INAPPROPRIATE REACTION

A number of oil-producing countries agreed to limit their appetites for another nine months to ensure an increase in oil prices. The deal reached in December 2016 between 13 OPEC member-states and 11 non-OPEC members to cut production by 1.8 million bpd between Jan-Jun 2017 played a role in securing oil prices within $45-55. However, this price corridor has significantly activated third-party producers, not signatories to the agreement, and primarily the U.S., for which the extraction of shale oil became profitable.

Therefore, the hopes of the oil-producing countries for a significant reduction in oil reserves, a reduction in the difference between supply and demand, were not fully justified.

It was not possible to achieve a market balance largely because some individual producers have failed to fulfil their obligations to cut oil production. In particular, Russia was able to reach the agreed volume of reduction by 300 thousand barrels only by May 2017.

New term

It was necessary to extend the term of the agreement with the possibility of expanding both the number of countries and the volume of oil cuts. This was done to support the trend of reducing oil stocks and the market was waiting for this move by OPEC.

But the extension of the period of reduction down to volumes agreed in December 2016 cannot ensure a sharp increase in oil prices up to $60.

As a result, the meeting of 24 countries interested in reducing the oil volumes held on May 25 in Vienna did not justify the excessive optimism of the market. It was agreed to extend the agreement by the agreed 1.8 million barrels for another 9 months, namely until Mar 2018. However, the oil prices immediately began declining and fell to almost $50 (Brent). At first glance, the fall in global oil prices can be defined as an inappropriate reaction, since the achievement of an agreement would only move the prices up. Market expectations were more optimistic and aimed at a significant reduction.

The current arrangements, most likely, only saved the oil market from the collapse of oil prices below $40 per barrel, and the extension of the agreement will allow it to keep them within $45- $55.

Azerbaijan supports the deal

However, the Azerbaijani Minister of Energy Natig Aliyev expressed his optimism about the rise in global oil prices. During the 172nd OPEC ministerial meeting in Vienna on May 25, 2017, Azerbaijan joined the agreement to extend the agreement to reduce oil production by the end of March 2018.

According to the minister, the results of the Vienna agreement concluded in December 2016 allowed to stabilize oil prices at $50-55 per barrel. This was facilitated by the fulfillment of the commitments undertaken by the 24 countries, and according to the preliminary estimates of the Monitoring Committee, the OPEC countries cut oil production by 104%, while the non-member states - by 102%.

During the meeting in Vienna, the participants did not discuss the issue of additional reduction of volumes, as the participants expect that the extension of the terms of the Vienna agreement will stabilize the oil prices within $55-60 per barrel.

Azerbaijan has agreed to reduce the oil production by 35,000 bpd. "The extension of the agreement for another nine months fully meets the interests of Azerbaijan. At the same time, Azerbaijan does not see any problems in implementing this agreement until the end of 2018," said Natig Aliyev.

The next OPEC meeting is expected to be on November 30, 2017.

Shift from oil to gas

It should be noted that for Azerbaijan, the undertaken responsibilities to reduce oil production should not have any serious consequences for the national economy. In recent years, the country has clearly seen a decline in oil production due to the depletion of productive strata in the leading fields. Along with this, any price above $50 per barrel can be considered favorable for the further research and development of new deposits.

The leadership of Azerbaijan has announced a shift from the oil era to the development of gas and condensate industries. In the future, it is planned to open a number of large gas condensate fields and a significant increase in natural gas production in Azerbaijan.

One of the steps in accelerating the discovery of new deposits was the commissioning on May 18, 2017 of the new Heydar Aliyev semi-submersible drilling rig (SSDR). President Ilham Aliyev said during the commissioning ceremony: "This is a historic event in the oil industry of Azerbaijan, as so large a drilling rig has not been built in Azerbaijan so far. We canalize the revenues from oil industry to such giant projects. The funds invested by both the State Oil Fund and SOCAR in the implementation of this project amount to approximately $1 billion."

The new SSDR will be used at the promising gas condensate field Absheron, as well as the perspective projects at Umid, Babek, and Garabagh fields.

"This giant installation can conduct drilling operations anywhere. The oil industry is probably well aware that in Soviet times it was impossible to reach locations where the water depth exceeded 200 meters. Perhaps that is why we managed to preserve the Azeri-Chirag-Guneshli and Shah Deniz fields for independent Azerbaijan today. If at that time there were such opportunities, then we would have missed these deposits. As well as the reserves of the vast majority of our main deposits on land would have been depleted during the times of Tsarist Russia and the Soviets. But with the help of this installation, we can conduct drilling operations anywhere. This installation can work at sea depths up to thousand meters. As I was informed, the depth of drilling is 12,000 meters," said President Aliyev.

Shale oil is a real problem

The fact that the global oil prices did not respond to the decision of oil exporters to extend the reduction agreement shows that this process also depends on the U.S. and Canada, the key producers of shale oil.

In fact, the decision of 24 oil-exporting countries to reduce oil production by nine months should help to remove the oil surplus in the market, which is estimated at 253 million barrels based on the average level of last five years.

But the implementation of these plans may prevent steps to increase the production of shale oil in the U.S. and Canada. The current global prices contribute to the development of shale deposits, since the oil shale mining is already profitable at $40-45. Accordingly, the decision to cut production, on the one hand, leads to an increase in oil prices, and on the other - stimulates the production of shale oil, which presses on prices, contributing to their decline.

Therefore, the potential of OPEC member-states to influence global oil prices is reduced. A decrease in the share of the leading oil producers in the oil market may lead to a new round of tension within the OPEC countries, as well as to another imbalance in the market in case of obligation violations and the desire to "pour the world" with cheap oil. After all, the agreement to reduce oil production is mainly based on honorable understanding without any sanctions on violators anyway.

Thus, the current arrangements represent a sort of procession on a rope over the price fall. If the incumbent U.S. president Donald Trump is unlikely to bring prices down to $25 per barrel, then the steps of the new White House administration to lift all environmental bans may prevent oil prices from reaching the long-awaited $60 per barrel.