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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Oil Could Fall To $40 If OPEC Abandons Its Deal

In more proof that U.S. oil production is continuing to alter global oil markets, Russia’s finance minister Anton Siluanov said on Saturday that Russia and OPEC might decide to increase production to fight for market share with the U.S. His remarks were first covered by Russia’s Tass News Agency.

Siluanov said that lower oil prices would then have a negative impact on U.S. oil production, an argument that was also made as far back as late 2014 when the Saudis sought to drive U.S. producers out of business by opening the oil production spigots in spite of an already flooded global oil market.

“(If the deal is abandoned) the oil prices will go down, then the new investments will shrink, American output will be lower because the production cost for shale oil is higher than for traditional output.” He said that prices could drop to $40 per barrel or even less for up to one full year, adding that there had been no decision on the deal yet and he did not know whether OPEC countries would be happy with this scenario.

Siluanov’s comments aren’t without precedent. Russia has hinted before that it could start to pump more oil, which would in effect cause the world’s second-largest oil producer to nullify its participation in the OPEC+ oil cut deal put in place at the start of the year to remove 1.2 million b/d of oil from the market for six months, with a review period after this time.

The OPEC+ deal, the second of its kind in three years, has been successful in reducing global oil supply, in addition to geopolitical developments, including reduced production from OPEC members Iran, Venezuela, and Libya. In lockstep, global oil prices have spiked to five-month highs, rising 30-40 percent on tightening supplies. Related: U.S. Doubles Oil Exports In 2018

On Friday, London-traded, Brent crude futures rose 72 cents, 1%, to settle at $71.55 per barrel. U.S. oil benchmark West Texas Intermediate (WTI) crude rose 32 cents for the session, settling at $53.89 per barrel - the sixth straight week of gains for WTI. And despite some bearish news at the beginning of the week, crude prices have held around these levels.

Saudi Arabia to stay the course

If Russia is waffling over its commitment to remain in the OPEC+ deal, Saudi Arabia is indicating that it will stand fast. Saudi Arabia’s Energy Minister, Khalid al-Falih, said two weeks ago that he was “optimistic” about the prospect of continued commitment to the OPEC+ production cuts. Earlier he said he expected other oil producers to “catch up very soon.”

However, the fact remains that other producers in the agreement, including Russia, aren’t as committed to the deal (with lower compliance rates) as the first OPEC+ agreement that was put in place in January 2017, which was successful in bringing OECD oil inventory levels to five year averages and boosting prices that had sunk below $30 per barrel in January 2016.

If Russia does decide to increase production, the Saudis will be faced with a no-win situation. If the Kingdom keeps its part of the oil cut deal, it will cede market share to Russia, particularly in China and other parts of Asia.

If the Kingdom also forgoes the OPEC+ deal and ramps up production to fight for market share, though, it would put downward pressure on oil prices, especially as U.S. oil production continues to push ahead. However, whether oil prices would plunge to a dismal $40 per barrel as Siluanov predicted remains to be seen.

By Tim Daiss for Oilprice.com

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  • Mitch Farney on April 16 2019 said:
    Interestingly enough, the Saudi's are under producing by more than the non OPEC participants cut amount. And for that extra cut and ceding of market share, they probably are selling the rest of their exports for 5-10 dollars a barrel more. I think they let the non-OPEC jump out, IF they agree to cap their production the next 6 months at the levels used for determining the cut level. I just dont see why they collectively would want to go back to Nov/Dec 18. And certainly not the every1 produce flat out like in 15 for market share.
  • Mamdouh Salameh on April 17 2019 said:
    With Russia or without, Saudi-led OPEC is determined to continue with the OPEC+ production cut agreement until the global oil market has irrevocably re-balanced and oil prices surged beyond $80 a barrel which is the level needed by the overwhelming majority of OPEC members to balance their budgets. And if Saudi Arabia is staying the course, then so would the OPEC cuts. Therefore, the talk about a $40 a barrel doesn’t arise.

    Furthermore, oil prices are buoyed by a convergence of bullish influences currently at play in the global oil market such as a strong global oil demand adding 1.45 mbd this year over 2018, rock solid Chinese oil imports projected to hit 11 million barrels a day (mbd) this year, Chinese economy exceeding expectations and growing at 6.4% in 2019 instead of the projected 6.3%, a slowdown in US production and a tightening the global oil market caused by OPEC+ production cuts.

    The suggestion by Russia’s Finance Minister Anton Siluanov that OPEC and Russia should compete with US shale oil production for market share is an already discredited policy having been tried by Saudi-led OPEC and found wanting during 2014-2016 in the aftermath of the 2014 oil price crash. Even when oil prices crashed to $30 a barrel, it only slowed US shale oil production but failed to deal a knockout blow.

    Russia played a pivotal role in negotiating both OPEC+ production cut agreements in 2017 and 2018. Moreover, Russia will never withdraw from its commitments. Still, Russia’s contribution is more moral than actual. Russia has yet to fulfil its full share of this year’s OPEC + cuts amounting to 230,000 barrels a day (b/d).

    On balance, I doubt Russia will abandon the OPEC+ production cut deals because in its assessment of the global oil market, Russia looks beyond the oil price and takes into consideration geopolitical factors particularly its growing relationship with Saudi Arabia and the great influence it has gained over the global oil market from its cooperation with OPEC.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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