ARITHMETIC OF REDUCTION

A principle of “more production, more profit” has proved to be illogical, at least in oil industry. Due to oversupply of oil in world markets, even the main exporters of hydrocarbons have started to offer openly dumping prices for their product to be able to sell it as soon as possible.

Failure to cut oil production by the leading producing countries resulted in a drastic drop of oil prices in January 2016 (even below $30 per barrel), which was more than three times in comparison with the level of 2014. Global crude oil stocks have set a new record. Not only the storage tanks but also large tankers were fully packed with oil in anticipation of "fair" oil prices.

A slight decrease in oil production in the North Sea and the reduction of drilling rigs at the most expensive shale deposits in the United States have not affected the global market prices. The crisis with low oil prices took too long and had quite a painful effect on financial position of most of the oil-exporting countries.

To improve the situation, 24 oil-producing countries agreed in December 2016 to reduce oil production by 1.8 million barrels per day (bpd) for the upcoming six months. In particular, 13 OPEC countries agreed to cut oil production by 1.2 million barrels and 11 non-member countries by 558 thousand barrels.

Implementation of Russian commitments

During the meeting chaired by the Russian President Vladimir Putin on February 1, 2017, the Russian Energy Minister Alexander Novak introduced an initial report on the implementation of reduction plan by leading oil producing countries.

As Novak mentioned, oil production in January already reached about 1.4 million bpd while some countries have reduced volumes even more than initially planned. In January, Russia decreased oil production by 117 thousand bpd and the agreed reduction by 300 thousand bpd is expected in April.

"We can already see the effectiveness of agreements and decisions, as we note the stabilization of prices at $55 per barrel. According to leading analytical agencies, the price is much closer to a fair price, about $10-15 higher than it would be without the deal. We can also witness a decrease in price volatility. In January, the price fluctuations were in the range of $5. The overall investment attractiveness of the industry is recovering gradually. For the first time in the last three years, all market actors expect to increase investments, which will help to avoid the collapse of production in the future", said Novak.

The first meeting of the Monitoring Committee, including representatives of the Russian Federation, Oman, Kuwait, Algeria and Venezuela, was held on January 22 in Vienna. It showed that all countries were determined to follow the agreement, as it is in the interests of both producers and consumers. The rebalancing of the oil market, subject to full compliance with existing agreements in the first half of the year, will allow reduction of oil volumes to the average of five years by the middle of 2017.

Azerbaijan implemented obligations in full

According to the Azerbaijani Ministry of Energy, Azerbaijan has prepared a report on the implementation of commitments made in January 2017 and submitted it to the Joint Monitoring Committee of OPEC.

According to report, a daily oil production in Azerbaijan was 793.9 thousand barrels. Thus, Azerbaijan has fully complied with its obligations to reduce daily production by 35 thousand bpd. In particular, prior to the signing of the agreement, Azerbaijan was producing 829.1 thousand bpd.

The studies by the Ministry of Energy show that a decision to cut production had a positive impact on increasing and stabilizing oil prices.

Implementation of commitments by Azerbaijan confirm the accuracy of oil production forecasts and highlights the interest of countries in the implementation of measures necessary to stabilize oil prices by OPEC.

Certainly, the reduction of oil production cannot be considered a positive trend for Azerbaijan but in recent years the country experiences a decline of production volumes associated with natural field depletion. Both SOCAR and BP are taking measures to stabilize oil production. In such circumstances, a temporary production cut to increase prices is quite a justified step. Azerbaijan’s contribution as an oil-exporting country will turn into a generous reward as a result of increasing global oil prices.

According to SOCAR, the average price of Azerbaijani oil shipped from Ceyhan in January 2017 was $55.14 per barrel, which is by 70% more than in January 2016. As a result, despite production and exports drop (1.4 million tons in January 2017 versus 1.51 million tons in January 2016), the export revenues have increased by more than $200million, which is the effect of rising oil prices.

Prospects for price growth remain in vague

Currently, the most discussed topic is when adopted cutback measures ensure the overcome of psychological barrier of $60 per barrel. Some experts believe this threshold unreachable despite the production cut measures taken by OPEC. The main obstacle is the leveling effect of the reduction for Canadian and the US oil. Recently, both countries have been increasing the number of drilling rigs and production of shale oil, respectively.

Also, many experts note that during his pre-election campaign, the US president Donald Trump promised to lift all restrictions on the development of energy resources and support the American companies.

Anyway, currently all 24 oil-exporting countries have no other option but to continue reducing oil production in order to achieve the main goal - the increase of currency profits from global oil sales.