They measured in wells

Why Russia needs to restore relations with OPEC at all costs

The history of the confrontation of Russia (in those days - the USSR) and OPEC has long -standing roots. Back in the early 1980s, OPEC, primarily the Kingdom of Saudi Arabia (KSA), sought to maintain oil prices by reducing production. The USSR, on the contrary, increased oil production (the peak of Soviet production fell in 1987), which greatly complicated the life of KSA.

However, since September 1985, KSA began to greatly increase oil production, trying to supplant competitors from the market, and above all - the USSR. In many ways, they succeeded - the union survived the collapse and partial decay. The 1991 lesson was very clear and visual:

It is possible to win a price war from the advice, the main thing for this is to offer an excess of oil at prices below acceptable to the USSR.

Further is a matter of time. Higher oil production costs in Russia guaranteed that our country would lose a long price war. So it happened.

For modern Russia with its aging deposits, this means that the winning strategy is cooperation with the KSA. Even significant concessions in the issue of reducing oil production and exports are more profitable than a strong price drop: just lower the size of losses.

The technical capabilities of Russian oil companies do not allow them to increase production by more than 0.2-0.3 million barrels per day (MBD). And this is very difficult to achieve. According to informal estimates, KSA demanded that the Russian Federation reduce the production by 0.3 MBD. Regarding Russian exports - 5.7 MBD oil + about 3 MBD oil products - the KSA requirement looked moderate.

However, Russia rejected the KSA proposal (again, according to informal data, in an insulting form for KSA), which led to the oil war: not only did the Saudis increased the oil supply, but, in addition, buyers of Russian oil received large (up to $ 8 per barrel) discounts on Saudi oil. Prices for Russian oil Urals brand fell strongly, and after their fall, the ruble fell.

The decision of Russia to reject the proposals of KSA to support the price by reducing production does not have a rational explanation, which is clearly illustrated by the reaction of the head of the largest Lukoil private oil company in Russia. Leonid Fedun smoothed the corners as much as possible, but even in this form his assessment is quite concrete: the extremely strange and irrational (in order not to say more) decision.

However, the drop in oil prices, caused by the collapse of the OPEC+transaction, was overlapped by a much more formidable reduction in demand due to the pandemic of coronovirus and the introduction of quarantine measures. Accurate estimates are possible only post -facts, but even very cautious estimates give a drop in demand by more than 20 MBD.

This is a huge figure, which is simply impossible to compensate for some oil production. OPEC+ resources+ are completely not enough for this, because the production of OPEC+ about 38 MBD, and it is impossible to reduce it by 20 MBD even technically.

The landslide drop in oil demand is not yet fully laid down in prices: for example, an excess of supply at 3-3.5 MBD and in 1986, and in 2015 caused a drop in prices by about 4 times. In the meantime, the drop in demand at 20 MBD is not yet fully conscious of the market. But very soon, an understanding of the scale of problems will come to everyone. And this will lead to a new round of price wars for maintaining their share in the falling market.

Russia will obviously lose this war -

The operating costs of oil producers from KSA are noticeably lower than that of their Russian competitors. This is facilitated by the warm climate, and the smaller problems of the aging of deposits, and the much less distance from deposits to seaports. The geography factor should not be underestimated - it was he who allowed KSA to strike a crushing blow to the Soviet economy, which greatly brought the collapse of the USSR.

Therefore, a rational strategy is to try to stop this war. The price of the question is too great. It is necessary to abandon any emotional considerations and at any cost to restore the normal negotiation process with KSA.

Unfortunately, the pandemic caused such a drop in oil demand, which is not possible to compensate only for the forces of OPEC+. Here some optimism is inspired by the expectations of the softening of quarantine measures.

After about a month, many countries will gradually begin to soften the measures of hard quarantine, which is expected to raise some oil demand somewhat. And it is very important to approach this moment at least with the working concept of a new OPEC+transaction. No matter how difficult it is.