World oil production will decrease by 1.9%

Russia and the OPEC countries were able to agree on the long-hope deal to reduce oil production for about 1.9% of the world level, which caused the prices increase by 10%. Moscow for the first time since 1999 agreed to participate in the overall reduction of OPEC countries, exempting Iran as a member of the cartel. However, the final impact of the deal on the industry is assessed mixing: remains the risk of non-compliance with the agreements, including from Russia part, as well as a reciprocal strengthening of the positions of the US oil producers, who are not affected by the deal.

The meeting of the OPEC countries in Vienna, at which the cartel planned to make a decision to reduce oil production, was accompanied by a habitual change of scenery and moods. Since OPEC has been idle for two years and has been negotiating the agreement for about a year, the meeting had a priori to finish with either a complete failure, after which analysts unanimously declared this organization incapable, or a triumph - at least temporary. This state of things dictated the appropriate drama - from the deepest pessimism which reached its apogee on the evening on November 29, causing collapse in oil prices, to timid hopes in the morning on November 30 (Brent price rose by 2.2%, to $ 47.4 per barrel). Optimism was strengthened by the middle of the day after the appearance of the first leakage of information on the agreement (by 15:15 Moscow time the oil rose in price to $ 50.45). With no official confirmations the quotations went down (to $ 49.5), but after the statements under the summit results, the overall growth for the day exceeded 10% (to $ 52).

The cartel members managed to surprise the market seriously, not only with the agreement - for the first time in eight years - to reduce oil production to the maximum expected volume (by 1.17 million barrels, to 32.5 million barrels per day), but also with the promise of further reduction by 0.6 million barrels per day from non-OPEC country parties. As a result, the overall decrease could reach 1.8 million barrels per day, which is much more than the current surplus in the market. This means that huge oil reserves accumulated in 2015-2016 should begin to be used.

OPEC made public disclosure of per country quotas, which in turn increased confidence of market participants. In particular, Iran was allowed to increase production by 90,000 barrels per day to 3.8 million barrels. Nigeria and Libya will be able to maintain the current level, like Indonesia (temporarily left the organization). The rest will reduce production, most of all - Saudi Arabia (by about 0.5 million barrels, up to 10 million barrels per day). The deal should enter into force on January 1 for six months, but may be extended. A complete surprise was Russia's agreement to cut production with OPEC - so far this precedent was observed only in 1999. As explained Alexander Novak, the Head of the Ministry of Energy, during the first half of 2017 the country is ready "to gradually reduce production to 300 thousand barrels per day in a short time, based on technical capabilities". Until now Russia had been saying that it was only ready to freeze production at the current level of 11.2 million barrels per day. However, the position was changed by the decision of Vladimir Putin after the phone conversation with Iranian President Hassan Rouhani. Mr. Novak, although being out of Vienna yesterday, was in touch with the participants of the meeting, agreeing on a joint position. As a result, in fact Russia undertakes the second largest reduction after Saudi Arabia, allowing Iran not to reduce, but even increase its quota within OPEC. The same amount of reduction should be provided by unnamed "other" countries outside OPEC - most likely, we are talking about Mexico, Kazakhstan and Azerbaijan. Their representatives did not comment on the deal yesterday. Although many parameters of the deal have been made public, it has not formally been signed yet - representatives of the participating countries must meet and sign the relevant document within ten days, the meeting may take place in Doha. It is assumed that compliance with the terms of the reduction will be monitored by the committee of representatives of Algeria, Venezuela and Kuwait on behalf of OPEC and, probably, Russia and another country outside the cartel. Interviewed analysts had expected that in case of OPEC meeting success, oil prices could rise to $ 55 per barrel. After the first speculative price increase, the market participants will carefully study the real impact of the reduction in production.

The technical aspects represent a particular difficulty: in winter Russia hardly can close oil wells, i.e. it will most likely be about stopping the drilling of new wells - this means that the production decline will be gradual and the real reduction will be less than 300 thousand barrels per day. Another aspect is the impact on the market from alternative producers, primarily shale oil from the US, which may occupy a niche being freed up after the departure of OPEC and Russian oil. Ecuador Foreign Minister Guillaume Long said that according to OPEC, the US producers will not be able to significantly increase production at current prices. At the moment, according to OPEC forecast, the increase in production in countries outside the cartel in 2017 should be 0.3 million barrels per day and will be absorbed by the growing demand. However, oil production in the US has already begun slightly growing in October.