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Oil prices far above 'equilibrium', at risk of overheating: Russian deputy minister

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Oil prices far above 'equilibrium', at risk of overheating: Russian deputy minister

Highlights

Russia sees long-term oil price of $45-$60/b: Sorokin

Spare capacity sufficient, though less flexible than Gulf OPEC

OPEC+ must monitor commodity super-cycle

Russia does not want the oil market to overheat and is aiming for global crude prices to settle long-term into a $45-$60/b range, deputy energy minister Pavel Sorokin said Oct. 7.

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He said the recent surge in the market appeared to be part of a commodities super-cycle that the OPEC+ coalition would have to monitor closely.

"You're seeing a super-cycle everywhere across the board, not just in oil," he said at an industry conference. "If prices get too high, it leads to demand destruction, which is not healthy. We have not changed our view that we prefer stable prices, predictable prices, because that is the only way that the economy can plan ahead."

Dated Brent has surpassed $80/b in recent days, for the first time since October 2018. The rally has been supported by growth in oil demand from the pandemic recovery, as well as the OPEC+ alliance's continued restraint in releasing supplies.

The producer bloc, co-led by Russia and Saudi Arabia, on Oct. 4 agreed to stick to its plan to raise crude production by 400,000 b/d a month, despite calls from the US and other consuming countries to put more oil on the market.

Sorokin said OPEC+ countries would remain flexible and reactive to market needs, but that the "equilibrium" price was at least $20/b lower.

"The current price environment is favorable for...producers, but at the same time we are conducting our analysis and making our decisions based on a significantly lower price band," he said at the Energy Intelligence Forum. "In the long run, we expect equilibrium between $45-$60/b, and that's where the market can supply all the necessary demand and ensure that enough resources are being put online to satisfy it, and also where consumers can enjoy a fair price for the energy they need."

Russian spare capacity

Russia and nine other producing countries have cooperated with OPEC since 2017 on a series of production cuts to prop up the market – most notably a historic accord to slash a combined 9.7 million b/d in spring 2020 during the initial pandemic price crash.

Those cuts are on pace to be completely unwound by late 2022. While declining to say how much spare production capacity Russia holds, Sorokin said his country would have no problem fulfilling its output quotas.

Russia pumped 9.77 million b/d of crude in August, according to the latest S&P Global Platts survey of OPEC+ production, down from 10.63 million b/d in April 2020, the month before the historic cuts were implemented.

S&P Global Platts Analytics estimates that as of October, Russia held about 464,000 b/d of spare production capacity.

"We have all the necessary capacity to fulfill these obligations to fully meet these targets," Sorokin said, though he acknowledged that due to the more technical nature of Russia's reserves, it is not as flexible bringing production on- and offline as some of OPEC's core Gulf members.

"We reduced our output back in 2020 after the pandemic started [and] we, of course, have all that reduction of spare capacity. But beyond that we also need to drill, and we believe we can come close to the target levels that have been announced."