Oil game who is interested in revising the OPEC + deal

US, WASHINGTON (ORDO NEWS) — The main beneficiaries of toughening the OPEC + transaction will be Saudi Arabia, the United States and large banks, said Leonid Krutakov, assistant professor of the Financial University under the Russian government.

The deadline for the first stage of the OPEC + deal is approaching. Since July, the maximum reduction in production under the transaction should decrease by 2 million bpd (from 9.7 to 7.7 million bpd). On June 8, a meeting of the OPEC + Ministerial Monitoring Committee should be held, and on June 9-10, participating countries should evaluate the results of the first stage of the transaction and decide on further actions.

From the side of Saudi Arabia , proposals are already being made to maintain the current level of production decline at 9.7 million bpd. Everything is clear here. The budget of the kingdom is made up at the rate of $ 80 / b, and Riyadh has no other income. Social payments to state employees and the military are cut off (more than 70% of Saudi citizens are civil servants), investment programs are limited, VAT has been raised 3 times to 15%.

Problems are continuing in the United States, which was one of the initiators of the new OPEC + deal, when the shale industry sprang up due to dumping of Saudi Arabia. According to the forecast of the Federal Reserve Bank of Dallas, at a price of oil no higher than $ 40 / b, even in the relatively “cheap” Permian shale basin no more than 15% of producers will survive within a year. 17 companies have already filed for bankruptcy; by the end of next year, the number of bankruptcies, according to various estimates, will be up to 250 oil producers. The total debt of the industry exceeded $ 300 billion, to repay it is necessary to produce 9 billion barrels. Exactly so much shale mining in the history of the industry.

The main interests in maintaining the former conditions are understandable. Investments in the shale industry, according to the forecast of the IEA, will fall twice this year, and it is no longer possible to finance production from stock operations. To date (since 2007), the shale companies index has lost 31% with an 80% increase in the S&P 500. Riyadh even had to, after a conversation with Trump, go for an additional (over commitments) reduction in production of 1 million bpd.

Everything is very thin. At a high oil price, i.e. major stock players are also interested in maintaining restrictions on production. Having driven futures on negative territory (-40 $ / b WTI) at the end of April, large investment banks formed colossal contango *. To exit the new state in an organic way, that is, without huge losses for the largest players, the stock market can only with price increases of at least $ 50 / b.

The fact is that Mexican Pemex hedge annual sales of its oil at a price of $ 49 / b, which corresponds to $ 65 / b for Brent crude. Mexican oil buyers are major Wall Street players such as Barclays, Goldman Sachs and Morgan Stanley. It is estimated that if the oil price remains below $ 40 / b, US banks will lose more than $ 6 billion (Mexico will earn this amount by hedging).

An alternative to price increases is to regularly lower short futures in a minus on a downward wave, which is unacceptable for the extremely debt-bearing real sector of shale production. The dynamics of commodity prices is a key factor on the ability of companies to generate positive cash flow to service loans. Another jump in the red, and the ash may not remain from the industry.

In Russia, oddly enough, the situation is seriously different. No, Russia, of course, as an exporting country, is interested in high prices, but the risks of Russia are not comparable with the risks of Saudi Arabia and the United States. For our country, maintaining the current level of production restriction means the forced conservation of wells, after which the return of many of them to operation is hardly technologically possible.

Russia can understand the situation of others, but it is not obliged. It is enough that Moscow proved to be a responsible market participant, agreeing to a reduction in production at the time of the deepest drop in demand caused by the pandemic. Moreover, the severity of the decision turned out to be more significant for Russia than for Saudi Arabia: the reduction of Russia in the framework of the current OPEC + transaction in relation to Russian exports is 48%, while for the Saudis it barely reaches 27%.

The situation that put the world market on the edge of the abyss did not arise because of Russia. It was formed by the Saudis, unilaterally withdrawing from the previous OPEC + agreement, throwing a huge amount of oil from its reserves onto the market and lowering the official price of its oil below the market. Riyadh realizes its export advantage by continuing its expansion policy in key markets, dumping and increasing the volume of exported goods .

Today, more than 50 million barrels of Saudi oil are sailing to the shores of the United States , threatening the collapse of the American oil and gas industry. The unloading of these tankers in storage actually eliminates the reduction in production volumes that US manufacturers were forced to go in the spring to reduce the excess supply over domestic demand.

Free storage capacity will continue to be severely lacking. And these are not jokes at all. According to PricewaterhouseCoopers estimates, the US oil and gas industry directly and indirectly employs 10.34 million people (5.6% of the country’s working population). Three months later, the election in America. Russia just needs to wait for Trump to pick up the phone and once again “talk” on the phone with the Saudi king or crown prince.

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