REDUCTION FOR GROWTH

Recently, quite an interesting event took place in the area of nuclear power development: Chinese authorities authorised the operation of the world's first thorium-powered nuclear power plant (NPP). The reactor and the accompanying two-megawatt power plant were constructed in Wuwei, the Gansu province, on the outskirts of the Gobi desert. The South China Morning Post estimates that China has enough thorium reserves to supply the country with electric power and heat for 20,000 years. If the tests prove promising, a pilot 400MW thorium-powered NPP will be built by 2030, which, according to experts, will be an important step towards expanding nuclear energy capabilities.

While scientists are figuring out the new ways of using alternative energy sources, fossil fuels are still part of experiments. Thus, on June 4, at another hours-long meeting, OPEC+ decided to once again cut oil production quotas from 41.9mbd to 40.46mbd.

Under the new agreement, quotas will not change for Saudi Arabia, Iraq, Kuwait, Algeria, Kazakhstan, Oman and South Sudan. Meanwhile, Azerbaijan agreed to reduce its oil production for 2024 by 133kbd.

The goal is to prevent the fall of oil prices on the global market.

Saudi lollipop

At its regular ministerial meeting in Vienna, the OPEC+ thus decided to reduce oil production quotas for 2024 by a further 1.4mbd. In parallel, OPEC and non-OPEC member states pledged to reduce oil production to 24.994mbd and 15.469mbd, respectively.

The new agreement for the current year has not changed anything. Under the current 2023 limits, the oil production is expected to be 41.856mbd: 25.416mbd by OPEC and 16.440mbd by non-OPEC member states. It is planned to achieve this level by cutting oil production by 2mbd from October 2022 levels plus a voluntary reduction of a further 1.66mbd by the nine OPEC+ countries (Russia and Saudi Arabia, 500kbd each, Iraq, UAE, Kuwait, Oman, Algeria, Kazakhstan, Gabon) in May-December.

The same nine countries also decided to extend the voluntary restrictions for the whole of 2024. The quota reduction next year will affect Russia, Angola, Congo, Equatorial Guinea, Nigeria, Azerbaijan and Brunei. At the same time, the UAE and Mexico will be able to increase production.

As an extra bonus Saudi Arabia has unexpectedly decided to reduce its production by a further 1mbd in July, or 10%, producing 9mbd, which is an unprecedented decision for recent years. It was announced by the Saudi Energy Minister Prince Abdulaziz bin Salman after the ministerial meeting, calling the surprise a "Saudi lollipop" and explaining that the cut was for one month but "could be extended". The decision best illustrates Riyadh's determination to lift oil prices above $80 per barrel, which can push it to going for such unprecedented cuts. But if it has the desired effect, the other OPEC+ members will benefit too. However, there is a flip side to the story - in case of a successful outcome, Saudi Arabia will have a strong argument in negotiations with its counterparts to convince them to take the same step. For now, it has to act alone. There were no other participants in the June meeting willing to offer the same "lollipop".

Summing up the meeting, the Saudi minister called the new agreement "unprecedented" and able to provide more transparency on the market. Perhaps this is Riyadh's way of hinting that it hopes for clear, rather than empty, fulfilment of promises to reduce oil production by some of its partners in the OPEC+ deal.

The Saudi minister did not comment on how he sees supply and demand on the market: "We are taking safety measures and will continue doing so until we see clarity and stability in the market". He stressed that OPEC+ and Saudi Arabia in particular are willing to do whatever is necessary to bring stability to the oil market.

At the same press conference, Russian Deputy Prime Minister Alexander Novak said that Russia and Saudi Arabia had no disagreement on the OPEC+ deal. "For many years now, our agreement has been working in the interests of the market, in the interests of signatory countries. I would say it is in the interests not only of the exporters, but also of the producers. Of course, there are always preliminary decisions, but nevertheless, we all come to common agreements," Novak said.

UAE Energy Minister Suhail Al-Mazroui acknowledged that he had been pushing the idea increasing production, as the country had long had the capacity to do so and had repeatedly raised the issue. "It is a compromise agreement," he said.

Azerbaijani Energy Minister, Parviz Shahbazov, said that his goal was to balance the oil market and prevent volatility from having a negative impact on the development of the oil sector.

"I believe that the current OPEC+ decision will provide the necessary support to the oil market," Shahbazov said confidently.

The next OPEC+ meeting is due to take place in Vienna on November 26. The OPEC+ monitoring committees will meet every two months to discuss the market situation.

Unstoppable quotes

Contrary to the latest OPEC+ decision, we do not observe an upward trend in the current oil prices. Therefore, prices can drop well the second quarter in a row amid ample market supply as well as expectations of weaker demand amid tightening of monetary policy by the world's biggest central banks.

The price of Brent crude is currently around $76 and WTI sells at $70-72 per barrel.

Experts believe that Saudi Arabia's initiative to reduce production by a further 1mbd from July can push prices up.

Rystad Energy estimates that additional production cuts by the Saudis will widen the global market deficit to 3mbd in July, which will support prices in the coming weeks. "Production cuts reduce downside risks but do not add to confidence that demand reaches expected levels in the second half of the year," Rebecca Babin,  Senior Trader for CIBC Private Wealth, said.

Nikolai Shulginov, Russian Energy Minister, believes that voluntary cuts in oil production by Russia and a number of other producing countries will balance the market and boost oil prices by the end of this year. "Voluntary production cuts are necessary for balancing the market. As a result, the demand will increase, we believe. And I think prices may increase in the fourth quarter. So we don't expect a substantial budgetary loss due to voluntary cuts," Shulginov  said.

Meanwhile, fewer analysts believe prices will rise to $100 per barrel. Many leading financial institutions have significantly lowered their oil forecasts for the current year, making it clear that only major geopolitical events can contribute to a significant jump.

In the meantime, boosting prices is not enough; holding them at that level is more important. In this case, we can expect more action, especially from Saudi Arabia. However, a response will also follow from OPEC+, if prices fall.

60 years later

The Organisation of Petroleum Exporting Countries (OPEC) celebrated its diamond jubilee, the 60th anniversary. The celebration was originally planned for September 2020. However, it was postponed several times due to the COVID-19 pandemic and the associated health and travel implications. Celebrations were eventually held on June 16, 2023 in Baghdad.

Together with the OPEC Secretariat, Iraq has developed a celebratory programme including various cultural events.

The ceremony was attended by Iraqi Prime Minister Mohammed al-Sudani, as well as senior Iraqi government officials and OPEC representatives, including the Iraqi Oil Minister Hayan Abdulghani, Saudi and UAE energy ministers, Azerbaijan Deputy Energy Minister Kamal Abbasov and OPEC Secretary General Haitham al-Ghais.

Over 60 years, OPEC has managed to maintain, if not the power, but effectiveness and influence over the oil market. Through its alliance with a number of states outside the cartel, it has only strengthened its position and continues to play a leading role in regulating prices on the world market.

50-60 years ago, only few would have imagined that Azerbaijan would become OPEC's close friend, let alone a member of the family, that the OPEC Secretaries-General would visit Baku to discuss cooperation, talk about the country's role in regulating the global oil market and ensuring a balance between supply and demand. However, the reality is exactly that: two days after the anniversary celebrations in Baghdad, Haytham al-Ghais made his first visit to Azerbaijan as the new OPEC Secretary General.

The aim is to increase cooperation with Azerbaijan. This is a case where the volume of oil production does not matter at all – far more important is the status of a reliable partner. Azerbaijan is one of the few countries in the OPEC+ alliance that has been faithful to all its obligations under the agreement to limit oil production. Apparently, it is the reliability and fulfilment of their promises that have been the key to the success of our country's cooperation with the cartel.

Mr. Al-Ghais was received by Azerbaijani President Ilham Aliyev and held meetings with Energy Minister Parviz Shahbazov and SOCAR President Rovshan Najaf. No details of the talks were shared. Official reports provide only the issues discussed during the talks: cooperation between Azerbaijan and the OPEC Secretariat, cooperation within OPEC+, the role of the country in regulating the oil market, preventive measures to ensure stability in the market, the importance of applying modern technologies in the oil and gas sector to minimise the negative impact on the environment.

In a meeting between President Ilham Aliyev and Haytham al-Ghais, Azerbaijan discussed the role of the OPEC+ mechanism in the current global oil market and noted the contribution of the current format of cooperation to ensuring its stability.

The parties also discussed future investment in the oil and gas sector, which is of great concern to many market participants, and underlined the importance of investing in the sector.

Speaking at the opening of the Baku Energy Week in early June, Ilham Aliyev pointed to the rash decision of some international financial institutions to cease funding for fossil fuel projects due to the transition to green energy, noting the key importance of gas for energy security.

Aliyev and Al-Gais expressed concern about the decline in oil and gas investment amid rising energy demand as a result of the growing global economy.

OPEC predicts that global oil demand will return to its pre-surge levels of 101.9-102mbd by the end of 2023, although investment in the oil industry have yet to recover – from about $350-400b today to $500-600b annually before the COVID-19 pandemic.

OPEC expects energy demand to grow in the future, and meeting it will require significant investment.

"We believe it is important that oil fuels the increasing energy demand, which we estimate will be around 23% by 2045. Demand for oil will increase by almost 13mbd compared to current indicators. 13mbd by 2045 still requires significant investment," said the OPEC Secretary General.

He said as much as $12.1 trillion would be necessary to meet rising demand between now and 2045.

Going back to the June 4 agreement, Baku again supported the decision to reduce oil production. Azerbaijan's oil production quota under the OPEC+ deal will be 551,000bpd in 2024, compared to 684,000bpd in 2023. Thus, the country pledged to reduce oil production next year by 133,000bpd.

Azerbaijan's liquid hydrocarbon growth comes from condensate, which is not counted in the OPEC+ deal calculations, so Azerbaijan should have no problem meeting its commitments.