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OPEC, Russia highly likely to decide on oil output cuts

January 28, 2016, 16:58 UTC+3 Zamyatina Tamara
© Viktor Drachev/TASS

MOSCOW, January 28. /TASS/. If the Organization of the Petroleum Exporting Countries (OPEC) and Russia decide to go ahead with planned oil output cuts, this measure will undoubtedly lead to higher oil prices and balance the budgets of oil producing states. The probability of this decision is very high as it meets the interests of both OPEC countries and Russia, experts polled by TASS said on Thursday.

Russia’s national oil pipeline monopoly Transneft CEO Nikolai Tokarev said on Wednesday after a meeting of domestic oil companies’ chiefs with Russian Energy Minister Alexander Novak that Saudi Arabia had come up with a proposal to discuss the prospect of reducing oil output.

According to the Transneft head, an OPEC meeting may take place in February and by the summer the Russian oil companies can cut oil production by 6% after negotiations with Saudi Arabia.

Despite a fall in oil prices, Russia built up crude oil output to 534 million tons in 2015 or by 1.4% on an annual basis.

The OPEC countries showed enthusiasm over Saudi Arabia’s initiative. Iraqi Oil Minister Adil Abdul Mahdi has said that Saudi Arabia and Russia as the two largest oil producing states are now cooperating "more flexibly" with other countries with regard to oil output cuts.

The Iraqi oil minister also said that Iraq was ready to cut oil extraction, if other countries agreed to similar measures and predicted an oil price at $50 per barrel in the second half of the year.

Kuwaiti Finance Minister Anas Al Saleh who also discharges the duties of the oil minister welcomed on Thursday the negotiations between OPEC and non-OPEC countries, in particular, Russia.

Oil market expert and formerly BP Russia Research Director Vladimir Averchev believes that the forthcoming OPEC meeting with the aim of oil output cuts and bilateral talks between Russia and Saudi Arabia will undoubtedly facilitate an oil price increase.

"This is good news. The announcement of upcoming OPEC talks in February has energized the market. The psychology of oil traders who are actually commodity exchange speculators will itself prompt an increase in oil prices. And if the talks of oil producing countries yield a positive result, this circumstance will give a long-term effect of oil price growth," Averchev told TASS.

"Considering that the initiative to cut oil output was put forward by Saudi Arabia, this means that the kingdom has secured its share on the hydrocarbon market, edging out both its rivals and Russia, and budget problems are prompting Saudis to make this move. According to data of the International Monetary Fund, the GDP growth rates in Saudi Arabia have slowed down by almost five times over the past five years and the kingdom posted a 19.5% budget deficit in 2015 after running a surplus before that," the expert said.

"Similar problems are seen in Russia, which has drawn up its 2016 budget based on the oil price of $50 per barrel. Therefore, there is a high chance that Riyadh as the OPEC leader and Russia as the world’s second largest oil producing country will be able to influence oil prices," the expert noted.

Director of the Institute of Globalization Problems Mikhail Delyagin said that Saudi Arabia looked like a king who had ordered the sun to rise precisely at the dawn: "Oil prices already switched to growth in January, bouncing back from the bottom of $27 per barrel of Brent crude. As Riyadh has discerned this trend, it is trying to demonstrate its significance and has come up with an initiative to cut oil production. This is a proper PR move that can, indeed, prompt the growth of oil prices," Delyagin told TASS.

On the other hand, Riyadh’s forced initiative shows that Saudi Arabia lacks the safety margin ascribed to it, the expert noted.

Saudi Aramco CEO Khalid al-Falih said at the Davos World Economic Forum back last week that Saudi Arabia would be able to sustain cheap oil even for a long period. But it turns out that it can’t. Saudi Arabia had to introduce an austerity regime last year. It is fighting in Yemen and fears an offensive by the Islamic State terrorist organization.

"In these conditions, Riyadh is unable to flood the world with cheap oil any longer and is forced to propose oil output cuts. This is very good for Russia because even with the growth of oil prices by a couple of dollars per barrel, the country’s budget will get $2-3 billion per year, which is a substantial sum, considering the current budget deficit," Delyagin said.

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