Oil wins: Azerbaijan benefits from bull market Review by Caliber.Az

The global oil market showed stability after the price increase on July 13 - the price of September futures for Brent on the London exchange ICE Futures crossed the $81.4 per barrel landmark on July 14.

After a period of high volatility in oil prices in the first half of 2023, the market is gradually beginning to strengthen the "bull market", supported by increased purchases of hydrocarbons by China, as well as the efforts of OPEC+ to optimise production in order to stabilise the industry experiencing a lack of investment. These trends are also stimulating price growth for Azeri Light crude, generally favouring Azerbaijan's energy exports.

According to the data published recently by the General Administration of Customs of China, in the first half of 2023, Beijing recorded an 11.7 per cent growth in oil imports: 282.07 million tons of oil were supplied to the country during the reported period.

The growth in oil needs is explained by the removal of anti-void restrictions and overcoming the downturn in production, as well as levelling of negative processes associated with last year's collapse of the "bubbles" of the housing and mortgage crisis. As a result, China's GDP grew at an annualised rate of 4.5 per cent in the first quarter of 2023, thereby accelerating significantly from the 2.9 per cent growth rate in October-December 2022.

Considering the scale of the Chinese economy, its rise by just a couple of per cent tangibly increases demand for oil, gas and coal, thus affecting global market prices. In the same way, in January-June 2023, China increased its imports of natural gas by 5.8 per cent and coal by 93 per cent, and it is expected that the trend of increasing purchases of hydrocarbons will continue and even intensify in the second half of 2023.

It is possible that in the second half of 2023, the demand for oil will increase in a number of other Asian countries, which together with the Chinese factor will put some pressure on the market. At the same time, the commodity trade is noticeably affected by the decline in oil supply given OPEC+'s decision in early April to cut oil production by 1.66 million barrels per day by the end of 2023, as well as the cartel members' agreement in June on a target production cut of about 1.4 million barrels per day from 2024.

The situation is aggravated by objective factors after the energy crisis of 2014-2017, which led to a sharp decline in oil prices, many multinational oil companies began to reduce investments in the exploration of new fields and drilling wells. The situation was even worse in developing countries, where underfunding had a marked impact on the upstream sector.

The market is still experiencing the negative consequences of underfunding the oil sector today. For example, over the last ten years oil production in Venezuela has decreased by 75 per cent due to technical problems in the industry, and the largest oil terminal in Africa, Nigeria, has closed due to the same technical problems.

According to Bloomberg, the protests have caused a decline in production at Libya's major El Sharara oil field. The sanctions pressure on Russia's oil sector is also leading to production cuts, curtailing exploration and drilling of new wells, and according to some reports, the industry's decline could reach 25-30 per cent in 2023-2024.

Against this backdrop, the scenario of increasing market demand for "black gold", presented recently in OPEC's monthly report, looks quite objective: this year oil demand will increase by an additional 2.44 million barrels per day (bpd) to reach 102 million bpd, and in 2024 it will increase by another 2.3 million bpd. The estimate has been adjusted mainly due to improved economic performance in China in the second quarter, as well as improved growth dynamics in the US and South America. OPEC experts believe that the demand for oil in 2023 will slightly increase in the Organisation for Economic Co-operation and Development (OECD) countries, i.e. in the developed world.

At the same time, the greatest demand will be in the countries of America, led by the United States, against the background of growing consumption of jet fuel and gasoline. Non-OECD countries will see oil consumption grow by 2.4 million bpd to almost 56 million bpd, also significantly exceeding the pre-pandemic figures for the prosperous 2019.

In particular, the relatively high level of total commercial oil reserves in OECD countries is still a constraint on energy prices: by the middle of the year, they were 139 million barrels higher than last year's figures. However, in the past year, which was marked by the global energy crisis, most OECD countries experienced a decline in industrial production and transport transhipment, which led to lower demand for oil and fuel.

The first half of 2023 was also tricky, but the US and a large part of the EU countries managed to avoid the worst scenario - recession. Moreover, in the summer there was a trend of economic growth. These trends are likely to increase demand for oil in the second half of the year, in which case the role of oil reserves accumulated in the OECD countries will not be so important. Especially since the available oil reserves are not so large - 101 million barrels below the average for the last five years and 140 million barrels below the average for 2015-2019.    

The outlined "bull market" (a Wall Street term meaning gambling for higher prices) in the oil market will certainly influence prices in the second half of 2023, but experts' assessments vary widely, given the presence of a number of factors.

Obviously, the expectations of relative tangible growth in oil prices voiced at the beginning of the year turned out to be somewhat exaggerated closer to the summer. Thus, based on OPEC+ decisions on production reduction, analysts of the American investment bank Goldman Sachs raised their forecast of Brent oil price for December 2023 from $90 to $95, and for December 2024 - from $95 to $100 per barrel. And Rystad Energy even admitted that already this summer the cost of Brent could rise to around $110 per barrel.

Oil prices are rising but at a much slower pace. That is why in the recently published report of the US Energy Security Administration (EIA) the average price of Brent this year was revised from $79.54 to $79.34 per barrel, although the benchmark for 2024 was kept at $83.51.

One way or another, even keeping the average annual price of Brent within the range of $80-85 dollars is quite a comfortable scenario for Azerbaijan, where during the June revision of budget parameters the base price of oil in the state budget for 2023 was raised from $50 to $60 per barrel. Thus, the cut-off price in the budget is still below average world oil prices, which ensures comfortable fulfilment of obligations on the revenue side of the state budget, as well as the reservation of foreign currency revenues from oil exports in the State Oil Fund.

Azerbaijan remains in benefit also taking into account the trend of oil prices growth this week: since July 13, the price of Azeri Light oil has increased to $84.11.

Azerbaijan is certainly interested in further oil price increases, especially given its recently declining production figures: 2.9 million tons of oil with condensate were produced in 2022, with a 6.9 per cent decline. Nevertheless, OPEC predicts that this year the drop in oil production at older fields, such as the Azeri-Chirag-Guneshli (ACG) oil fields, will be partially offset by increased condensate production at other fields - Shahdeniz, Absheron and Umid-Babek.

As a result, the average daily production of liquid hydrocarbons (oil and condensate) this year in Azerbaijan will be kept at the level of 0.7 million barrels, which corresponds to the indicator of 2022.

In the long term, Azerbaijan will have to adjust its crude oil production to 551 thousand barrels per day in 2024, reducing it by 133 thousand bpd. Nevertheless, suppose the measures taken by OPEC+ ensure the growth of world prices for hydrocarbons. In that case, the country can significantly increase revenues from the export of raw materials, even physically exporting abroad smaller volumes of oil and condensate.