Speculation – Key Factor in Oil Prices. Russia Seeking to Freeze Production at Capacity in Doha (Analysis)


April 12, 2016

“Real Time” on Tsargrad TV with host Yury Pranko

Translated by Kristina Kharlova


Video transcript (10:30 – 25:00)


Sergey Chizhov, President of Russian Gas Union

Konstantin Simonov, General director of National Energy Security fund

Konstantin Simonov: Second half of the year might turn out more comfortable for the oil market. January prices were too low. We have to take into account not only our (Russia’s) wishes, but also the US factor. We must understand that most shale projects are now below break even point, and these are not just our estimates. I have not seen any Western analysis were it was below $45. Our estimates are higher: $53-55. 

You cannot produce a product below break even for a long time.

They are thinking about what will happen to their own [oil] industry. Their production has grown by more than 200 million tons in the last few years. I don’t think they want to increase it by that much in order to shrink it.

None of the major oil producers like the current situation. The Saudis don’t like it. Although we are told they have huge reserves, but they are shrinking. It’s a warring country. Iran doesn’t like it. Therefore the price should get closer to $45-50.

Last year Russia produced 534 million tons. The US produced more. In the last few years US production grew from 300 to 500+ million tons. If you follow the American system, we produce 11+ million barrels a day, and about the same in America. In 5 years the increase is 1.5 times.

Sergey Chizhov: Everyone used to talk about the gas revolution, forgetting about the shale oil revolution in the US.

The new volume of oil production was an unpleasant surprise for us and others. We expected the prices and oil supplies to remain comfortable for us. After the January events, I think we are now observing a positive dynamic.

We can expect $45 in the first quarter, $50 – in the second quarter. Not sure about $55, this will depend on any surprises in financial markets.

Host: This is an important point. When we are talking about oil futures – it is a financial instrument and not a physical volume. The market is in the expectation mode before Doha meeting. Is the price rise purely speculative? 

Konstantin Simonov: Oil prices always depend on two factors. There are two expert camps, who argue with each other. The first camp says oil is a regular product and it depends on supply and demand. The second one says oil is not a regular product, as all the commodity products. Since 95% of transactions is in oil futures, we have to take into account the speculative factor. 

I always belonged to the second camp, but the pressure from the first camp was so strong that I am used to explaining it from their paradigm. What I said earlier was an attempt to analyze it from their perspective, from which we can see that cheap oil at $30 is not profitable for the US. Why the US? Why do people tend to frown when we are talking about the speculative factor? Because everyone understands that most of the money comes from American investment funds. When we talk about speculators we are talking about the US. So people tend to get up in arms: “Now you are getting into conspiracy theories! Rothschilds! Rockefellers…!” But this is a real factor, because we know the volume of money circulating on the futures market vs the real oil market.

Host: Does it mean we will be shedding tears on April 17th?

Konstantin Simonov: What matters is not what the participants of the conference do, but what they say… Even if they don’t sign or freeze anything significant, what matters is that they say the same thing. We need to send a counselor there who will instruct them what to say. All they need to say is we agreed and we will get together again. The main thing is how they present it so that the market speculators will have an adequate reaction. 

If a Saudi prince will come out later and say “we want solar panels”, or the new Iranian president says “we don’t agree”, then it will go back to the old craziness. However, there have been many conflicting statements so far, but the market is still growing because there is an expectation that something will happen. The main task is to continue the trend of searching for compromise. The worst scenario is to say we didn’t agree on anything.

Host: Are there any real, not financial or psychological reasons for optimism, like demand in China or the US, or stimulating domestic demand?

Sergey Chizhov: We are in a balancing state. On one hand Chinese index started growing for the first time in recent days… I don’t think anything dramatic will happen in this time frame, and if there will be no ‘counselor’ there, we may be disappointed… 

Host: So there are no real reasons?

Sergey Chizhov: In my opinion, no.

Konstantin Simonov: Look, we are dealing with a product for which demand is growing. It has even increased last year, may be not as fast as in the 90’s or the 2000’s. Psychologically people think oil is an outdated product, for which demand is falling every year. This is not true. 

Many experts say China’s demand is falling. They say China grew by 9% before and now by 6%, therefore it’s falling.  What do you mean – falling? It is growing by 6%.  As far as supply, the situation is difficult. US ministry of energy forecasts the loss of 800 thousand barrels a day.

Iraqi production grew in March, in February there was a terrorist attack, and oil fell. Iraq is hard to predict. 

As far as the number of 540 million tons a year… We [Russia], Qatar, Venezuela and Saudi Arabia as you know made an agreement in February to freeze production at January 11, 2016 level. This number is not random. On that day we reached our daily national record. If you annualize this record, you will discover that we can still increase production by 2%. If we used to extract 534 million tons, 2% is 10 million tons.  We can easily extract 545 million without breaking this agreement. Our ceiling is 545. In March we grew by 3.1%. 

Host: Does it mean we continue increasing capacity?

Konstantin Simonov: It means we were lucky. We hit capacity at the moment when we were supposed to decrease it and freeze it. If our production is not growing, lets make a nice gesture and say its not growing ‘due to international agreements’. 

Host: Will there be a drop in production below 540?

Konstantin Simonov: Yes, under any circumstances. The limit has been reached. We cannot increase capacity even if we change our investment policy and tax law. The national record of USSR was reached in 1987 and dropped since due to withdrawal of investments from the industry prior to the fall of USSR, not related to the 90’s factor. Communist party bureaucrats said: “You are breaking records, what are you talking about?” Today’s ministry of finance bureaucrats have the same mentality – “You are breaking records!” They are not thinking 5 years ahead. 

Host: This is a dangerous trend.

Konstantin Simonov: Of course!


Part 2: Russian Gas. Coming soon!

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