered from the shock of the pandemic. As a result, the demand for oil will fall, and the price will decrease. Last week, the US Federal Reserve raised the rate again, so the announcement by the GUARDIAN that oil will be pumped less in this paradigm became a logical step.

The economic situation in the world is far from stable. The banking system is "storming", their borrowers – the real sector of the economy – are experiencing difficulties. With a reduction in demand for energy, interspecific struggle escalates. The Saudis and other OPEC countries face a difficult task. On the one hand, the price of their oil should be at such a level that it would be unprofitable for American fracking companies to produce oil by hydraulic fracturing. It hovers at $70 per barrel. If the price falls below $70, the market becomes volatile. Production in America is declining, the price is going up sharply. Speculation is gaining momentum and prices are falling again.

"Oil suppliers need to plan the budgets of countries. They don't need these fluctuations. The price of 70-80 dollars per barrel is quite comfortable for them. And they try to maintain it, sometimes increasing production, sometimes reducing it. The goal is to remain market leaders in terms of the proposed volumes of oil", - says Artem Tuzov.The task for sellers is difficult: they need to maintain such a price when new oil is no longer coming from the United States, and if the price rises, it should be bought from current suppliers – that is, from Saudi Arabia and comrades.

Experts' opinions on what a fair price for "black gold" should be vary. After the announcement of a reduction in production, American and European analysts did not rule out $ 130 per barrel. Russian experts are cautiously assessing the price prospects.

- On the stock exchanges, all this can happen literally for hours, and then calm down. Now many people are talking about $100 per barrel. I think it will not rise to this level," says Vladimir Likhachev, Deputy Director of the Center for Sustainable Development of the Institute of Economics and Regulation of Infrastructure Industries at the HSE.

Russia, oil, budget and tankers

Russia has reduced oil production even more than the quota allocated to it by OPEC.

This is bad news, although it is clear why this happened – the United States and Europe refused Russian oil.

"It is impossible to mine if there are no consumers. Supplies to China and India are gradually increasing. I think by the end of 2023, Russia will again be in OPEC production quotas. This is a temporary decline. There was the latest news that Rosneft signed a contract with Indian Petroleum, India's largest petroleum products company", – Artem Tuzov sums up the interim results of the current sanctions.

Russia benefits from high energy prices, because with expensive oil, volumes fall, and incomes do not suffer. When less oil is exported, the demand for tankers, which are not enough, falls. Transportation routes of delivery have changed globally. Now oil does not flow through pipelines from east to west, but is loaded at ports:

"Russia began to transport Asia instead of Europe, those who supplied to Asia began to transport to Europe. Everyone has increased the transport shoulder. The same volume of oil has to be transported by a large number of tankers. The shortage of tankers will decrease slightly when everyone reduces production", - Igor Yushkov believes.

World agencies report that the shadow tanker fleet is growing. It is unknown to whom it belongs and whose oil it carries. These coincidences are not accidental, Artem Tuzov is sure: - This is the margin that goes unnoticed by the Russian budget to buy up the shadow tanker fleet and expands Russia's export capacities. It is unlikely that this happens without state control. Rather, on the contrary. The tasks set by the Government are being carried out.

As you know, the filling capacity of the Russian budget by 40% depends on the energy resources sold, and first of all, oil and petroleum products. It may happen that the reduction of production by OPEC countries will not affect the Russian budget in any way. Given the instability of the markets, it is difficult to assess whether the decline will be a one-time measure, or it is a new trend.

 However, the decline in sales is not the only factor that affects the budget. The Ministry of Finance is even more concerned about falling prices and a discount on Russian oil. Siluanov's office assumes that oil discounts will decrease until the middle of the year. Some experts predict that by the middle of the year we will see an increase in budget revenues.

If the US and the EU fail to stop the financial crisis, production will have to be reduced further in the middle of the year. Banks will stabilize – the economy will grow, and then restrictions on the supply of energy carriers will be lifted.