Truth, nothing but truth
Last Wednesday in Vienna, two days before the Friday meeting on a series of OPEC + agreements, the so-called ministerial meeting of the monitoring committee was unusually promptly held. This is a traditional regular meeting according to a long-agreed schedule, but expanded - with the participation of signatories of well-known transactions.
The monitoring committee usually prepares materials and a decision for a large ministerial meeting, which usually only approves the committee’s decisions. But this is not at all why, but due to the fact that the situation in the oil market really depends on it and, as a result, the state of the entire world economy in the context of the growing epidemic of the Covid19 virus, the meeting was in the center of attention of the world media.
The expectations of the writing fraternity from a large interview of oil ministers were justified only partially. Journalists were especially encouraged when it became known that Russia had not yet supported an excessively large decline in production levels, citing technological problems and the inability to immediately comply with new OPEC + standards.
Almost immediately, this was followed by the departure from the meeting of the Russian Minister of Energy, Alexander Novak. Many were ready to report the OPEC’s divorce from Russia, but Novak quickly relieved the tension when he first announced that he would return to the big meeting on March 6th. The Minister explained that his departure from the meeting of the OPEC + Ministerial Monitoring Committee shortly before its completion had been planned in advance and had nothing to do with the negotiations.
Yes, Russia did not support the proposal of most OPEC + partners to increase production cuts due to the impact of the coronavirus epidemic on the oil market. But this, we repeat, only so far, because in Moscow they well understand that they will have to do something in any case. To date, the total volume of reduction in oil production by the OPEC + Pact participants, recall, is 1,7 million barrels per day. But this is not enough to maintain oil quotes at an acceptable level.
The main share of the decline, almost 500 thousand barrels per day, as you know, took over Saudi Arabia, the traditional long-term leader of OPEC. Russia, which basically does not join the organization, but has established good interaction with it in the form of a series of OPEC + deals, is on the second with a quota of 300 thousand barrels.
Currently, the prospect of reducing the total quotas by another 500 thousand barrels is being discussed, of which Russia, according to experts, may get 100 thousand or even more. Meanwhile, our oil industry is already experiencing serious problems associated with the need to comply with OPEC + standards.
Demand in the domestic market, which is already extremely low due to an abnormally warm winter, does not compensate for significant losses in exports. At present, the prospect of closing several dozen low-profit wells is becoming a brutal reality, since reducing production at large fields is almost impossible due to technological reasons.
In fact, on Wednesday there has not yet been a disagreement or disruption of the next pluses to OPEC transactions. But for some reason, the members of the monitoring committee decided for some time, maybe only until March 6, not to spread about the decisions taken. There are no doubts that some decisions, which obviously suit all the participants in the meeting, were made.
Who is not the first, that is not the second
In fact, the first to be stunned by the growth of the Chinese coronavirus beyond the Middle Kingdom, were, as you would expect, stock brokers. They brought down quotes and indices, which leads to suspicions of an outright thirst to finally play for a fall. The drop in oil prices, which was also expected, exceeded all the most pessimistic forecasts by inertia.
Oil traders, who are well aware that the real drop in demand for black gold is not so great that prices have fallen by almost half, simply ended up at the tail end of stockbrokers. Pressure on the market, which was exerted and still exerted by speculators, literally required an answer. The answer from decision makers.
However, the answer, which is hardly worth considering adequate, was clearly delayed. Hopes that the situation would resolve at least a little did not materialize, and oil producers had to take drastic measures. And we are talking, it seems, not only about a sharp decrease in production quotas, but also about urgently building and filling up the colossal volumes of backup storage.
Under such storages, where it will be possible to drain excess oil, existing reservoirs in China, in rogue countries under sanctions such as Iran and Russia, are quite suitable, but much remains to be built. Build quickly and in colossal volumes in order to reserve the ability to manipulate the volumes of supplies to the markets much more freely.
Returning to the scale of a possible decline, we note that the situation cleared up a bit when some of the other members of the monitoring committee and some of the ministers got into the public. And then a simply frightening figure sounded of the necessary reduction of quotas of 1,5 million barrels.
Despite the fact that the ministerial meeting will continue on Friday, when everything should be decided, oil quotes are already creeping down. The prospect of the return of the Russian minister and the upcoming voice of the official Russian position did not really inspire traders to buy. Sales offers, although rather sluggish, continue to prevail.
According to reports from Vienna, Mohammed Arkab, Minister of Energy of Algeria, President of the OPEC Conference, became one of those who did not hide information about one and a half million barrels. He backed up the dangerous figure with a rather lengthy statement, having only an indirect relation to the case: “... the price (for oil. - Aut.) Fell to $ 50 per barrel, while at the beginning of the year a barrel was worth more than $ 65. "Many factories, especially in the automotive sector, were forced to cease production, which had implications for the entire production chain in China."
Following him, the UAE Oil Minister Suheil al-Mazrui managed to bring in at least a little positive, who said that OPEC “does not plan to do anything unilaterally.” Cartel members, he said, "agreed that they would do everything together as a group." Journalists immediately concluded that the group refers to OPEC +.
But even the OPEC Secretary General, Mohammed Barkindo, did not say specifically what the Russian quota will be or should be in those same one and a half million. Experts believe that in this colossal volume, Russia may request cuts even by more than 300 thousand barrels. In any case, by Thursday evening it was certain that countries that were not members of OPEC (besides Russia, it was Kazakhstan, Indonesia, and it was possible that even the United States) would be offered a total quota of 500 thousand barrels.
Our oil industry can cut another 300 thousand barrels just can not pull. The situation is such that we have to choose from two evils - either reconcile ourselves to extremely low oil prices for a long time, or, again, squeeze ourselves to our detriment. In both cases, the blow to Russian oil production will be very strong, and which of the two evils will turn out to be bigger and worse, no one can predict at the moment.
It is well known that Russian business, sending Minister Novak to Vienna, agreed only to extend the existing quotas, but not to expand them. The expansion, as it turns out, is so massive that the possible benefit from it in the form of newly rising prices for hydrocarbons can be completely useless.