In late April, Russia was left standing at the alter in Doha, as Saudi Arabia walked away from a production freeze deal, leading the negotiations to collapse with no result.
A few days later, top Russian oil executives met at the Third National Russian Oil and Gas Forum that convened in April 19-21 in Moscow, Russia.
While discussing major factors influencing the oil market at the Forum, the speakers agreed the geopolitics have become an essential factor, although the condition of the world economy and market forces along with the technological advancement seemed to still be taking a lead in driving oil prices.
“We must understand that the oil prices cannot change drastically because we are now reaching the projected output level that we set out to achieve with the investments that we historically made six, five, four years ago, and the production cannot be curtailed,” said Vagit Alekperov, LUKoil’s Chief Executive Officer. According to Alekperov, last year LUKoil spent 300 billion rubles on investments in the industry, and 112 billion rubles of investments in the first quarter of 2016. Related: ISIS Working On Driverless Car Causes More Worry Than Necessary
Alekperov also said that the complex geopolitical situation in the Persian Gulf has caused the OPEC members from the Middle East to compete harder for their share of the oil market.
“What we see here, is that amidst the oil prices slump the Persian Gulf countries attempt to increase their production output to cover their budget deficits caused by slashed oil revenues, including compensating for the part of budget they need for procuring arms”, Alekperov noted.
However, LUKoil’s CEO believes oil prices are passed their lowest point, and the equilibrium price should fluctuate around $50 per barrel for the rest of 2016 and first half of 2017. Prices should then rise in the second half of 2017 as demand begins to exceed supply.
The Chairman of the Russian Union of Industrialists and Entrepreneurs, Alexander Shohin, described a litany of geopolitical issues affecting oil prices. “The fact that the Saudis rejected freezing the output blaming it on Iran’s absence from the negotiations and its refusal to cooperate by announcing intention to raise the production back to pre-sanctions level of 5 million bpd plus a couple million bpd on top of that; turmoil in Libya’s political situation, and a lack of a legitimate government there ; let alone the conspiracy plots that impact oil prices in countries that may be regarded as ‘unfriendly’…all this definitely points to a high role of geopolitics in global oil market,” he said. Related: It’s Not Looking Good For Canadian LNG
“However, as we have seen, the oil price did not react to the Doha agreement derailment, and in my opinion, the price of $40, $41, $42 per barrel shall remain as an equilibrium price under current market situation through 2016,” Shohin added. The Chairmen also stressed the importance of energy efficiency and technological advancement as crucial factors making the long-term difference in the industry.
“Technological breakthrough have enabled the US to transform from the net-importer to the net-exporter on the global oil market, and this is a long playing factor,” he said.
According to Shohin, weak and disappointing global economic growth is keeping prices from rebounding. “We see the world economy growth rate lingering at just a little slightly over 3 percent, which means that there will not be any additional demand, taking into account the already existing high volumes of excess supply of oil on the market,” Shohin said. “Thus, my pessimistic forecast is that under the favorable concurrence of all the factors we talked about, the equilibrium price in 2017 will not go beyond USD 50 per barrel.”
Saudi Arabia’s Deputy Crown Prince said in the lead up to the Doha summit that his country could ramp up oil production much further. But Russia’s Energy Minister Alexander Novak was unimpressed. “They (Saudis) have the ability to raise output significantly. But so do we,” Novak said. Related: Crisis In Venezuela – A Lesson From Saudi Arabia
Russia’s Deputy Prime Minister Arkady Dvorkovich commented that the Russian Government was going to revise its budgetary planning for the next year based on an oil price of $40-45 per barrel.
Alekperov reassured the audience the Russian oil industry was resilient enough to withstand any price fluctuation and volatility. However, Alekperov also emphasized that the Russian government had to adopt new legislation on a production sharing agreement to encourage investment in the industry, and to introduce the legislation recognizing the discoverer’s rights to give an incentive to exploration of the new oilfields across the regions of Russia.
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“Our industry is at a very mature stage of development. We have not launched a single new oil province in the last year except for Northern Caspian. We need stable legislation to ensure a stable industry development and functioning, otherwise raising production would be impossible.” Alekperov stated.
By Ekaterina Prokrovskaya for Oilprice.com
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