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