Situation on Oil Market: OPEC Factor

The Organization of the Petroleum Exporting Countries (OPEC) marks today its 55th anniversary. In light of the upcoming anniversary, the Rossiya Segodnya International Information Agency hosted a round-table conference, the attendees of which assessed the progress achieved by OPEC since its establishment and analyzed prices on the oil market. Moreover, they touched upon conjuncture around the volumes of production, sale and extraction on the oil markets, with regard to the lifting of anti-Iranian sanctions.

The round-table conference was attended by Anatoly Dmitriyevsky, Professor, Member of the Russian Academy of Sciences (RAS), Director of the Institute for Oil and Gas Problems, RAS, Konstantin Simonov, Director General of the National Energy Security Fund, Vitaly Bushuyev, Professor, Director General of the Institute of Energy Strategy, member of the Committee for Energy Strategy and Fuel and Energy Complex, Russian Chamber of Commerce and Industry, Stanislav Zhiznin, Professor at the MGIMO, Russian Ministry of Foreign Affairs, President of the Center of Energy Diplomacy and Geopolitics, Alexander Kurdin, Head of the Strategic Energy Research Department, Analytical Center for the Government of the Russian Federation.

According to the experts, OPEC managed to coordinate and harmonize the oil policy of member states, effectively protecting their collective interests, and to significantly influence the oil prices on world markets.

Although the prices for “black gold” plummeted compared to the previous years, many analysts believe that OPEC's position remains pivotal in oil price formation. Anatoly Dmitriyevsky noted that the situation on the oil market was very hard to forecast at the moment, because it was influenced by many factors bearing down upon the price of oil. "In the past, if a tanker arrived with a delay, the oil price would react to that momentarily. Today, the situation in the Middle East, particularly, in Libya, and the Islamic State factor have its impact," he explained.

The expert emphasized the fact that the state of affairs on the oil market was unprecedented. When the price for oil started nosediving, Saudi Arabia declared that it would not persuade OPEC member states to react to the developments. However, OPEC had always been trying to retain direct influence of its states on the world oil market.

"Let the United States feel that the price for oil affects economies of many countries and requires a reaction. Ultimately, the US should take part in the process of oil price adjustment," Dmitriyevsky said.

In his turn, Konstantin Simonov divided the world into two camps, each trying to explain the oil price, depending on different positions. The first camp consists of market experts who interpret all fluctuations in oil prices solely as market conjuncture: a shift in supply and demand on the market. "In the early 2015, the oil price increased by 30%. Why did it happen if nothing changed in the structure of supply and nothing changed in the structure of demand? There are falls that cannot be explained," he opined.

In this respect, the expert noted that explaining everything through the lenses of market conjuncture was fruitless. The oil glut is 2-3 million barrels a day, taking into account that Russia extracts over 10 million barrels a day, a considerable volume. It is absolutely unclear where the surplus is stored. It appears that we have no clear and verifiable understanding of the developments on the oil market. That is why it should be understood that the market is exceptional, oil is an unconventional product.

Concerning the second camp, the expert believes that it appeals to financial instruments, in other words, to the amount of dollars. It is common knowledge that it exceeds the volume of money circulating on the oil futures market. Futures are deals that do not take the shape of physical shipments, yet their volume acts as a magnet guiding the marketable oil prices.

"In this context, a question arises: should we join OPEC? I am strongly against the idea. It has no point at all, at least because OPEC has not been influencing anything for a long time, the good old times of the cartel are over, and many members of the organization understand it well. I am afraid that this anniversary may become the last one, because OPEC has confronted the need to reformat itself," Director General of the National Energy Security Fund said.

Konstantin Simonov noted that a serious crisis in the relations between Saudi Arabia and Iran was appearing on the horizon. It is provoked by Tehran's demanding back the quotas it had been stripped of after the European Union's ban on purchase of Iranian oil.

Concerning forecasts for the “black gold” prices, the expert presumes that prices would not fall to $20-30 per barrel. "No matter what the US tells us about its shale projects, it is well-known that they are all very diverse and the price cannot fall below $50. If the price does fall, shale gas projects will start collapsing, because they will not be able to pay off," he explained.

In conclusion, the expert attested that Russia had no problems with crude sales. However, there are problems with extraction. Russia cannot boost extraction to benefit from the volumes, the way Saudis do. Nonetheless, the prime cost of most Russian projects is lower than world oil prices. It is below $10 per barrel in West Siberia, it will continue filling the budget with money even at that price. The mid-term forecast for the next one-two years is $50-75 per barrel. Yet, in the context of the current conjuncture, Simonov believes that starting Arctic oil extraction projects is unprofitable today, although, he notes, now is the time to "drive stakes into the territory" and develop the technological base.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.