On Monday, October 7, oil prices again took a downward course, despite last week's increase, which experts rated as the biggest weekly increase in a year. Despite the impact on pricing policy of the conflict in the Middle East, which could affect oil supplies, participants' concerns about excess supply outweighed geopolitical challenges, Reuters reported.

Lower oil prices benefit Ukraine because it weakens Russia in its war of aggression. At the same time, a number of influential experts and publications make predictions that contradict each other.

For example, the Swedish bank's chief commodity analyst Bjarne Schildrop believes that oil futures could rise to more than $200 a barrel if Israel destroys Iran's oil infrastructure. This was reported by CNBC.

But Politico is convinced that Saudi Arabia is implementing plans to increase oil production to protect its position as the world's oil leader, which will deal a blow to the Russian economy by reducing world oil prices.

"Ukrainian Energy" found out what is actually happening on the global oil market and what to expect in Ukraine.

The market is at a fever pitch

OPEC (The Organization of the Petroleum Exporting Countries) - the Organization of Petroleum Exporting Countries, an international cartel created by the largest oil nations to control and stabilize oil prices. In general, this is achieved by determining for each country quotas for its production.

OPEC was founded in 1960 in Baghdad by five countries — Iraq, Iran, Kuwait, Saudi Arabia and Venezuela. Subsequently, new members joined the association, and some countries either entered or left the organization, such as Kuwait, Indonesia, or Ecuador. As of the end of 2022, OPEC included 13 countries - Saudi Arabia, Iran, Iraq, Kuwait, Venezuela, Libya, Algeria, Angola, Gabon, Equatorial Guinea, Republic of Congo, Nigeria, UAE. In 2016, against the backdrop of a sharp drop in oil prices, 10 more countries — Russia, Kazakhstan, Mexico, Azerbaijan, Bahrain, Brunei, Malaysia, Oman, South Sudan, and Sudan — decided to join the OPEC initiatives to control oil prices. This is how a new format was formed — OPEC+.

These countries control about 2/3 of the explored oil reserves (mostly on the territory of the five OPEC founding states). In addition, the organization accounts for more than 30% of all its production. The headquarters of the organization is located in Vienna.

On October 2, at a meeting of the OPEC+ monitoring committee, representatives of the largest oil suppliers assessed the situation on the market. Saudi Arabia has warned its cartel partners that oil prices could fall to $50 a barrel if they fail to meet agreed production quotas. This is reported by the Wall Street Journal.

The Financial Times also believes that Saudi Arabia will abandon the price benchmark in order to regain market share, even if it means a significant drop in prices.

The kingdom is ready to launch a price war to maintain its market share if other countries do not comply, with Oil Minister Abdulaziz Bin Salman al Saud even accusing Iraq and Kazakhstan of exceeding their quotas.

In September 2024, Kazakhstan exceeded oil production limits established under the OPEC+ agreement by at least 126,500 barrels per day.

The country's crude oil production rose 10% from August to 6.55 million tonnes, equivalent to about 1.638 million barrels per day, according to Reuters. This exceeded the set OPEC+ quota by more than 170,000 barrels. Oil production in Kazakhstan is increasing thanks to the launch of the Tengiz field with a capacity of 720 thousand barrels per day.

Among the countries that violate quotas, the minister singled out Iraq in particular. According to S&P Global Ratings, in August this country produced 400,000 barrels per day above the established limit. Iraq's oil minister said his country had made enough voluntary cuts in oil production and would not agree to any additional cuts adopted by OPEC+ at the next meeting.

And according to the rating agency S&P Global, among the violators of the agreement is Russia, which is desperately trying to find funds for the continuation of aggression.

Chaos in OPEC

If at the beginning of April the price of the European benchmark grade Brent rose to $91 per barrel, then on May 31 it fell to $82, and on Tuesday, June 4, during trading, it fell below $77, which is the lowest figure since January of this year. As a result, in two months, quotations decreased by about 14 dollars. And last week it added 8% to the price, after which it started to decrease again. All because of excess oil.

Experts assessed the situation in OPEC+ on the verge of complete chaos. Some cartel members who agreed to cut are producing more oil than promised. This made the OPEC+ agreement less effective. The long-term reduction in production in the OPEC countries has led to a reduction in their share in the world. According to the International Energy Agency (IEA), it fell from 51% in 2022 to 48% in 2024.

The Saudi government no longer wants to cede market share to other oil producers and believes it has enough funding sources, including international reserves and bonds, to weather a period of lower crude prices. Added to all this was Russia's losing geopolitical strategy, which lost markets and fell under sanctions, thanks to the reckless policy of the Kremlin and the unleashed war with Ukraine. Therefore, it is the prerogative of yesterday's cartel partners to occupy the markets lost by the Russians.

It is also worth considering that Saudi Arabia has considerable experience in trade wars. In 2020, it helped collapse oil prices to a 17-year low. In 1986, increased production in Saudi Arabia plunged prices below $10 per barrel.

$200 per barrel?

Against the background of such forecasts, information about an increase in the price of oil to $200 per barrel looks like a complete fantasy.

The other day, US President Joe Biden showed his full support for Israel and hastened to announce that if the conflict in the Middle East develops now, Washington will provide Tel Aviv with all the help it needs. In particular, it will protect Israel from Iran and help strike its oil facilities.

Both sides have so far decided to refrain from striking nuclear facilities, but oil refineries, gas facilities and fields are under mutual crosshairs. Markets responded to such close attention to oil and gas with fever, which, however, quickly subsided.

However, some experts hastened to give an "optimistic" forecast of $200 per barrel, such as SEB bank analysts.

However, such forecasts are only hypothetical and aimed more at hype or at the pro-Russian audience. After all, there are no reasons for such a sharp jump in prices - the situation is even the opposite. Speculative moments certainly exist, and players on the stock exchanges are directly interested in them, since they too make money on the differences between the real price and its sudden changes, but this in no way cancels the balance of supply and demand.

Iran exports from 1 to 1.5 million barrels of crude oil per day, its main buyer is China. This is about 1% of the world oil market. Even a completely destroyed oil production industry of Iran will not create catastrophic consequences for the world market, although they may raise the price somewhat, but not to such gigantic levels, and only for a certain period.

The OPEC+ agreement showed that even systemic solutions agreed with a significant number of producing countries have a limited effect in time. After all, the effectiveness of the agreement began to decrease, and today it creates considerable problems for the participants of this agreement, so its cancellation is a matter of the agenda. The most likely development in the event of Israeli strikes on Iran is $100-$110 per barrel for some time.

Currently, the agreement between OPEC+ members causes more problems for its key participants. More than a year ago, its parameters ceased to meet expectations, and in order to save the agreement, Saudi Arabia voluntarily assumed additional obligations to limit production.

However, the largest oil producer on the planet - the USA - does not participate in the agreement and fills the "voids" that arise with its oil. OPEC+ members can cut production for a long time, but there is far more oil on the market than there is demand for it. OPEC+ managed to level the situation in 2020, when the oil market literally collapsed due to the coronavirus epidemic. But as soon as the market acquired stable parameters, the deal became ineffective and therefore doomed.

Guns instead of oil

At the end of September, Russian Finance Minister Anton Siluanov announced that Russia's budget was formed taking into account the oil price of $60 per barrel. The Russians also presented the draft budget for 2025.

Analysts pointed out that spending on defense, security, and public services is 1.9 times higher than spending on medicine, education, culture, the disabled, pensioner support, etc. The "National Economy" section continues to contract (minus 1% in real prices), although not as fast as this year, when, taking into account inflation, it decreased by at least 10%.

Russians have significantly increased the servicing of their national debt (+39%), which is almost equal to spending on education and medicine. The Russian government has decided not to touch the Reserve Fund next year and will annually increase the national debt by two trillion. The "Housing" section has almost doubled, because 1.05 trillion rubles of compensation to banks for issued mortgage loans will pass through it - in the current year, it is planned to spend 0.45 trillion. A very significant 17% decrease in expenses under the "Social policy" section, which is primarily due to a drastic reduction in transfers to the Pension and Social Fund. Taking into account inflation, the reduction in budget spending on pensioners will exceed 30%, which will cause a significant blow to the budget. Russian analysts" called such a budget "live vivisection".

However, the Russians did not take into account the actions of the Saudis. Russia's wartime economy could be hit hard if Saudi Arabia implements plans to increase oil production to protect its position as the world's oil leader, Politico reported.

The OPEC+ agreement provided inertial scenarios for Russia, but the situation may change soon. This will inevitably lead to significant drops in the price of oil on average on the market and even more significant drops associated with the forced discounting of certain grades in relation to reference ones. Russian Urals may fall more than the average market price due to discounts and sanctions.

In this case, the Russian budget may not receive very significant sums, approaching trillions (in rubles), since everything will fall - oil, gas, and oil products, albeit in different proportions.

Oil and gas have been the largest source of revenue for the Russian budget over the past decade, accounting for up to half of revenues.

Economist and staff member of the Carnegie Endowment for International Peace Oleksandr Prokopenko claims that under such conditions the stakes for Russia are quite high. At current exchange rates, a $20 drop in oil prices would reduce revenues by 1.8 trillion rubles ($20 billion), equivalent to about 1% of Russia's GDP. However, instead of saving his economy, it is more important for Putin to create a blackout in Ukraine, or to take another completely destroyed village in Donetsk region.

In this case, Ukraine can only wait for the rupture of the agreement between OPEC+ members and wait for the undermining of the Russian economy. After all, it will be difficult to sponsor a senseless war with a huge hole in the budget. And if propagandists tell Russian pensioners on TV that this is normal, the Russian elites are unlikely to agree with this state of affairs.

As the Ukrainians joke, Ukraine has already joined the OPEC+ cartel and now also regulates the prices of petroleum products, especially in Russia.