COST OF THE DEAL

Holding major international events in Baku is no surprise anymore. It was quite symbolic however that the 13th meeting of the OPEC+ Joint Ministerial Monitoring Committee (JMMC) and the 27th summit of the Joint Technical Committee (JTC) were held for the first time in Baku. Obviously, this confirms the significance of Azerbaijan for the most influential oil cartel in the world and the trust to our country due to its consistent policy and image of a reliable partner. The initiator of the forum in Baku was President Ilham Aliyev.

Implementation of the deal

The summit on March 17-18 gathered the representatives of fourteen states with only six of them being the members of the monitoring committee, namely Russia, Saudi Arabia, Kuwait, Venezuela, Oman, and Algeria. The rest of OPEC+ states are traditionally invited to participate in the meetings.

The main goal of the summit in Baku was to discuss the situation with the implementation of the deal reached on December 7, 2018 between OPEC and non-OPEC states to reduce oil production by 1.2 million barrels per day for six months (with the possibility of revision in April). Under the agreement, the member states agreed to cut the production by 800 thousand barrels per day (bpd) in the first half of 2019, while the non-member states of the cartel by half of this volume. Incidentally, Saudi Arabia and Russia accounted for the major share of the cuts—322 and 228 thousand bpd, respectively. Iran, Venezuela and Libya were exempt from the deal.

During the first two months after signing the deal, in January-February 2019, many countries demonstrated a high level of commitment. According to the cartel, the terms of the OPEC+ deal were delivered 90% as of February this year (compared to 83% in January). Saudi Minister of Energy Khalid al-Falih believes that in March the implementation of the deal can easily exceed 100%.

Saudi Arabia cut its oil production more than other OPEC member states. According to OPEC secondary sources, the kingdom removed 420 thousand bpd in January and 546 thousand bpd in February, reducing production to 10 million bpd instead of the 10.3 million as specified in the deal. In March, Saudis plan to go on further down to 9.8 million bpd, which means over-fulfilment of the deal by 2.6 times.

Among the ten non-OPEC countries, only Bahrain, Mexico, Oman and Kazakhstan could remain committed to the deal 100 percent in January-February. At the same time, the Kazakh Ministry of Energy promises a significant gradual decline in production starting from March due to the planned overhaul works at the Kashagan and Karachaganak fields. In January, Russia reduced production nearly by 50 thousand bpd, and in February - by 90-100 thousand bpd. Russian Minister of Energy of Alexander Novak expects that they will be able to reach the required level by the end of March-the beginning of April.

Azerbaijani promise

Azerbaijan also expects to improve its commitment to the OPEC+ deal in April. As part of the deal, Azerbaijan agreed to reduce oil production by 20 thousand bpd compared to the indicator of September 2018 (776 thousand barrels). According to indicators of January-February, Azerbaijan has not achieved the target set: in January, the daily oil production reached 793 thousand bpd, in February 2019 — 806 thousand barrels. According to the Ministry of Energy of Azerbaijan, Azerbaijan will reach the required level gradually as there is enough time for complete fulfilment of the deal.

"In December 2018, we assumed new obligations as part of the OPEC+ deal. However, we have not implemented them in full yet. We are actively working to fulfil our obligations and expect to improve our performance next month," Azerbaijani Minister of Energy Perviz Shahbazov said at the press conference following the Baku summit.

To fulfil its obligations, Azerbaijan will most likely suspend production at the Central Azeri platform scheduled for the second quarter of 2019 in the Azeri-Chirag-Guneshli field. The platform will stop operations for about fifteen days for maintenance.

Mr. Shahbazov also said that during two and a half years of cooperation within OPEC+, Azerbaijan has remained fully committed to its obligations. "Our intention is to continue the cooperation, to support the OPEC+ format in the future and to be its active participant. We can see that active participation of all the member and non-member states yields good results in terms of ensure the balance in the market," P. Shahbazov said.

Good results

The signatories of the deal rated the performance as positive. "We can see more stable prices; volatility is lower than it was before the OPEC+ deal," A. Novak said.

"The levels reached in February were excellent. UAE fulfilled its obligations by almost 119%. But every month we are trying to reach 100% on average. We expect that Russia improves its performance, and we are working with the Russian Energy Minister Alexander Novak. I can say that in general we are approaching the balance in the market. I am optimistic, as we can hit the balance this year. We can see a recovery," UAE Energy Minister Suhail al-Mazroui said.

Indeed, thanks to the commitment of member and non-member states to the terms of the deal, oil prices have remained at the highest levels since November 2018. May futures for North Sea Brent crude oil is around $67.72 per barrel while WTI crude oil reaches $59.84 per barrel.

At the same time, experts predict a further increase in oil prices in the remaining months of 2019 due to the expected deficit in the market. Analysts from Citigroup Inc. raised the original forecast for the average annual price of Brent oil for 2019 from $64 to $70 per barrel, and their colleagues from Morgan Stanley for Brent crude to $70-75 per barrel in the next year. According to experts, the rise in prices is accompanied by improved profitability of oil refineries, which suggests that it is going to be a long-term rally.

By the way, OPEC Secretary General Mohammed Barkindo believes that not only the member states but also U.S. shale oil producers benefited from the OPEC+ decision to lower oil production. "They said they benefited from our decision and called on OPEC+ to continue efforts to stabilise the market," Mr. Barkindo said.

Saudi Arabian Energy Minister, Khalid al-Falih, supported the extension of the deal for the remaining half of the year: "We need to continue to limit production in the second half of the year." He noted that the U.S. oil reserves are "filled to the brim", and the reduction of this surplus remains the main goal of OPEC+ for balancing the market. "We need several months to remove the surplus stocks from the market," said Khalid al-Falih.

Impact of American sanctions

If earlier Riyadh proposed to extend the deal in April, then later, in Baku, the Saudi minister suggested that the decision to extend the OPEC+ deal could already be made in June. According to Mr. Al-Falih, OPEC does not want to change the course while oil reserves continue to grow and the effect of the U.S. sanctions (against Iran and Venezuela, R+) is unclear.

In December 2018, OPEC + ministers adopted a decision to reduce oil production by 1.2 million bpd in the first half of 2019 and immediately assigned the date of the next extraordinary meeting in April for a possible revision of the decision to taked forward measures to stabilise the market, if necessary.

Incidentally, the deadline for exemptions recognised by the U.S. Treasury for a group of countries that could import Iranian oil not running the risk of being hit by sanctions ends in early May. Potentially, the volume of this import is about 1 million bpd.

"Of course, sanctions shape negative trends in the market by completely distorting the image of the supply-demand balance. The sanctions are illegal because they are one-sided and introduce confusion to the market. They are imposed to promote individual products of the country that introduces sanctions and introduces uncertainty," A. Novak said in Baku before the OPEC+ meeting.

In March 2018, President Donald Trump reacted extremely negatively to the increase in oil prices and rejoiced when they declined. At the end of February 2019, he expressed dissatisfaction with high oil prices and urged OPEC to limit measures aimed at reducing production and supporting prices. Following the Baku summit, Mr. Trump he did it again. It is noteworthy that, unlike his previous posts on the same topic, he thanked the members of OPEC in advance. "Very important that OPEC increase the flow of oil. World markets are fragile, price of oil getting too high. Thank you!" the American president wrote on Twitter.

From April to May

Meanwhile, the participants of the Baku summit agreed to hold an extraordinary ministerial meeting of OPEC+ not in April, but in May in Jeddah, Saudi Arabia. "Given that the fundamental factors of the market are unlikely to change significantly in the next two months, the monitoring committee accepted a recommendation to postpone the OPEC+ ministerial summit, originally scheduled for April, until May 2019 before the OPEC conference scheduled for June 25, during which a decision will be made on production targets for the second half of 2019," press release of the JMMC meeting said.

On the other hand, there are still factors making a critical uncertainty for the global oil market. Therefore, the monitoring committee underlines that all participating countries are jointly responsible for restoring market stability and preventing the recurrence of any imbalance. Representatives of OPEC+ countries assured the committee that they will remain committed to the terms of the deal.

JMMC also adopted a number of individual decisions. Thus, it recommended the nomination of Kazakhstan, Iraq, Nigeria and the UAE for JMMC membership. Also, Oman decided to leave the OPEC+ committee. Furthermore, the committee approved the adjustments to oil volumes of three countries, namely Brunei, Malaysia and Ecuador. In total, the three countries agreed to cut oil production by 34 thousand barrels.

As Azerbaijani President Ilham Aliyev predicted before the summit, one can expect that the OPEC+ ministerial meeting in Baku will contribute to stabilising oil prices and maintaining the relative balance in world oil markets until at least the talks in June. Positive mood of the main exporters demonstrated at the March talks gives hope for setting an optimistic price corridor for Azerbaijan at $60-70.