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Russia, OPEC to rein in growth of oil price within $70 per barrel in 2018

Energy Minister Alexander Novak has said recently that Russia might consider quitting the transaction ahead of time in case of market imbalance in the second half of 2018

MOSCOW, December 25. /TASS/. Oil-exporting countries will continue supporting market stability by limiting production in 2018, despite some players’ wish to drop it, analysts polled by TASS said. Market watchers expect the oil price to stay above $60 per barrel next year and go up to $70 in volatile periods in 2018.

In late 2016, OPEC member-states accounting for up to 40% of global oil supplies and 11 independent oil-exporting countries (the so-called OPEC+), including Russia, entered into an agreement to reduce oil production. According to that agreement, during the first half of 2017 the participants were to withdraw 1.8 million barrels per day from the oil market in comparison with the level of October 2016. Russia’s reduction quota amounted to 300,000 barrels per day. In May 2017, the participating countries extended the agreement until April 2018, maintaining the previous quotas for all participants. The purpose of the agreement is to reduce global oil reserves to the average level of the last five years.

Analysts interviewed by TASS consider the deal to be effective, as most of 2017 the price of Brent crude oil stayed above $50 per barrel and breached the $60 mark by the end of the year.

"The oil price has surged by $15 since the agreement was made, thanks to the fact that Russia and Saudi Arabia, which assumed the highest obligations, demonstrated a high compliance rate over the whole year," Tatiana Mitrova, Director of the Skolkovo Energy Center, said.

According to calculations provided by the Russian Direct Investment Fund (RDIF), both countries managed to gain up to $40 bln worth of additional revenues due to output reduction. Finam’s Alexei Kalachev assumes that Russia has met the goal on the cheap. "(Russia) has cut production by 2.7% versus October 2016, while OPEC countries - by 4.5%," he said.

On the New Year Eve, Russia and Saudi Arabia agreed to extend the production cap deal for another nine months until end-2018. Analysts expect the decision to support prices, though some of them said the highly-expected balance of demand and supply might never come.

Energy Minister Alexander Novak has said recently that Russia might consider quitting the transaction ahead of time in case of market imbalance in the second half of 2018.

However, Maxim Edelson of Fitch Ratings in Moscow notes that the US projected oil production may hit a new record since 1970s of 10.3 mln barrels per day (up 0.6 mln barrels versus 2017) in 2018.

"Moreover, apart from shale producers, Canada and Brazil will also increase production, having been able to cut costs substantially," Mitrova said.

All this may result in an increase in developed countries’ oil reserves of 43 mln barrels by the end of 2018, up 1.5% compared with 2017, Edelson said.

Both experts agree that the market imbalance is rooted in growing demand, and expect a fragile balance in 2018. "However, OPEC+ countries will have to support the agreement in 2019 as well because of new producers of cheap oil," Mitrova said.

Kalachev shares the view that it is likely the agreement will be kept in some form. "The deal may be transformed into export restrictions, with refining being increased. This will affect price stronger than production cap," he said.

The analyst said he expects the price of Brent crude oil to stay within the range of $60-65 per barrel in 2018, adding that the economic turmoil in Venezuela and new political scandals in the Middle East might trigger price upsurges up to $70 per barrel.

Tatiana Mitrova forecasts average oil prices within the $63-68 per barrel range next year.

Fitch’s fundamental outlook is $52.5 per barrel in 2018 and $55 per barrel in 2019, with the market expected to be volatile, Maksim Edelson said.