PAUSE UNTIL APRIL

This is the second year in a row when the members of the Organization of Petroleum Exporting Countries (OPEC) and non-cartel members agreed to cut oil production by the end of the year, which causes a serious stir in the oil market. The current meeting of the OPEC and non-OPEC ministers took place on December 7 and was remarkable for the outcome, which exceeded all expectations.

New deal

Three days of difficult discussions ended with a new deal to cut oil production by 1.2 million barrels per day (bpd). OPEC member states agreed to reduce production to 800 thousand bpd (2.5% of the production volume of each member state), while non-member states agreed to reduce production to 400 thousand bpd (2% for each non-member state). Reduction takes place starting from October 2018. The agreement was extended for six months with a possible revision in April 2019. Iran, Venezuela and Libya were exempted from the deal.

Russia's Minister of Energy, Alexander Novak, regarded the new deal as a good signal for the market, indicating continued cooperation within OPEC+ and the ability of oil-producing countries to respond to any situation.

“The situation on the market remains difficult. We are going to see an overabundance of oil during the first and second quarters of 2019... Oil cut should provide a better situation to balance the market. I think all countries will make every effort to make a deal,” Mr. Novak said.

According to the Russian minister, the signing of a new deal within OPEC+ will allow balancing the market during the first and second quarters of 2019. “At least, we hope that the prices currently formed on the market will remain. Without the decision adopted today, prices could drop significantly,” A. Novak believes.

At the same time, the Russian minister called a price range of $55-65 per barrel acceptable for oil producers and consumers. “They could create conditions for the development of the industry, preventing overproduction and shortage of oil in the market,” A. Novak believes.

Saudi Arabian Energy Minister Khalid al Falih warned however that OPEC+ is not going to cut production for too long to prevent significant growth in shale oil production.

Saudi Minister reacted to the statement of the US President Donald Trump not to reduce production. “Oil consumers, including the United States, should be pleased that we bring stability to the market,” Khalid al Falih said. In his opinion, oil and gas producers in the United States “sighed with relief” because OPEC+ “provide some certainty for 2019” and companies can form their budgets. According to the Saudi minister, “one of the biggest catastrophes” is that the United States has become one of the largest oil producers, but it does not participate in the negotiations.

Iranian President Hassan Rouhani generally regarded the decision of OPEC to reduce oil production as a failure of the US intervention policy. “Despite US attempts to intervene in OPEC and undermine the balance, thanks to the resistance of member countries and the efforts of our Minister of Oil (Bijan Zangane, R+), their plans failed,” the Iranian leader concluded.

Azerbaijan supports expensive oil

Azerbaijan will also contribute, albeit modestly, to the implementation of new agreements within OPEC+. Under the terms of the deal, Azerbaijan will reduce oil production by 20 thousand barrels per day from 2019, based on October 2018 volume of 783 thousand bpd, to 763 thousand bpd.

Evaluating the outcome of the OPEC+ ministerial meeting in Vienna, Azerbaijani Energy Minister Parviz Shahbazov called the decision to reduce oil production until April 2019 very important for the development of the oil industry. “Recently, under the influence of political and economic factors, the price of oil has fallen, the process has acquired a long-term character. Overproduction and the forecast decline in the global economy meant a fall in prices in the following year as well. OPEC+ could support the oil market in this case. Today’s decision was a very important step for oil producers, the oil market and the future of the oil industry,” Shahbazov said.

By the way, Azerbaijan has always supported the measures to stabilise oil prices and clearly fulfilled its obligations under the first OPEC+ deal, reached on December 10, 2016. As part of these agreements, Azerbaijan pledged to reduce oil production by 30 thousand bpd, thereby maintaining it at a level no higher than 834 thousand bpd. In 2017, the average daily oil production in Azerbaijan reached 781.9 thousand barrels, while the average daily production in January-November 2018 hardly exceeded 793 thousand barrels. No doubts that Azerbaijan will fulfill new obligations to maintain daily production at 763,000 bpd. Of course, the reduction in oil production will affect the statistical indicators in 2019. However, the OPEC+ deal is valid until the end of March next year and it is unlikely that its further extension is expected. Therefore, Azerbaijan may well compensate for this reduction in the remaining months of the year. Still, the dividends that Azerbaijan can get from maintaining oil prices at $60+ are worth making certain sacrifices. Thus, the government expects a growth of assets of the State Oil Fund of Azerbaijan (SOFAR) during 2019, subject to the average price of oil at $60 per barrel.

“With an average oil price at $60 per barrel, SOFAR’s assets, after meeting all budget obligations and deducting their own expenses, may increase by $2.5 billion by the end of 2019 compared to the indicator of 2018. If oil prices are around $45 per barrel, the fund’s assets will not change,” Finance Minister Samir Sharifov said.

He pointed out that the change in oil prices can affect only the parameters of the consolidated state budget, which is created mainly on the incomes of SOFAR. “As for the parameters of the state budget for 2019, the decline in oil prices can only affect income from income tax from SOCAR and the Azerbaijan International Operating Company,” S. Sharifov said.

State Oil Fund expects that its assets will grow to $50.8 billion by 2023, provided that the average oil price remains at $60 per barrel. According to the adviser to the head of the Fund Nargiz Nasrullayeva-Muduroglu, in 2015-2016 there was a decrease in the assets of SOFAR, which was associated with a sharp drop in oil prices on world markets. “However, the rise in prices, combined with the successful optimisation of public budget expenditures, allowed starting in 2017 a quick recovery of the fund’s assets, which are now at a record level of $38.9 billion,” Nasrullayeva-Muduroglu said.

Successful operation

Throughout 2018, oil prices have gone up steadily due to a sharp drop in production in Venezuela and promises from the United States to impose tough sanctions against Iran. By early October, the price of Brent crude oil jumped to $80 per barrel. However, by the end of November, oil prices fell below $60 following the adoption by the United States of sanctions on Iranian oil. According to sanctions, Washington allowed China, India, Italy, Greece, Japan, South Korea, Turkey and Taiwan to import Iranian oil for another 180 days, gradually reducing the volume of purchases. After that, prices sharply dropped reaching the level of $58-59 per barrel. During the first week following the OPEC+ new deal, the price has remained steady at $60 per barrel.

In any case, the extension of the deal can certainly be considered another successful joint operation of OPEC member and non-member states, which will calm the market for a while. This period should be enough to agree on the further course of actions, for example, to sign in the first quarter of 2019 a charter on the further cooperation of OPEC and non-OPEC members.

In addition, OPEC may still be able to involve new oil producers in joint efforts to stabilise the oil market. Thanks to these efforts, a number of new countries have joined OPEC as observers including Chad, South Africa and Uzbekistan.

“We welcome the new countries that will join us and will work responsibly to balance the market and preserve this hardly achieved stability,” UAE Oil Minister Suhail Muhammad al-Mazrui said. This announcement, made at the OPEC+ ministerial meeting in Vienna, had a special meaning amidst the unexpected statement by Qatar about leaving the cartel, which was made by the country's Energy Minister Saad Sherida al-Kaabi. “Qatar will leave OPEC on January 1, 2019 and will not implement OPEC agreements. We do not have a huge oil potential, we are very realistic in this. Our potential is gas,” al-Kaabi said. According to Bloomberg, Qatar is 11^th in terms of oil production in OPEC, producing 610,000 bpd, which is about 2% of the total OPEC production.

Summing up, the last move of OPEC to balance the oil market this year was very spectacular. No doubt that 2018 will be a remarkable year in the history of this organization. We can hope that 2019 will be less rush and dramatic for oil-producing states and their potential customers, and in general the market will present no price surprises.