How will Azerbaijan benefit from deeper OPEC+ oil output slash?
Analysis by Caliber.Az

ANALYTICS  06 June 2023 - 13:19

World prices for July futures on WTI crude oil and August futures on Brent crude oil rose slightly on June 5 morning as a reaction of the markets to the decision of OPEC+ the day earlier to cut oil production from 2024 by about 1.4 million bpd (barrels per day). Despite pressure from the US and the EU to reduce commodity prices, participants in the OPEC+ agreement and their partners agreed to continue efforts to voluntarily reduce oil output.

Thus, at the beginning of April, it was decided to cut oil production by 1.66 million bpd until the end of 2023, and now it was agreed to further reduce it for the whole year 2024. According to Azerbaijan's Energy Ministry, the country fully supports OPEC+'s preventive measures to stabilize the market.

Since last autumn the global energy market has been under pressure from negative impulses due to the reduction of industrial production in the European Union and the United States, reduced energy consumption in emerging markets, in particular in the industrialized regions of Asia, and all these processes were accompanied by high price volatility.

Forecasts of a severe recession expected in 2023 and the collapse of many economies also contributed to the negative dynamics, which also depressed demand in stock markets. For example, between August and December last year alone, the price of a barrel of benchmark Brent oil slumped by more than $30.

Notably, apart from objective processes, oil-producing countries were under pressure from the West, which was seeking to bring down or freeze oil prices as low as possible at any cost, including in the context of the sanctions strife with Russia.

These negative trends were also observed in the first quarter of this year, and the growth of commercial oil stocks in the global market only increased price volatility, as confirmed by the OPEC+ Ministerial Monitoring Committee (JMMC).

In order to prevent a further drop in hydrocarbon prices and stabilise market demand, in early April this year, at a regular OPEC+ meeting, nine of the twenty countries participating in cartel agreements announced a voluntary coordinated reduction of oil production by 1.66 million barrels per day (bpd) between May and December 2023.

Experts of Bloomberg agency and many other analytical structures acknowledged JMMC ministers' initiative as a revolutionary decision, and prices for Brent were expected to go up already in the summer of this year, approaching $100 per barrel. However, it was only a short spike after the landmark OPEC+ decision in early April which pushed it back down to $72.65 by May 31, from $85 a barrel in April.

Global oil prices declined due to higher commercial reserves in the US, stabilised demand in the EU, and congested oil terminals in India, China, and a number of other South-East Asian countries, where discounted Russian crude had been sold in huge quantities since last year.

The seasonal factor also played a role: the end of the heating season in April-May is traditionally accompanied by a decrease in energy consumption and, as a consequence, slumping demand and prices for energy carriers.

One way or another, the emerging situation required new steps to stabilise market supply and demand. On 4 June, during the 35th ministerial meeting of OPEC in Vienna, cartel members and representatives of other states in the framework of the OPEC+ agreement decided to cut oil production quotas for 2024 by a further 1.4 million bpd to 40.46 million bpd. This agreement will take effect on January 1 and run until December 31, 2024.

At the same time, as part of a voluntary initiative, Saudi Arabia will cut oil output by an additional 1 million bpd in July, noting that this step could be extended if necessary. The voluntary additional production cuts are intended to reinforce the preventive measures taken by OPEC+ countries to maintain stability and balance in oil markets.

Commenting on the agreements reached last Sunday at the cartel's ministerial meeting in Vienna, Russian Deputy Prime Minister Alexander Novak stressed that an additional reduction in oil production, taking into account the 2 mb/d announced in October 2022 and the 1.66 mbpd reductions effective from May 1, 2023, would total about 3.66 mbpd from last autumn's level.

Next year, production will be reduced by a further 1.4 mbpd which, according to the Russian deputy prime minister, will increase the stabilising effect on the market. It is worth mentioning that Russia's full support for the cartel's decisions is largely forced: an embargo on oil deliveries from Russia to Europe by sea came into force last December, maintaining limited exports only through the Druzhba pipeline; a price cap was also introduced for Russian oil.

As a result, about half of Russia's total oil supplies to the EU - 4.5 mbpd - have ceased since December 5. According to forecasts by the International Energy Agency (IEA), Russian oil production is likely to fall by 1.4 mbpd in 2023 due to the embargo. And in this respect, Moscow, in fact, has nothing to lose.

Losses in oil production are inevitable in any case, and solidarity with the OPEC+ position promises political dividends and even increased profits in case the price of "black gold" rises in the future.

On June 5, following OPEC+'s decision to cut production in 2024, there was a slight increase in crude prices: Brent crude oil futures on the Intercontinental Exchange (ICE) in August rose by 2.19% to $77.80 per barrel.

"The OPEC+ meeting resulted in a decision to extend oil production cuts until the end of 2024. At the beginning of April a number of countries had already announced production cuts, in addition, Saudi Arabia announced an additional reduction of oil production by 1 million in July. That is an imbalance of supply and demand is growing and along with its lack of transparency, which may lead to high oil prices," the Secretary General of the Government of Japan Hirokazu Matsuno stated on June 5.

In Washington and Brussels, the decision to cut oil production was also met with undisguised dissatisfaction.

For his part, Giacomo Romeo, an analyst at US investment firm Jefferies Group LLC, believes that the outcome of the OPEC+ meeting is more a reflection of Riyadh's concern about the level of short positions in the oil market than an indication of concerns about demand prospects. In his view, the decision to extend next year's production cuts is likely to help prevent additional short positions from being opened.

Either way, the production cut plans suggest that even in surplus markets, oil inventories will quickly run out and that by mid-summer, declining supply, and rising demand will pull prices up.

Azerbaijan, where crude production has been decreasing recently, also has an interest in this: 2.9 million tonnes of oil with condensate were produced last year, i.e. a decline of 6.9%. According to previous OPEC+ forecasts, liquid hydrocarbon supplies from Azerbaijan were expected to increase by 37,000 bpd in 2023 - to an average of 0.7 million bpd - but as of April, daily oil and condensate production had reached only 626,000 bpd. And in the long term, during 2024, Azerbaijan will have to adjust its crude production to 551 thousand bpd, reducing it by 133 thousand bpd.

Nevertheless, if the measures taken by OPEC+ ensure the growth of world prices for hydrocarbons, our country can significantly increase revenues from the export of raw materials, even if less oil and condensate are physically exported abroad.

"We adopted another decision serving for a balance and stability in the global oil market within the OPEC+ format. Azerbaijan always supports the preventive measures of the OPEC+, which minimise the risks negatively affecting the development of the oil sector," Azerbaijani Energy Minister Parviz Shahbazov, who attended the meeting in Vienna, noted on his Twitter page.

We should remind you that the next OPEC+ ministerial meeting will be held in Vienna on November 26 this year.

Caliber.Az