As oil prices climb, Azerbaijan moves to increase revenues OPEC+ strikes back

Global oil prices on April 4 morning continued to rise after Monday's spike due to the reaction of markets to OPEC+'s decision to reduce production. Despite efforts by the US and the EU since the second half of last year to get global hydrocarbon prices down, Saudi Arabia, Russia, and several other producing countries announced a voluntary coordinated oil production cut of 1.7 million barrels per day. It is not yet clear what form the negative reaction of Washington and Brussels to the OPEC+ decision will take. However, leading experts, banking, and stock market analysts are for the most part confident that the bull trend in the oil market will continue and have raised their annual forecasts to $100 or more per barrel of Brent.

After the end of a period of steady and sustained demand and oil price increases since 2021, which supported black gold prices of $100/bbl and above at their peak, commodity markets have been quite volatile since last autumn. The energy market gained negative momentum due to a decline in industrial production in the European Union, and reduced energy consumption in emerging markets, in particular in the industrial regions of Asia, all of which were accompanied by high price volatility. Numerous forecasts of an expected severe recession in 2023 and the collapse of many economies have also depressed demand on stock markets, with the price of a barrel of Brent oil losing more than $30 in August and December of last year alone and this trend has continued this year.

However, despite the pressure of the collective West, which tried to freeze the oil prices at the lowest possible level, at the beginning of October 2022 the members of the oil cartel decided to reduce oil production by two million barrels per day beginning from November. Later, at the December meeting of the Ministerial Monitoring Committee of OPEC+ (JMMC), the participants of the agreement, uniting 23 oil-producing states of the world, agreed to maintain the current oil production quotas. According to the Azerbaijani Ministry of Energy, our country's commitment to reduce crude production by 33,000 bpd remained unchanged, while the daily quota remains at 684,000 bpd.

Growing oil reserves since the start of the year and high price volatility in the first quarter of this year have prompted OPEC members and their partners to make some adjustments to production levels. JMMC ministers also confirmed the increase of commercial oil stocks on the market during their meeting on March 27. At the same time, nine out of the twenty countries participating in the OPEC+ deal announced a voluntary coordinated reduction of oil production by almost 1.7 million barrels per day (bpd) from May to December 2023. Under the decision, Saudi Arabia will cut daily production by 500,000 bpd, Iraq by 211,000 bpd, UAE by 144,000 bpd, Kuwait by 128,000 bpd, Oman by 40,000 bpd, Algeria by 48,000 bpd, Kazakhstan by 78,000 bpd and Gabon by 8,000 bpd. JMMC's intention was also supported by Russia, which extended its decision to reduce oil production by 500k bpd from July until the end of 2023.

It should be noted, however, that Moscow's position on this issue is forced: an embargo on oil supplies from Russia to Europe by sea came into effect last December, with limited exports remaining only through the Druzhba pipeline, and a price cap was also imposed on Russian oil. As a result, about half of the 4.5 million bpd of Russian supplies to the EU have been cut since December 5 last year. According to forecasts by the International Energy Agency (IEA), the embargo could reduce Russian oil production by 1.4 million bpd in 2023. And in this regard, Moscow has nothing to lose - its oil losses are inevitable in any case, and solidarity with the position of OPEC+, among other things, adds political points, not to mention the increase in profits due to rising prices.

The Bloomberg agency experts think that the decision made by the JMMC ministers a few days ago was revolutionary: "Saudi Arabia changed the situation on the world energy market by agreeing to reduce daily production of oil by 500 thousand barrels per day, the same steps were taken by the Kingdom's partners - the other members of OPEC+. As a result, Brent prices may approach $100/bbl for the foreseeable future". Bloomberg notes that immediately after the decision of the cartel and its partners, exchange prices rose by $5 to above $84/bbl, and this growth will continue since there is considerable optimism that current events are the beginning of a bull trend in exchanges. It should be noted that on April 4 oil prices were rising slowly, with June Brent futures crossing $85.9 on several exchanges.

Other experts also believe that given the latest OPEC+ decisions, the growth of oil will continue: analysts of US investment bank Goldman Sachs reviewed their earlier estimates increasing the forecast of Brent price for December 2023 from $90 to $95, and for December 2024 - from $95 to $100 per barrel. Some experts even began to talk about three-digit numbers, in particular, Rystad Energy assuming that this summer the cost of Brent could reach $110 per barrel.

As to the cartel's archenemies, the US and EU, it is clear that the latest OPEC+ decision had a muted negative reaction. "The cartel's decisions are regrettable. It is still difficult to predict the impact of lower oil production on world prices, but I think the move itself is wrong," US Treasury Secretary Janet Yellen said. A similar opinion was expressed by John Kirby, Coordinator for Strategic Communications at the White House National Security Council, who said that given the unclear situation in the market, reducing oil production at the moment is undesirable. "The United States will seek to replenish oil in the strategic oil reserve, and we are trying to do so at a cost to taxpayers. This will now depend on constraints, such as mandatory sales approved by Congress and maintenance needs, but we remain determined to rebuild the reserve," said Kirby, who stressed that the cartel had warned the US about plans to cut oil production.

For his part, European Commission (EC) spokesman Tim McPhie noted that the EC is closely monitoring the situation in the energy markets after the OPEC+ decision to reduce oil production, but is only analysing the data and is not ready to comment on it. It should be noted here that it is the European Union, which recently increased sanctions on Russian oil, fuel, and petroleum products on its market, that is experiencing the most pressure because the cartel decides to reduce production. Production cuts and rising oil prices are making it very difficult for US and EU central banks to reduce inflation, which, coupled with the recession, is increasing risks for Western economies.
One way or another, analysts believe that oil price declines due to the deteriorating global economy and the banking crisis in the US and Europe, seen in recent months, will no longer be the main factors affecting the outlook for the global energy balance. Given the plans to cut production, it can be assumed that even in surplus markets oil reserves will soon be exhausted quickly, and that by summer the reduced supply and rising demand will pull prices up.

Azerbaijan, where crude oil production has been decreasing of late, also has an interest in this: last year 2.9 million tons of oil including condensate were produced, i.e. a decline of 6.9%. However, with the growth of world prices, our country can significantly increase revenues from oil exports, even physically exporting smaller volumes of oil. Actually, it is already happening: the price of Azeri Light rose following the growth of Brent price. After the OPEC+ decision it was traded on CIF basis in the Italian port Augusta for $87.81 per barrel, thus the price rose by $5.93 or 7.24%. On April 3, Azeri BTC Blend premium traded at +3.30 and Azeri Light at +3.10. Given the recent trends, Azeri oil prices will rise consistently, especially given the growing demand in the EU, where this year there will be even less Russian oil. An additional driver boosting demand in the global market will be the lifting of COVID-19 quarantine restrictions in China as its economy starts to catch up. It is expected that demand for crude on the Chinese market could reach 1.6 million bpd by the end of this year.