Now only one thing prevents the increase in oil prices — and it’s not offshore company USA.
Anyone who follows the oil futures CLM7, +0.10% recognizes that US production is growing — rapidly — but these profits were to accrue to organizations monitoring the situation in the oil sector, including OPEC and the energy information Administration. These organizations also suggest that the growth of shale oil in the US is significantly less than the amount to which members of OPEC and the countries, it is not included, agreed to cut production.
The only obstacle standing in the way of higher prices for oil — Russia. While virtually all parties to the agreement on the reduction of production between member countries and non-OPEC, has already confirmed the renewal of Russia is still to be done.
It is important to note that Russia has not yet made any decision as to whether to support or not to support the extension of the existing agreement. Nevertheless, Russia participated in group discussions where the conclusion was made about necessity of prolongation.
Estimates of supply and demand provided by the observer organizations, if the OPEC agreement will be extended until the end of the year, the supply shortage in some moments, will reach approximately one million barrels per day that indicates a serious reduction of the global offer.
Ultimately, the reduction sentence is exactly what was sent to the agreement of OPEC, and statistics have shown that to reduce global offer is possible, despite the fact that the U.S. oil market it is not reduced. But things can change very quickly.
Using the same data obtained from the observers, we see that there is still global oversupply. But it is expected that in June that will change with the current OPEC agreement on production cuts. It is assumed that the market for the first time in many years, will reach an equilibrium between demand and supply. The question is whether this state of Affairs later?
Focusing on Russia, the need to monitor the implementation of the plan and at the same time for the effects of fluctuations in oil prices on the stability of the Russian economy.
Although almost all participating countries expressed support for the extension of the agreement on production cuts, many also stated that in any case will be able to quickly re-ramp up production. Russia said the same thing, so it’s safe to assume that if production cuts will not be renewed, the balance between supply and demand will again become loose quickly and strongly, and the supply will greatly exceed demand, even more exacerbating the glut in the market.
It’s destructive impact on oil prices and the Russian economy.
If Russia did not support the extension of the existing agreement between the member countries and non-OPEC, oil prices could fall 20% in addition to the decline that happened last week.
However, if the opposite happens, oil prices will probably rise more than 30 %.
The difference between the prices in a situation if the countries-participants of the OPEC agreement to extend it, and in a situation if they do not, is significant, but it is especially significant for Russia. Its economy not so long ago rose in connection with rising oil prices, but if prices fall, which is very likely in the case of non-renewal of the agreement, the revenues of the state oil companies in Russia are likely to be 50% lower than otherwise.
The obstacle to higher oil prices is Russia, and nothing more, but regardless Russia, there are serious preconditions for the extension of the agreement. So far, however, Russia is in the spotlight, and the recent decline in prices was solely due to the fact that Russia has not expressed its full support for the extension.
However, prices fell, and is immediately struck by the stability of the Russian economy, and given the precarious nature of the recent decline, Russia has every reason shortly to Express support. And we expect from this country that it soon will.
Thomas Kee, a former broker and founder of Stock Traders Daily. According to the rating HedgeCo for 2016, Ki has developed the world’s fourth-effectiveness of the strategy.