Valery Nesterov: "There has been a positive trend in oil prices"
One of the key dates of 2016 for the oil industry was December 10, when OPEC and countries outside of the cartel signed an agreement on joint cut of oil production at a meeting in Vienna. Meanwhile, as Energy Minister Alexander Novak said, summing up 2016, oil production grew by 2.5% to 547.5 million tonnes this year, which is 5.7 million tonnes more compared to 2015. Vladimir Putin noted that gradual reduction of oil production under agreement with OPEC will not affect Russian economy. "We calculated the budget for 2016 based on the price of $50 per barrel, but it stayed at the level of $40. In spite of that, we managed to keep the reserves," Putin said.
Sberbank CIB analyst Valery Nesterov summed up oil results of the year in an interview with Vestnik Kavkaza.
- Annual growth of oil prices has exceeded forecasts of many experts, made a year ago. How long will prices stay at this level and will they grow further?
- Decline continued after difficult beggining of the year. Price stayed at the level of $43 for Brent and somewhere around $42 for Urals. In January-November of 2015 Urals price was $52.6 per barrel. In other words, we see a 20% decline in 11 months of this year. It would be bad if we didn't see that this trend has stopped, that overall price of Urals this year was 42-43. Brent is usually more expensive by a couple of dollars. This price is higher than in November of 2015. So there is a positive trend.
Opinions regarding further growth may differ. There are optimists like City Bank, who promise a price of $70 per barrel. But this is unlikely, in my opinion. We can expect that the price will stay at the level of $50-60 in the first quarter of next year. It is much more difficult to predict anything in the second half.
Now there are more optimists who say that the prices will continue to grow till the end of the year.
Those are great forecasts, but they are not guaranteed. First we must see the discipline - will 24 countries that signed this agreement adher to it or not. Cut will probably be smaller. It is unlikely that all countries will comply with all provisions of the agreement, but if the main actors will cut (Russia by 300 thousand barrels, Iraq by 200 thousand barrels, Saudi Arabia - half a million) then everything will be alright.
Some people are optimistic due to Saudi Arabia's budget deficit reduction plans, because they will increase oil revenues by about one-third. If this country plans to increase its wealth, its budget, then it will have to fight for it, take certain measures. And the only correct measure is to cut its oil supplies to the market. According to their calculations, revenues from this sector will increase by 46% in 2017. It is pretty good, because Saudi Arabia is going to cut production by about 5%, while revenues from this sector may increase by 46%! The country is very interested in maintaining these prices, just like Russia. Countries responsible for this agreement are really interested its implementation. At least in the first six months of 2017. If it will be implemented partly, it will still have a positive impact on prices.
Right now those niches that are formed or will be formed due to lack of supply of Saudi, Russian, Iraqi oil, will be filled by competitors. Those competitors are US shale oil and Canadian oil sands. They will receive investments once again, projects will be launched. Norway and some other countries will increase production. So it is necessary to carefully monitor market condition and try not to lose it, because we are witnessing how the likes of Saudi Arabia and Iran are taking Eastern Europe markets, threatening the interests of Russia in this traditionally Russian market.
- How can you describe this year in the Russian oil industry?
- This year was difficult, but very successful, because production rates grew by 2.5%, which is higher than planned. We implemented a number of major projects, fields, which have already been put into operation. Tax stability in this sector is also maintained.We made certain steps towards import substitution, energy exports grew.
On the other hand, falling price didn't allow energy exports to play a role it played in previous years. Oil and gas currently provide about a third of budget revenues, while a couple of years ago they provided half. Oil companies have already done a lot, they have successfully used weakness of the the ruble, but perhaps right now they have reached the peak of their current capabilities.
It will be difficult ot achieve further growth, in particular due to financial sanctions, lack of foreign equipment. Moreover, success has been achieved through intensive drilling of reserves, which costs us a lot. Current growth rate or maintenance of production is often carried out at the expense of less rational use of resources of these fields through intensive drilling of reserves. On the other hand, US oil companies are doing the same, they are currently drilling sweet-spots. Not everything is alright in terms of rational subsoil use.
- How well did the balance of supply and demand restore so far?
- There is still oversupply in the market. Estimates differ, no one knows them for sure. Experts say one or two million barrels per day.
- What trends will affect oil prices in 2017?
- The existing trend may continue if the agreement will be respected and if it will be extended to the second half of next year. Making 24 very different countries, or even the five major oil producers, sign a joint agreement is very difficult. At this point only temporary conjunctural improvement is being discussed. So we shouldn't relax. Agreement may be broken, but Russia or Saudi Arabia won't be responsible for this. There will be another price trajectory.
Right now it is important that there is a consensus, and a pretty broad one. Everyone - Middle Eastern exporters, African and American producers of shale oil, as well as Russia are satisfied with the price of $52 or $60. It will be great of the price stays at this level, or even grew to $70 in the next few years.
But it's impossible to guarantee this trend at this stage, because oil trade is a very "nervous girl." The situation in the Middle East is potentially explosive, there is still instability in other countries, in Brussels and in Africa. So it would be wrong to make any precise forecasts.