Azerbaijan wins again as oil prices hit multi-month highs Analysis by Caliber.Az

After a long period of unstable demand and price volatility, oil price growth has been recorded in the global market. On September 6, the price of October futures for Brent for the first time since November 2022 crossed the mark of $90 per barrel on London's ICE Futures exchange.

Experts attribute this trend to the plans of Saudi Arabia and Russia to extend voluntary production cuts until the end of the year, as well as to the growth in demand for fuel in China and OPEC+ efforts to optimise production. And while experts at international oil trader Gunvor forecast a sharp drop in demand in 2024, it is expected that high prices are likely to persist until the end of this year. In the meantime, market demand and rising prices for Azeri Light oil favour the commodity industry.

Since the end of last year, two opposing trends have collided in the global commodity market. On the one hand, Europe, North America, Japan, and a number of other countries in the Asia-Pacific region (APR) were experiencing negative processes in the economy associated with the developing global recession.

The decline in GDP growth rates was affected by the fight against inflation, which forced the central banks of the world's leading countries to sharply increase the discount rate. As a result, the rise in borrowing costs led to an investment slowdown, slower production and reduced demand for hydrocarbons, which, naturally, restrained the rise in oil prices.

On the other hand, commodity trade was significantly affected by the decline in oil supply, especially given OPEC+'s decision in April 2023 to cut oil production by 1.66 million bpd (barrel per day) by the end of this year and the cartel members' agreement in June to reduce production by another 1.4 million bpd from 2024.

More broadly, the effects of the underfunding of the oil sector following the 2014-2018 energy crisis have been felt. Over the past nine years, for example, Venezuela's oil production has fallen by 75 per cent due to technical problems in the industry.

According to Bloomberg, in July, production was also declining at Libya's large El Sharara field, and Africa's largest oil terminal in Nigeria closed due to technical problems. Sanctions pressure on Russia's oil sector is also leading to production cuts, curtailing exploration and drilling of new wells, and according to some sources, in 2023-2024 the decline in Russia's oil industry may reach 30 per cent.

Throughout the first half of 2023, the above factors mutually balanced the oil market, high volatility was observed, but prices varied within a small amplitude of $72-78. However, after a long period of price volatility, the process of gradual growth of demand for oil in China and a number of other countries began in July. At the same time, the factor of declining supply had an impact.

Since September 5 the commodity market has been growing steadily: Brent crude oil rose above $91 per barrel for the first time since November last year amid the news of Saudi Arabia's plans to extend its voluntary production cut of 1 million bpd until the end of 2023. On the same day, Russian Deputy Prime Minister Alexander Novak said Russia was also ready to extend its voluntary cut in oil supplies to global markets (by 300,000 bpd) until the end of this year.

At the international conference of oil industry representatives (APPEC) held this week in Singapore, Gary Ross, head of investment company Black Gold Investors LLC, said that by the end of 2023, oil prices may continue to rise in the range of $90-100 per barrel against the background of growth of tourist activity in China and limitation of production by OPEC+ countries.

According to the expert, domestic air traffic in the Middle Kingdom is already at 110 per cent of its pre-pandemic coronavirus level (prosperous 2019), while international traffic has recovered to 75 per cent of pre-pandemic levels.

In particular, China is forecast to see a significant increase in demand for jet fuel, which is forecast to be around 500,000 barrels per day in that country alone; road travel activity is also very high, especially as long-distance journeys are predominantly made in petrol-powered vehicles. "Petrol sales in China this summer have been staggering, people are driving and the level of demand compared to last year will be impressive," says Gary Ross.

Whether the Chinese factor will become a determining for maintaining stable demand for oil in the short and even more so in the medium term is a rhetorical question. Thus, the Bloomberg agency, referring to experts from the international oil trading company Gunvor, believes that further growth in oil prices is under threat.

Thus, the head of the global research and analysis department of Gunvor Frederic Lasser believes that in the next six months, the slump in market demand due to recession in the world's largest economies (primarily the EU and the US) may reduce the price of Brent oil to $71-72 per barrel. The expert admits that such a scenario is quite possible as early as the first quarter of 2024, even without major changes in fundamentals or the balance of supply and demand.

One way or another, but, to all appearances, the oil market will end the current year with a price growth trend. Moreover, in addition to the increased demand in the very capacious Chinese fuel market, there are other processes at the regional level, indicating a reduction in supply.

In particular, recently the largest oil hub in the Italian port of Augusta in Sicily, where tankers brought crude oil and oil products from Africa, the Middle East, including Azerbaijan (then the oil raw materials were distributed to terminals and refineries in Europe), saw a decrease in supply offers, a kind of local deficit compared to the usual supply.

On the other hand, the activity of oil traders in the Black Sea region is dropping: the increased attacks of Ukrainian drones on the Russian port of Novorossiysk since this summer have had a very negative impact on the work of the largest regional oil terminal located in this port.

The risks of international transport companies are growing, and insurance costs are increasing along with them. The number of tankers operating in the Black Sea and ready to load at the port of Novorossiysk is declining accordingly.

All of the above has a negative impact on the global oil market, creating a tendency for supply to shrink relative to demand. In particular, already in the first ten days of August in the monthly forecast of the Energy Information Administration (EIA) of the US Ministry of Energy, it was noted that global consumption of oil and liquid hydrocarbons in 2023 will amount to 101.19 million bpd, thus the estimate of oil demand in 2022 was raised by an additional 1.76 million bpd against last year's figures.

In turn, the International Energy Agency (IEA) raised its forecast for global oil demand in 2023 by an additional 2.2 million bpd to 102.2 million bpd, attributing this to demand growth in China of more than 70 per cent.

It is noteworthy that Azerbaijan is an obvious beneficiary of the processes taking place in the oil market: even if the average annual price of Brent does not reach $100, but remains within the range of $80-90, this is quite a comfortable scenario for Azerbaijan, where during the June revision of budget parameters, the base oil price set in the state budget for 2023 was $60 per barrel.

Thus, the cut-off price in the budget is still below average world oil prices, which ensures comfortable fulfilment of the obligation on the revenue side of the state budget, as well as the reservation of export foreign exchange earnings in the State Oil Fund.

Azerbaijan remains a gainer also taking into account the current rise in oil prices: since Wednesday the price of a barrel of Azeri Light oil has increased to $96.42. Even taking into account the fact that today almost the entire volume of domestic oil is exported through the Baku-Tbilisi-Ceyhan (BTC) pipeline in the form of BTC blend (the pipeline also handles transit Turkmen and Kazakh oil), the export profits of our country will increase significantly, especially since at present the premium for BTC blend in Ceyhan exceeded $5.3 relative to the market price of Brent.

The global rise in oil prices indirectly contributes to the improvement of market assessments and credit indicators of the State Oil Company of Azerbaijan (SOCAR). Thus, recently Moody's Investors Service (Moody's) has upgraded the Baseline Credit Assessment (BCA) of State Oil Company of the Azerbaijan Republic (SOCAR) to ba2 from ba3. Concurrently, Moody's has affirmed SOCAR's corporate family rating (CFR) at Ba1.

All these parameters reflect SOCAR's improved financial and credit performance against the backdrop of favourable oil and gas market conditions, helping it generate cash and have good liquidity.