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Alexander Khurshudov: Stock exchange doesnt believe in cooperation between Russia and Saudi Arabia

September 06, 2016/ 06:09

Moscow. Russia and Saudi Arabia agreed to take joint efforts and measures together with the other oil producers to maintain stability of the oil market and sustain the level of investment in the long run. Previously during the G20 summit the crown prince of Saudi Arabia Muhammad Ibn Salman told Russian president Vladimir Putin that cooperation between Russia and Saudi Arabia would have a  favorable influence on the global oil market.

 Oil and gas information agensy expert Alexander Khurshudov comments the news:

Brent prices gained 5% in response to the news, but then dropped again within the same day. The stock exchange does not believe in the possibility of this cooperation. Neither do I. Though you should see for yourself.

For more than 5 years now Saudi Arabia has been exceeding quotas established by OPEC led by the Saudis themselves. Has anyone at least apologized about that? Like, “well, we’d be happy to play by the rules, but we are broke, so we have to bend over backwards and produce a little more…”Personally I haven’t heard anything like this. In April they made a solemn promise to keep production on the level of January and see what happened? Somebody (I’m not saying the name, because everybody knows it) stepped on their toes and the princes took their words back in JUST ONE DAY. What kind of agreements can one make with such a “partner”?

So, 9 out of 10 this piece of news is going to be another trick to scare the stock exchange. Everybody now tries to scare them –it is so profitable. Last week they spread rumors about reserves increment in the US, though it was only due to import. Then they told us horror stories about the number of drilled shale wells, which are only waiting to be put into production. Like there are over 4 thousand of these wells and as soon as they start producing, the oil price will drop to $50. These people may create stories as wild as they wish, because there is no official data available. However, a simple thought comes to mind: they wouldn’t suspend economic wells. Since the wells were not put into operation it means geophysical evaluation was not too promising and the owners are not eager to spend $2 million on multistage frac jobs. They are head over ears in debt as it is.   

However, there is 1 chance out of 10 that the oil monarchy will be able to negotiate (because their need for money is growing) and it will be possible to establish control over the oil market, and this is the chance we mustn’t waste. Let’s think what may happen then.

It’s obvious that OPEC has outlived itself. It’s impossible to allocate quotas according to reserves. Arabs are not united anymore and, it seems, they never will be. It is hardly possible to reform OPEC and it’s not even worth trying.

However, OPEC may be re-created. Gradually, in small steps. By joining. The world’s top producing countries should start the process.

Let’s say Russia and Saudi Arabia agree to hold the current production level for 3 months (not a big deal, really) and announce: “everybody who agrees with us, please join”. Kuwait and the UAE will join because they have been in line with the Saudis for a long time. Venezuela and Ecuador will only be happy, they’ve been asking for it for too long. Kazakhstan and Azerbaijan will be pleased because their production has been decreasing anyway. Iraq has never opposed the idea. What if Iran doesn’t join? May Allah help them, their production has not been growing for 4 months already. When the three months finish we shall see. Some countries may keep the production level, some may not, but in general the production will decrease. Wonderful! Then we may keep the same production level for six more months…

That may sound easy, but there is a lot to do about it. We’ll have to develop a production reporting system, implement some control mechanisms, work out a procedure for decreasing production levels… So, lots of things need to be done and they won’t be done in a day. But there is no need to be sad about it.

OPEC production in July (excluding its new member Indonesia) amounted to 32.37 mln bpd, which is 139 thousand bpd less than in quarter 1. The US production decreased for 493 thousand bpd during the first six months, and this is not field data, this is authentic statistics. Meanwhile global oil consumption is steadily growing for 1 mln bpd every year. These seemingly slow processes will soon set things straight.

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