Novak hopes for diminished market volatility, despite failure to reach oil freeze deal
MOSCOW. April 18 (Interfax) - Despite the failure to agree an oil production freeze, Russian Energy Minister Alexander Novak hopes that oil market volatility will not be strong, since market factors are beginning to play a role.
"The price that took shape before now, at $40-per-barrel level, reflects the actual picture, was a comfortable one for consumers and producers while we have overproduction of oil," Novak said in an interview with the NTV television channel, noting that the current oversupply is estimated to total 1.5 million barrels per day.
But Novak doesn't think the absence of an oil freeze deal will contribute to strong market volatility. "I don't think volatility on the market will be strong. Fundamental factors that affect oil and market sentiment have begun to play a role in the last few months," he said.
"We are seeing declining production in the U.S., where literally in the last few days production fell under 9 million barrels per day. Further decline is expected this year. We have seen nearly an 80% decline in drilling rig counts compared with 2014. The major oil and gas companies have slashed investment, by 15%-40% in 2015 and an expected 10%-30% this year. Underinvestment now totals about $400 billion. The effect of this will be to lower supply. Demand, according to many analysts, will continue to increase, by 1.2 million barrels per day this year.
"For this reason the market will balance out; the cycle will approach the end. The idea of the freeze was to bring that situation nearer by three-six months," he said.
That said, Novak acknowledged that if a freeze had been agreed, the risk posed by speculative trading would be lower. "When there is an agreement, it lowers the risk that speculators will make market plays. The absence of an agreement creates such risks. We will be on the lookout," he said.
"Of course, we are a bit disappointed at the outcome of the negotiations, because we flew there to reach an agreement. But overall, Russia won't suffer in this case," he said.
"We took the following position: if an agreement is achieved, we will receive an additional dividend in the form of a shorter time to balance out the market," Novak said.