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Russia and OPEC-kingpin Saudi Arabia are reportedly mulling to delay an increase in oil production in January, maintaining an output cut aimed to raise oil prices as demand has weakened due the coronavirus pandemic.
Russia and the Organization of Petroleum Exporting Countries held their annual talks on November 2 with Russian Energy Minister Alexander Novak saying the partnership between
OPEC and other oil producers such as Russia, a group known as OPEC+, has been instrumental in maintaining market stability, particularly during the COVID-19 pandemic.
OPEC+ is currently scheduled to restore almost 2 million of the 7.7 million barrels of daily output currently halted to avoid a major drop in demand and collapsing oil prices.
Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp in Moscow, told New Europe by phone on November 4 that Russia’s push to maintain the cut “it is obviously related to the weak demand but not just that. I think the big extra factor is the Libyan output. Libya is pretty close to 1 million barrels per day and that’s much more than the International Energy Agency (IEA) expected just a few weeks ago. That’s bigger than expected,” Kokin said.
The extra Libyan barrels flooding the market are a problem for OPEC+. Following a truce in Libya’s civil war, the country’s oil production is rising rapidly as the National Oil Corp (NOC) has revived operations at previously idled fields and ports. The OPEC member was pumping less than 100,000 barrels a day in early September. The NOC reportedly plans to increase Libya’s output to 1.6 million barrels daily — around the same level as before the 2011 uprising that ousted former dictator Muammar al-Qaddafi — by the end of 2021.
Kokin also noted that drilling is recovering steadily in North America, especially in the United States where low oil prices had slowed down US shale producers. “And demand isn’t really looking good. So, all in all the only way to stabilise prices is to extend the production quotas for a while. Extend them without changing them – keep things as they are for a while maybe into the first quarter. I didn’t know whether Russia would be okay with that, but I guess it’s just inevitable. There’s no other way out. Otherwise we are risking a new decline in prices below $35 that year,” the UralSib oil and gas analyst said.
Kokin also reminded that Russia has changed its tax regime, imposing higher taxes on the energy sector which could make extending oil output cuts by OPEC+ easier to accept by Russian oil companies. “It has raised taxes to most oil producers. So, there are less incentives to increase output. Small companies are less willing even given the opportunity to increase production. So, they are more compliant with the idea that they will ration the output for a while. They are more okay with it than before,” Kokin said.
Russian President Vladimir Putin, who has not ruled out extending oil cuts if market conditions warranted, approved the new system of taxes last month to help Russia deal with the effects of the coronavirus on the country’s economy.
Kokin said the new tax measures would make it more expensive for oil companies to increase production from mature oil fields and produce more heavy crude. “From the 1st of January production tax will go up on quite a lot of fields – from green fields to certain geologically complex projects. So, overall the incentives to increase output will be less – not gone but somewhat weaker than before,” Kokin said.
OPEC+ is scheduled to meet on November 30 and December 1 to decide whether to extend the cuts or increase production in January.
Algeria, holder of the rotating OPEC presidency, has backed an extension of existing supply cuts. Reuters quoted Algerian Energy Minister Abdelmadjid Attar as saying keeping current cuts into the first half of 2021 could be considered at the next OPEC+ meetings, according to state news agency APS. The second wave of COVID-19 meant the oil market faced a “very dangerous” situation, he said.
Kokin told New Europe that both Russia, which is the largest non-OPEC producer, and Saudi Arabia, which the largest producer of the oil cartel, favour extending the cuts to avoid an oil glut. “It could be an agreement. We’re already a few weeks from the OPEC meeting on November 30. So, there has to be an agreement within a couple of weeks. I think Russia and Saudi Arabia are on the same page but some others might not be in the same page. Iraq might actually budge and try to get a quota for itself. I don’t know about Kuwait. Kuwait is apparently going along with this,” Kokin said, “Iraq might be the main opponent because I guess they have no choice”.
