As OPEC Output Falls, Russia's Novak Says It's Premature to Consider Extending Its Production Cuts

Friday September 8, 2017

Just days after Russia's deputy prime minister suggested that an extension of the Organization of the Petroleum Exporting Countries (OPEC) cutback initiative is likely, Alexander Novak, that country's energy minister, warned that it's premature to decide on whether to extend the deal.

Like Arkady Devorkovich, Novak said the oil market has been rebalancing; but while the former pointed out that the next logical step would be extending the cuts  beyond March of next year, Novak thinks it's too early to decide.

However, he added that if the market struggles to achieve balance, "we would discuss the option of the deal extension"; he also noted that the current market price of $54 for crude is "optimal for producers and consumers and facilities industry investment."

The problem with the position of both leaders is that the term rebalance is not defined, inviting criticism from fundamentals-focused analysts who believe it'll take years before global inventories will sink to acceptable levels.

Still, evidence continues to support Novak and Devorkovich's claims, at least in part: Reuters reports that the volume of North Sea crude held in floating storage has "declined sharply" since mid-August, from 10 million barrels to 4 million.

A North Sea trade source said, "The whole market is tightening up; crude inventories have been drawn down, and there is no direct economic incentive for floating storage."

Additionally, according to Thomson Reuters Oil Research, crude exports from OPEC in August were 25.19 million barrels per day (bpd), their lowest level since April; however, while this contributes to a more even-keeled market, the 2017 level for January-August of 25.05 million bpd were above the 24.85 million bpd recorded for the same period in 2016.

Plus, while this year's drop was attributed to civil disruption in the cartel's African members, that drop is not expected to last long: indeed, Libya's massive Shahara field resumed operation earlier this week following successful negotiations between militant groups and government.

While the true status of the crude market is unclear, one fact is undeniable: the decline in North Sea crude storage and recent drops in African production have done nothing for prices, and Igor Sechin, chief executive of Russian oil company Rosneft, went so far as to state that the main driver in the modest market showings of late is the weak dollar, not OPEC's cutback efforts.

He said, "The Americans support their shale oil producers through dollar depreciation; I believe that the OPEC deal has no impact (on the market), it is the dollar devaluation."

He added that if there is an OPEC cutback extension, it will be because of Saudi Arabia's plan to publicly list its oil company Saudi Aramco: "If it goes for (the listing), they will be interested in higher prices and will probably encourage their OPEC partners to extend it; if they don't, they will be less interested."

Earlier this week, Dvorkovich praised OPEC's efficiency in tackling the global glut while figures released concurrently showed that his country's oil and gas production between January and August of 2017 rose by 0.9 percent year over year, amounting to 364.8 million tonnes.