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Oil remains the blood of the global economy

03 September 2023

Gromov Alexey I. Principal Director on Energy Studies, Head of the Energy Department

Alexey Gromov, Principal Director on Energy Studies of the Institute for Energy and Finance did an extended interview with RIA Novosti about the current situation at the world oil market and the prospects of the OPEC+ alliance.

— The Organization of the Petroleum Exporting Countries (OPEC) appeared 63 years ago as a response to the largest European and American oil companies, the so—called "Seven Sisters". Its participants sought to regain their natural resources, on which Western companies earned. Alexey, do you think OPEC is necessary for the oil market now?

— In my opinion, now it is more correct to talk about OPEC+. This is the reincarnation of OPEC, which shows maximum efficiency in the global oil market. And the role of the alliance is no longer in the protection of national interests, it is a passed stage. Now it is, in fact, a regulator of market fluctuations in supply and demand, striving to increase the predictability of the global oil market.

How much do you think the interests of the alliance countries converge now, and how much do they all really need cuts?

— Now all the countries of the alliance are interested in maintaining oil prices at a relatively high but stable level. Here I would like to emphasize that the OPEC+ countries do not need a further increase in oil prices. They are well aware that if oil prices rush to $ 100 and above, then we will observe another round of the process of abandoning oil, alternative energy sources will be relevant again. If oil prices are low, it will discourage investment in the industry. Therefore, the price corridor that has developed now is optimal for the alliance — 80-85 dollars per barrel.

As for respecting the interests of each of the countries, it is important to understand that earlier OPEC really worked exclusively on quotas, demanded unconditional discipline from all members and fined those who refused to fulfill obligations, which led to an increase in discontent among the cartel participants.

OPEC+, as a voluntary association of countries, on the contrary, assumes greater flexibility in decision-making. The leaders of this alliance, Russia and Saudi Arabia, as a rule, listen to the position of small OPEC+ member countries, and, if necessary, are ready to take on additional voluntary restrictions. Therefore, in my opinion, all these tensions that really take place between African countries and Saudi Arabia are unlikely to lead to their withdrawal from the alliance. And any friction can be settled through negotiations.

— As for the voluntary cuts that a number of OPEC+ countries, including Russia and Saudi Arabia, have undertaken. Why were voluntary cuts needed at all? Why couldn't it be written in quotas?

— You know, this is another element of the flexibility of the OPEC+ alliance. After all, everyone understands perfectly well that if the leaders of the alliance prescribe additional quotas for themselves, then there will be a problem of a "stowaway" when other countries may think that this distribution is fair. Here, the members of the alliance demonstrated the general principle of quota reduction, with which everyone agrees.

Russia and Saudi Arabia, in particular, have stated that they have the opportunity to deepen the cuts for a short period of time, but this does not impose any obligations on them. You can always say that it was a voluntary decision. And the countries that have adopted it can always return to the current quotas, without the need to coordinate it with the alliance.

—   How do you see the oil market next year, and will the deficit deepen, which analysts expect already in the third quarter of 2023?

— I do not believe that there may be a significant deficit in the market, even by the end of this year. There are a number of factors that prevent this. Firstly, everyone expected that the Chinese economy, after the end of the policy of intolerance to the coronavirus, would return to "pre - COVID" growth rates, but now it does not reach 5%, which is quite a bit for the economy of this country. At the same time, we see a slowdown in economic activity in the Eurozone and the United States. This is reflected in the growth rates of global oil demand, which were clearly overestimated at the beginning of the year.

— When do you think OPEC+ can return to increasing production?

— The issue of reducing or increasing production is a matter of analyzing the market prospects. As I said, at the moment, until 2024, the situation at the OPEC+ level is clear. It is believed that the market is sluggish, and it needs to be stimulated by production restrictions in order to maintain a high price level.

But, in general, I do not think that OPEC+ will return to some very active or aggressive production growth simply because we know that prior to the decision on new quotas for 2024, the previous quotas were not fully used, the countries produced less. 

Gromov Alexey I. Principal Director on Energy Studies, Head of the Energy Department
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