Rosneft CEO Igor Sechin said the global industry has lost some $500 billion in the last few years.TASS
With the Russian economy seriously battered by export oil plummeting in value to its lowest level in the last 12 years, top executives from the government and energy sector have fallen into an old trap and now intend to play the OPEC trump card: Decrease output and dissolve the present glut by creating a relative shortage of supply.
For the record: In 2015, producers were extracting and offering the global markets a surplus of over 1.84 million barrels per day of crude oil that the market did not want and could not absorb.
In late January, Russian Energy Minister Alexander Novak suggested he was ready and eager to attend an emergency OPEC meeting, called by Venezuela, to forge an agreement to wind down oil production by 5 percent, to be done simultaneously and in good faith.
The same recipe for saving the embattled global industry, which has lost and written off some $500 billion in the last few years, was articulated by Rosneft CEO Igor Sechin when addressing the International Petroleum Week in London last week.
Common wisdom claims it is sufficient to engineer rebalancing within market fundamentals by cutting production and then watch tight supply automatically drive prices up. This did happen before triggering accusations by primary energy consumer nations that OPEC was manipulating the market. Today it won’t work and the grand idea of a concord between Russia and OPEC is not feasible.
The reasons this is a doomed enterprise are manifold but not all of them are apparent. It is all too easy to point out to the inherent squabbling within OPEC. This is the first argument. Now the disarray within OPEC has been exacerbated by the hostilities in Syria and Iraq, unleashed with the tacit support and financial sponsorship of Saudi Arabia and the Gulf monarchies, which view it through the prism of the holy war against the apostates: the Shiites of Iran and Iraq as well as the Alawites in Syria.
Secondly, apart from the regional showdown between the two branches of Islam, a similar business strategy is being pursued by the two main stakeholders. The Saudis persistently protect their oil market share against outsiders, that is the U.S. shale frackers, Russia and other non-OPEC traditional purveyors.
The Iranians, who are banking on revitalizing their energy sector, damaged by Western sanctions, have made it absolutely clear that they would not even consider putting a cap on production until they surge the current daily exports of app. 1.1 million barrels to 1.5 million barrels. In sum, neither Riyadh nor Tehran would go for a 5 percent diminishment of their oil output.
Thirdly, even if a miraculous consensus of OPEC members takes place and they manage to accommodate Russia as a temporary ally under a “marriage of convenience” deal, it will not affect prices to the extent the producers envisage. It will not be a game-changer.
Why? It is worthwhile quoting World Bank analysts, who claimed: “The sharp oil price drop in early 2016 does not appear fully warranted by fundamental drivers of oil demand and supply.”
The logic of this observation resonates with the earlier statement made by Rosneft chief Sechin when he attributed the flight of investors from oil to financial regulators in the United States.
Commodity market players who use derivatives like futures contracts, forward contracts, options, swaps and warrants, the multitude of contractors and subcontractors, and notably a sophisticated system of hedging of shale oil extraction – all these factors are instrumental in determining the price of this product and, according to the Rosneft boss, will define the industry’s development.
A more comprehensible explanation was offered by Konstantin Simonov, director general of Russia's National Energy Security Fund, who fired a succession of questions: “Why are all energy and raw materials markets tumbling? Are we witnessing an oversupply across the board, say, from aluminium to coffee? Has anyone heard of the arrival of shale coffee?”
His suggested answer sounds a bit provocative yet intriguing: “The FRS (Federal Reserve System in the United States) is playing a stronger dollar. And all the money from all the primary energy markets are invested into the dollar.”
The oil prices, in other words, are now detached from the market fundamentals. They do not reflect the classical pendulum of supply and demand. Moscow-based experts have calculated that 95 percent of all the oil derivatives belong to U.S.-registered banks.
With the FRS luring investors into a formidable U.S. dollar, the chances of causing a rebalancing of the oil market through tightening supply, looking at it through the eyes of the producing nations, are pitifully slim.
Against this “new normality,” even if Russia and OPEC go out for a tango, the global oil prices won’t budge and go down.
The opinion of the writer may not necessarily reflect the position of RBTH or its staff.
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