Oil could fall to $40 if OPEC abandons its deal

In more proof that U.S. oil production is continuing to alter global oil markets, Russia’s finance minister Anton Siluanov said on Saturday that Russia and OPEC might decide to increase production to fight for market share with the U.S.

His remarks were first covered by Russia’s Tass News Agency.

Siluanov said that lower oil prices would then have a negative impact on U.S. oil production, an argument that was also made as far back as late 2014 when the Saudis sought to drive U.S. producers out of business by opening the oil production spigots in spite of an already flooded global oil market.

“(If the deal is abandoned) the oil prices will go down, then the new investments will shrink, American output will be lower because the production cost for shale oil is higher than for traditional output.” He said that prices could drop to $40 per barrel or even less for up to one full year, adding that there had been no decision on the deal yet and he did not know whether OPEC countries would be happy with this scenario.

Siluanov’s comments aren’t without precedent. Russia has hinted before that it could start to pump more oil, which would in effect cause the world’s second-largest oil producer to nullify its participation in the OPEC+ oil cut deal put in place at the start of the year to remove 1.2 million b/d of oil from the market for six months, with a review period after this time.

The OPEC+ deal, the second of its kind in three years, has been successful in reducing global oil supply, in addition to geopolitical developments, including reduced production from OPEC members Iran, Venezuela, and Libya. In lockstep, global oil prices have spiked to five-month highs, rising 30-40 percent on tightening supplies

On Friday, London-traded, Brent crude futures rose 72 cents, 1%, to settle at $71.55 per barrel. U.S. oil benchmark West Texas Intermediate (WTI) crude rose 32 cents for the session, settling at $53.89 per barrel – the sixth straight week of gains for WTI. And despite some bearish news at the beginning of the week, crude prices have held around these levels.

Saudi Arabia to stay the course

If Russia is waffling over its commitment to remain in the OPEC+ deal, Saudi Arabia is indicating that it will stand fast. Saudi Arabia’s Energy Minister, Khalid al-Falih, said two weeks ago that he was “optimistic” about the prospect of continued commitment to the OPEC+ production cuts. Earlier he said he expected other oil producers to “catch up very soon.”

However, the fact remains that other producers in the agreement, including Russia, aren’t as committed to the deal (with lower compliance rates) as the first OPEC+ agreement that was put in place in January 2017, which was successful in bringing OECD oil inventory levels to five year averages and boosting prices that had sunk below $30 per barrel in January 2016.

If Russia does decide to increase production, the Saudis will be faced with a no-win situation. If the Kingdom keeps its part of the oil cut deal, it will cede market share to Russia, particularly in China and other parts of Asia.

If the Kingdom also forgoes the OPEC+ deal and ramps up production to fight for market share, though, it would put downward pressure on oil prices, especially as U.S. oil production continues to push ahead.

However, whether oil prices would plunge to a dismal $40 per barrel as Siluanov predicted remains to be seen.