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. Last Updated: 07/27/2016

No Panic as Fall in Oil Price Looms

Oil ministers from Saudi Arabia, Venezuela and Mexico have agreed petroleum-exporting countries should boost output in an effort to ease global oil prices from the highest levels in nine years, The Associated Press reported Thursday.

However, the accord caused little panic in Russia where the economy largely depends on revenues from oil exports. Analysts and oil industry experts said it was too early to panic, adding that the expected effect on oil prices is unlikely to drastically undermine Russian oil companies or budget revenues.

The three countries that made Thursday's agreement were the initiators of last year's oil production cuts, which have nearly tripled oil prices since March last year.

The wild success of the measure has been attributed to the unprecedented 80 percent to 90 percent compliance rate maintained by members of the Organization of Petroleum Exporting Countries. Mexico is not a member of OPEC.

The undersupplied oil market has been especially beneficial for Russian oil companies. Last year was their most profitable since they were created after the collapse of the Soviet Union.

Russia's benchmark Urals crude rose as much as 97 cents between Tuesday and Wednesday, fetching $29.31 per barrel for crude delivered to Mediterranean ports, Interfax reported. U.S. prices soared to $31.77 Wednesday and even went above $32 after the announcement in early trading Thursday.

Analysts estimate each $1 that benchmark Brent crude rises above $14 per barrel brings federal coffers an additional $1 billion annually, as well as adds $2 billion to the balance of trade.

However, Russian companies have generally recognized the temporary nature of the high oil prices. Both the budget and the business plans for oil majors for 2000 estimated the oil to average at $18 to $20 per during the year.

"Uppermost in our minds is to maintain stability in the markets,'' Saudi Oil Minister Ali Naimi said Thursday after the three oil exporting nations met in London.

"There is need for additional production. The issue is when and how much," The Associated Press quoted Naimi as saying.

Thursday's announcement can be read as a sign OPEC is likely to decide to increase the amount of crude shipped to undersupplied world oil markets at its annual meeting scheduled for March 27, analysts said.

The ministers, however, did not specify the amount of the extra oil OPEC will supply. OPEC produces about 30 percent of oil on the market.

"I think the number will be put forward when we finish our consultation with all other [OPEC] members,'' Naimi said.

James Henderson, an oil analyst with Renaissance Capital investment bank in Moscow, said prices were unlikely to drop beyond $20 per barrel any time soon. He said OPEC was likely to be very careful not to increase supplies too sharply so that prices do not to drop too much and too soon.

Global demand for crude stands at about 77 million barrels per day. Only about 75 million are supplied to markets.

Henderson said OPEC was likely to increase the production by about 1.5 million barrels a day in the second quarter.

According to Henderson, Russia should not suffer from the production increase. Should the price fall to $22 to $25 per barrel it will mean the end of the windfall period for Russia, but not a disaster, he said.

"Providing the price does not fall beyond $20 per barrel Russian oil companies and the Russian economy are still going to do very well," Henderson said.

Russian oil companies greeted the news from London cautiously Thursday.

"Of course the production increase will affect prices, but it is too early to say what this effect will be in numbers," said Dmitry Dolgov, he spokesman for the nation's No. 1 oil firm, LUKoil.

LUKoil announced earlier this year that its pretax profits for 1999 stood at $1.3 billion. The company planned its activities for 2000 on the basis of a lowish $18 per barrel.