The Mysterious Barrel: What Will Happen to Oil Prices This Summer

Despite short-term minor dips and rises, oil prices remained relatively stable throughout May - in the $63-65 corridor. Barrel prices were not disturbed by either the rather provocative position of OPEC+ participants, who took a confident course toward a gradual increase in production, or the standard attempts of European states to introduce new sanctions against the export of Russian energy resources. Experts are making cautious forecasts for the near future of the hydrocarbon sector, which has seasonally gone on "summer vacation", believing that the main events in it will start with the onset of autumn.

OPEC+ Changes the Rules of the Game

All the main events that could affect oil prices in June have already happened, according to experts. The central place among them is occupied by the next ministerial meeting of OPEC+ countries, co-chaired this time by Russian Deputy Prime Minister Alexander Novak. At first glance, the event was held in a routine manner and did not bring any sensational results. The summit participants confirmed previous agreements on the overall level of oil production until the end of 2026.

Meanwhile, it was on the platform of the alliance that the fundamental model of behavior of the most influential players in the global energy market for the near future was formed. The OPEC+ countries made it clear that their production system has finally switched to the "manual mode" of managing production levels, which will now depend not only on immediate targets, but also on those aimed at years ahead. And in the long term, the cost situation for hydrocarbons will change depending on both fundamental factors (that is, the balance of supply and demand for raw materials) and the constantly changing geopolitical situation in the main industrial centers of the world.

Although the OPEC+ Ministerial Monitoring Committee will continue to meet on average once every two months, the “manual control” of the hydrocarbon production and export market means that the alliance members will be able to call an extraordinary meeting any day and immediately and radically change the rules of the game – either sharply reduce production limits or increase production rates.

The price of a barrel, regardless of the type of raw material - the North Sea standard Brent or its cheaper Russian analogue Urals, according to economist and top manager in the field of financial communications Andrey Loboda, will in the future be determined by specific episodes in business and diplomatic relations of specific sellers and buyers. Well, long-term strategic maneuvers of OPEC+ will be postponed until the time when purely economic trends on raw materials trading platforms again begin to prevail over behind-the-scenes political games that interfere with healthy relations between producers and buyers of energy resources, and also encourage the earnings of stock speculators.

"The official wording of the final OPEC+ communique sounds reassuring - the organization's participants repeated the previously agreed framework of their deal," the expert notes. "But one should not fully trust these lulling forms, since in reality the alliance's leaders intend to act decisively and even aggressively. Those eight OPEC+ countries, including Russia, which voluntarily cut their own capacity by 2.2 million barrels per day in November 2023, will increase production by 411 thousand barrels in July, that is, for the third month in a row."

Middle East Maneuvers

For now, smaller volumes of raw materials will enter the market, since some OPEC+ representatives have recently exceeded their established quotas, so a corresponding correction is now required. However, the alliance leaders are not going to restrain their production appetites. As Bloomberg reports, Saudi Arabia demands that OPEC+ continue to accelerate the growth of oil production in the coming months. The Kingdom intends to regain its lost share of the global hydrocarbon market, which has fallen from 16-17% to 10-11% over the past 5 years. The Saudis insist that the alliance add at least 411 thousand barrels per day not only in July, but also in August and possibly in September, in order to take advantage of peak summer demand in the Northern Hemisphere. Thus, no later than mid-autumn, production of the countries included in the organization will be restored to previous production volumes.

It is unlikely that the Middle Eastern neighbors will object to Riyadh’s desire to increase the output of its oil wells. The United Arab Emirates has long stated that it would be happy to increase daily production from the current 3.5-3.6 million to 5 million barrels. The state-owned raw materials holding Adnoc, the national company of Abu Dhabi, has repeatedly stated that it has both the resource base and the technological tools to implement such an ambitious plan. Iraq, Kuwait and Oman, also members of OPEC+, for their part, have expressed agreement regarding the production jump. In particular, Kuwait Petroleum Corp CEO Sheikh Nawaf Al-Sabah said at the end of last year that his concern, together with the government of the emirate, plans to spend about $33 billion over five years to expand the production capacity of its hydrocarbon fields.

The next meeting of OPEC+ delegates dedicated to production quotas is scheduled for July 6. According to financial analyst and private investor Fyodor Sidorov, if OPEC+ continues to demonstrate movement to increase production, especially on the part of its key participants, the market may respond with a drop in prices. In this case, the price of Brent may go significantly below the current range of around $60. Morgan Stanley and Goldman Sachs analysts agree with this forecast, and are also confident that OPEC+ will announce at least three more times an increase in the output of its industrial facilities. Until now, the alliance has managed to control the price situation on commodity exchanges. Even the results of the last meeting of oil exporters did not affect the optimistic mood of exchange traders - the price of Brent consolidated near $65, and on some trading days exceeded $67. Many exchange players believe that, at least during this summer, a barrel will remain in the range of $60-70.

However, as practice shows, since the lion's share of summer energy supplies has long been contracted, the market will begin to play out the current decisions of the alliance in 2-3 months or, in other words, closer to the beginning and at the beginning of autumn. In this regard, large-scale market fluctuations should be expected precisely during this period.

Risks for Russia

For Russia, which is among the leaders of OPEC+ and also intends to increase its own oil production, the current circumstances, apparently, carry risks. According to the leading analyst of Freedom Finance Global Natalia Milchakova, the export price of the Russian Urals brand together with the discount to Brent is now around $52-55. The Ministry of Finance predicts that in June alone the state budget will lose 40.3 billion rubles in oil and gas revenues. If events develop according to the most pessimistic scenario (for example, if the US tightens energy sanctions against our country), it is possible that the federal budget's revenues from the sale of energy resources will be even smaller, and its deficit, instead of the predicted 1.7% of GDP, will grow to at least 2%, and may even exceed this level.

A potential factor that could drive up oil prices, according to Polilog expert Evgeny Zlenko, could be the escalation of conflicts in the Middle East. The threat of disruption of supplies from this region could keep the price of a barrel above $60. However, in this case, the incentive for pricing would again be not economic, but political reasons, the influence of which OPEC+ participants, including Russia, intend to get rid of.