OPEC+ deal constraining Russia’s oil output

Analysts consider Russia should exit the acting OPEC+ agreement. Although the deal’s effectiveness turned out to be better than initial market expectations, it has given more benefits to Saudi Arabia than Russia so far.

Russia should exit the current OPEC+ deal to overcome stagnation in oil production, which threatens to become the longest since Soviet times, claims Oilprice.com adding that the country shouldn’t delay the exit until the United States becomes a major net exporter of oil. For Russia, exiting the deal will remove barriers to production at fields that have been commissioned in recent years. This will spur the growth of Russian oil output, which slowed down from 5% at the beginning of the 2000s to 1,3% in 2009-2018, according to BP data. Although Russia’s exit can cause a drop in oil prices, the country’s budget is expected to remain stable, as prices of $40 per barrel are now sufficient to cover its expenses.

Having tied the state budget to an oil price of $40 per barrel, the Russian government has succeeded to replenish the National Wealth Fund. The federal budget itself has reached an impressive surplus of 3,1% of GDP in the first eleven months of 2019, according to estimates of the Economic Expert Group. By comparison, in 2016 Russia had a budget deficit of 3,5% of GDP. Nonetheless, the Kremlin failed to restart notable economic growth. At the same time, the existence of a budget surplus became a headache for the government, says Oilprice.com. In 2016, the federal budget left unspent 220 billion rubles, while in 2019, this figure is meant to exceed 1 trillion rubles, estimated Russia’s Accounts Chamber.

Saudi Arabia benefited much more from an increase in oil prices. The recent IPO of state-run Saudi Aramco oil producer has become the largest in history. Besides, the kingdom launched Saudi Vision 2030 programme aimed to diversify the country’s economy through major investments in infrastructure, tourism and human capital. According to IHS Markit data, the Saudis managed to reduce their budget deficit from 12,9% of GDP in 2016 to 3,8% of GDP in 2019, so Russia’s exit from the deal will not be too painful for them.

In 2018, the average actual price of Brent amounted to $71,3 per barrel exceeding the forecast level of the World Bank ($59,9 per barrel) and the US Energy Information Administration ($57 per barrel) by more than $10. In 2019, Urals spot prices in Northwest Europe were by 54% higher than in 2016 ($63,3 versus $41,1 per barrel, according to Refinitiv), when the first OPEC + agreement was signed. Overall, the Russian budget has received an additional income of 6,2 trillion rubles (just over $100 billion) from the moment the deal was concluded, the Russian Ministry of Energy estimated.

By Anna Litvina

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