Russian deal with OPEC could raise oil to $40

With oil prices at their current level, neither Russia nor the OPEC countries, can provide for the normal functioning of their economies.

With oil prices at their current level, neither Russia nor the OPEC countries, can provide for the normal functioning of their economies.

Reuters
Should Russia reduce oil production by 5%, analysts say prices of black gold could rise to $40 a barrel. However, the Russian government claims it has no real control over production policy in private companies, though firms may themselves reduce production due to the fall in crude prices.

Oil prices could increase if Russia is able to arrive at a deal with OPEC on reducing oil production by a limit of 5 percent, or by around two million barrels a day, according to analyst at MFX Broker Anton Krasko.

According to Krasko, considering that the current oil glut on the world market comprises just 1.5 million barrels a day, this will be enough to stabilize the market and return prices to at least the $40-a-barrel level.

Russian Energy Minister Alexander Novak said on January 28 that Russia had accepted an invitation to take part in the extraordinary OPEC summit in February. Novak said Saudi Arabia and OPEC are preparing to discuss the possibility of reducing oil production by 5%.

Despite denials by representatives of the cartel, prices on Brent crude have increased to their highest level since the beginning of the year; $35.8 a barrel.

"What's important is not the minister's words, but the position of Russia, Saudi Arabia and other large oil-producing countries, which have given hope to the imbalance in supply and demand on the oil market," explained Andrei Solozhkov, analyst at the investment company UFS.

Analysts note that another reason for the increase in oil prices could have been the U.S. Federal Reserve's recent decision to leave the key rate unchanged.

Trying to limit the budget deficit

Krasko said, with oil prices at their current level, neither Russia nor the OPEC countries could provide for the normal functioning of their economies.

Russian Finance Minister Anton Siluanov said in late December that the finance ministry was basing its estimates on budget revenues in 2016 on an average price of $40 per barrel, a downward revision of the original projection, which based the budget on $50 per barrel.

Meanwhile, Saudi Arabia's budget deficit in 2015 reached $98 billion, or 15 percent of its GDP. According to Reuters, the kingdom's Finance Ministry has predicted a budget deficit in 2016 of $87 billion.

"Saudi Arabia's calculations about producers of expensive oil not being able to sustain low prices and consequently starting to reduce production have been proven wrong. Shale companies are doing everything to reduce the cost of production, which on average has decreased from $40-45 to $30-32 a barrel," said Krasko.

In such conditions it is necessary to make agreements with oil producers who are willing to talk and, in this case, Russia is the best solution for OPEC.

Market players will decide by themselves

However, the Russian government cautions that it will not be able to influence the reduction of oil production in the country, since the overwhelming quantity of energy resources is produced by private companies

"In Russia, the oil sector is mostly commercially oriented and is not under the government's direct control. It is regulated by the decisions of separate companies," said Deputy Prime Minister Arkady Dvorkovich at a press conference in Moscow on January 29, adding that it would be the market players themselves who decide whether or not to cut production.

Several Russian analysts believe that it is not advantageous for the country to reduce its current production volumes.

"There will be the risk that Russia will be replaced by Iran or Saudi Arabia," said Georgy Vaschenko, director of operations on the Russian capital market at Freedom Finance.

Iranian representatives have already proclaimed their intention to raise oil production by one million barrels a day.

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