Russia needs to exit the OPEC + deal now, before it's too late?
In 2019, despite a 9 percent decline, spot prices for Urals in Northwest Europe were one and a half times what they were three years ago. According to Refinitiv, $ 63.3 versus $ 41.1 per barrel in October 2016, which became the benchmark month for the OPEC + deal.
As a result, the Russian budget is back, as in 2017-2018, received additional income. According to estimates by the RF Ministry of Energy, it reached a total of 6.2 trillion rubles (a little over $ 100 billion) since the conclusion of the agreement.
Thus, the OPEC + deal once again proved its effectiveness, which turned out to be higher than the initial market expectations . For example, in 2016, the World Bank and the United States Energy Information Administration (EIA) predicted that between 2017 and 2019, the average price of a barrel of Brent would be $ 59.3 and $ 58.4, respectively. In fact, it reached $ 63.2 per barrel.
And in 2018, the average actual price for Brent ($ 71.3 per barrel) exceeded the forecast level of the World Bank ($ 59.9 per barrel) and EIA (57 dollars per barrel) for more than $ 10, the resource Oil Price notes.
This significant difference is partly due to the high discipline among the parties to the transaction. In November 2019, OPEC members fulfilled its conditions by 154%, and non-OPEC countries by 125%. However, Russia was not able to get all the benefits of the deal that it could.
That the Russian Federation benefited from participation in the OPEC + alliance
By linking the budget to the oil price of $ 40 per barrel, the government was able to seriously replenish the National Welfare Fund. In the first 11 months of 2019 alone, it more than doubled, from $ 58.1 to $ 124 billion.
The federal budget itself also won. If in 2016 its deficit amounted to 3.5% of GDP, then in the first 11 months of 2019, its surplus reached an impressive 3.1% of GDP. This follows from the estimates of the Economic Expert Group.
What OPEC + disappointed with Russia
However, the government failed to resume economic growth, which has already slowed down to 1.8%. Moreover, the very existence of a budget surplus has become a headache for the government. If in 2016 the federal budget left 220 billion rubles unspent, then in 2018 – 778 billion rubles, and in 2019 – a whole trillion.
Saudi Arabia benefited from the deal much more. Largely due to rising oil prices, the Kingdom not only successfully conducted the IPO Saudi Aramco, but also launched the Vision-2030 program. The goal of this program is to diversify the economy through major investments in infrastructure, tourism and human capital.
Having made a decisive contribution to reducing oil production, Riyadh managed to reduce the budget deficit (from 12.9% of GDP in 2016 to 3.8% GDP in 2019, according to IHS Markit). This means that Russia’s possible exit from the OPEC + deal will not become too painful for Saudi Arabia.
What are the advantages of the Russian Federation withdrawing from the OPEC + transaction
The fact that such a scenario is feasible is evidenced by the fact that in December the OPEC + agreement was extended for only three months. This is a clear sign that in 2020 the transaction will be revised to one degree or another. For Russia, this is not so much a threat as an opportunity .
On the one hand, exit from the deal will remove barriers to production at the fields that Rosneft commissioned (Suzunskoye, Russkoye, Zapadno-Erginskoye, Yurubcheno-Tokhomskoye) and Gazprom Neft (Kuyumbinskoye, East Messoyakhskoye) in recent years. As a result, this will accelerate the growth of Russian oil production, which, according to BP, slowed down from 5% in 1999-2008 to 1.3% in 2009-2018.
On the other hand, it is expected that even with falling prices oil the federal budget will remain stable. Indeed, at present, $ 40 per barrel is enough to cover his expenses, and not more than $ 100, as it was in 2013. The revised deal will not be a disaster.
Russia should begin to prepare to withdraw from the agreement now, rather than postponing it until the United States becomes a net exporter of oil. This could negate the efforts of the OPEC + alliance to reduce production.
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