OPEC+ policy to help Azerbaijan to raise revenues in 2023 Anaysis by Caliber.Az

OPEC+'s recent decision to reduce oil production starting from November and extending the deal until late 2023, as well as full support of this decision by the Persian Gulf countries, Russia, and other oil-producing states, give reason to believe that the oil market will not undergo sharp fluctuations in the short term. The reduction in supply will not only adjust the high price volatility but will also pre-empt the consequences of negative scenarios - recessions in the EU, the US, China, etc. Nevertheless, according to experts, the likelihood of a sharp drop in oil and gas prices next year is low, and this is crucial for Azerbaijan, whose budget policy is oriented toward spending growth.

Global oil prices recovered on October 17 morning after falling more than 3% during October 14 trading: the price of December futures for Brent crude rose to $92.39 per barrel, while WTI for North American oil rose to $85.3. In contrast to the first half of 2022 when oil showed a steadily rising trend, since July the price of 'black gold' has gone down from the landmark mark of one hundred dollars per barrel. Many experts agree that the reason for the decline was overheating of the energy market, which during the first half of the year was fuelled by speculative growth amid risks of shortages due to the war in Ukraine and anti-Russian sanctions. Real global oil demand, on the other hand, was somewhat overestimated, mainly due to the situation in the European region. However, high prices did not stimulate further growth in energy consumption in developing countries, primarily in the Asian region. Overall, the oil market showed high price volatility in August-October, with the price of a barrel of Brent falling by $27 during this period.

To stabilise the market, OPEC+, led by Saudi Arabia and Russia, recently decided to cut oil production by 2 million barrels per day starting in November, and extended the six-year deal under the expanded cartel format to the end of 2023.

This trend runs counter to the US and some EU policies, with President Joe Biden even warning that Washington's strategic relationship with Riyadh could be reconsidered if the Saudis do not refuse to change their current course. But Saudi Arabia is not alone in its vision of oil strategy - the day before the heads of relevant agencies in Kuwait, Bahrain, Oman, and Iraq clearly supported the unanimous decision of OPEC+ in Vienna to reduce oil production. In particular, Sheikh Nawaf Saud al-Sabah, director general of the Kuwaiti National Petroleum Company (KNPC), confirmed the government's desire to "maintain a balance between the interests of producers and consumers" and welcomed the cartel's decision. SOMO, the Iraqi state-owned oil company, takes a similar stance, believing that "the OPEC+ decision is a proactive approach that maintains market stability and provides the necessary guidance for the future, and this choice is based on economic indicators and is made professionally, objectively and unanimously". The Minister of Energy and Natural Resources and Petroleum of Oman and his counterpart in the Kingdom of Bahrain echoed this sentiment.

Ali bin Sabt, General Secretary of the Organisation of the Arab Petroleum Exporting Countries (OAPEC), who expressed the common view of the Middle East region, stressed that steps to reduce oil production had been taken at the right time, given the uncertainties ahead for the global economy this year and next and the need to address imbalances in the oil market.

It should be noted here that attempts to keep oil prices at approximately the current level are dictated not only by the policy of OPEC+ but also by a number of other objective factors. According to the International Energy Agency (IEA), global oil demand will increase by 1.9 million barrels per day by the end of 2022 and will amount to 99.6 million barrels per day, in 2023, taking into account the expected recession, the growth rate will decrease by 1.7 million barrels per day to 101.3 million barrels per day. Compared to the previous report, the IEA forecast for oil demand for 2023 was reduced by 470 thousand barrels per day. It is obvious that with such calculations, oil-producing countries in most regions of the world are not interested in a sharp increase in production.

On the other hand, at the beginning of September 2022, the Organization for Economic Co-operation and Development (OECD) countries had 243 million barrels of commercial reserves below their five-year average of 2.736 billion barrels.

It is not possible to rely on their own efforts to correct the imbalance: the EU countries (which produce from the North Sea) cannot increase production for technical reasons - the fields are depleted and the exploration and launch of new wells in 2023 are not realistic. Further reductions in global energy production may occur from December 5 this year, when the EU embargo on imports of Russian crude oil and a ban on its shipping will become fully effective, and another ban on petroleum products from Russia will kick in on February 5, 2023. Russia believes that the reduction of oil production in the OPEC countries and the embargo on Russian hydrocarbons contribute to keeping world oil prices at the same level in 2023: according to the forecast of Deputy Prime Minister Alexander Novak, the average price of oil next year will remain in the range of $100 per barrel.

Finally, despite the fact that last week America recorded an increase in oil reserves by an over-forecast 9.88 million barrels (up to 439.082 barrels), according to the American Petroleum Institute (API), oil production directly in the United States decreased by 100 thousand barrels per day, to the level of 11.9 million barrels per day. Therefore, according to the latest API forecasts, the oil market in 2023 will be relatively balanced, and despite the high degree of uncertainty, a sharp decline in prices cannot be expected.

Moreover, according to Bloomberg, the number of active oil rigs in the US has not increased as much as required, including the forecast for shale production has remained virtually unchanged. Accordingly, Bloomberg experts also believe that the oil market will look increasingly strained in the medium and long term, and prices should rise. At least the price decline next year will be relatively small, even if the most negative scenarios of the International Monetary Fund, the World Bank, and other global donor agencies predicting a detrimental impact of the recession on the energy market come true.

The near future will show which of the oil market scenarios will turn out to be the right one. For now, benchmark prices are trending upwards, with Brent holding just above $92. Meanwhile, Azeri light crude, despite some decline in October, continues to outperform Brent: last Friday, Azeri Light was traded at $97.98 per barrel on a CIF basis in Augusta, Italy.

Taking into account the recently submitted by the Ministry of Finance draft state budget for 2023, where income and expenditure items are significantly increased, it is very profitable for Azerbaijan to keep the average price of Azeri Light within the corridor of $90-100. Next year's budget significantly increases expenditures for social objectives, defence and security, and agriculture, a lot of money is reserved for the projects on the revival of the Karabakh region, and the additional revenue from oil and gas sales will be very helpful, helping to cover the budget deficit of more than 2.6 billion manats.

In order for this scenario to remain risk-free for the republic, the world average oil price should be as high as possible above Azerbaijan's budget cut-off price. However, the Ministry of Finance took recession risks into account in its projections for next year, and in case global oil prices fall, the projected annual average oil price is reduced from $85 to $50 in the parameters of the draft state budget.

However, such a negative scenario is unlikely, and IMF and WB experts, as well as the European Bank for Reconstruction and Development (EBRD), believe that high energy prices will support Azerbaijan's economic growth in the near term: 4.5% in 2022 and 2.5% in 2023. The same opinion is held by the country's government, which believes that, given the relatively high energy prices and the positive trend in the non-oil sector in the next four years, our country can count on the sustainable dynamics of economic development. In particular, Azerbaijan's GDP growth is projected at 2.7% in 2023, with a marked increase in 2024 to 4.1% and keeping moderate growth in 2025-2026 - 3.7% and 3.4%, respectively.