BALANCE REACHED

In general, the passing year was fruitful for the oil market. The decision of the member and non-member states of OPEC to reduce oil production, as agreed in December 2018, made a significant contribution to the overall development of the industry. Although the extension of the deal until April 1, 2020 did not push prices up significantly, it nevertheless balanced the market and saved it from collapse.

The fact that the factors putting pressure on the oil market have not been eliminated since the inception of the deal proves that OPEC+ took relevant measures. These factors include the ongoing trade war between the two largest economies in the world - China and the US, fears of slowing down global economic growth, forecasts associated with the weakening of oil demand, continuing geopolitical tensions in the world and the growth of American oil industry. Thanks to the OPEC+ deal, the average prices of Brent crude oil and WTI (Texas Light Oil) since the beginning of 2019 have remained almost stable: $64.08 and $56.79 per barrel, respectively.

Deal breakers

Apparently, the desire to maintain this success for longer was dictated by the OPEC+ decision of December 6 to additionally reduce oil production by another 503,000 bpd: 372,000 bpd for OPEC countries and 131,000 bpd for non-member states. The current OPEC+ deal provides for a reduction of oil production by 1.2 million bpd by April 1, 2020 compared with the level of October 2018. According to the new deal, which will enter into force on January 1, 2020, the total reduction in oil production will increase to 1.7 million bpd. At the same time, Iran, Venezuela and Libya retained the exemption from the transaction.

"We came to the conclusion that in a period of falling demand, it is necessary to further ensure oil cut. A decision was made by the OPEC member and non-member states to further reduce production by 500,000 bpd by the end of the term of the agreement," Russian Energy Minister Alexander Novak said.

Long before the meeting, various assumptions were made about the possible steps of OPEC+ to maintain the balance in the oil market. The most likely option was the extension of the terms of the current agreement by 3, 6 or 9 months. That is why the choice in favour of further reducing oil production was quite unexpected. Moreover, not all participants fulfilled the obligations under the current OPEC+ transaction. The list of "violators" was topped by Iraq (less than 50% fulfilment of the deal in September), Gabon (-200%) and Nigeria (-228%).

During the September meeting of the OPEC+ Ministerial Monitoring Committee, ministers of Nigeria and Iraq said that in October they would bring the fulfilment rate to 100%, which could reduce oil production by another 400,000 bpd.

Russia does not fulfil the obligations on the OPEC+ deal either (93% in October, only 85% in November). This is because initially the country increased oil production to solve the problems caused by the pollution of the Druzhba oil pipeline. In October, Russia had to increase gas production due to cold weather, which led to an increase in condensate production, which is added to the total oil production volume. However, Russia was able to solve the situation by initiating at the OPEC+ meeting the issue of eliminating condensate from production calculations. Thus, by eliminating the condensate, Russia will be able to avoid accusations of non-fulfilment of obligations. "We adopted the recommendations to exclude condensate from monitoring and switch to monitoring by the OPEC methodology. The cartel does not take into account condensate but only oil. The same methodology will be taken into account for non-member states of OPEC," Mr. Novak said.

According to A. Novak, Russia intends to reduce its oil production by 228,000 bpd in December compared to October 2018. The new quota for the reduction of oil production in the first quarter of 2020 will already reach 298,000 bpd without condensate.

Royal "tasks"

Saudi Arabia, Algeria, Kuwait, Angola and Ecuador overfulfilled their obligations. At the same time, Riyadh made the main contribution to the decrease in oil production in 2019 exceeding its obligations by almost 500,000 bpd. Saudi Arabian Energy Minister Prince Abdulaziz bin Salman explained that under the new agreement, the reduction quota for the kingdom will increase by 167,000 bpd, to 10.1 million bpd, but the country will continue to voluntarily exceed its obligations under OPEC+ by 400,000 bpd producing no more than 9.7 million bpd.

"We want the total reduction (for OPEC+) to be 1.7 million bpd, so that our partners also commit themselves. Among other things, we will reduce production by another 400,000 bpd, which will result in a total reduction of the OPEC+ countries by 2.1 million bpd. Our voluntary reductions will continue only if we clearly understand that everyone else is committed to the terms of the deal," the Saudi minister said.

Riyadh's interest in reducing oil production is quite clear. Efforts to support the growth of oil prices are aimed not only at reducing the country's budget deficit, but also at the successful IPO of the state oil and gas company Saudi Aramco, 1.5% of which the Saudi authorities plan to sell. It is expected that the Saudi government as a seller will receive at least $25.6 billion from the deal, if successful. This transaction will be the largest in history, breaking the record of the Chinese Internet giant Alibaba, whose volume reached $25 billion in 2014. It might be that the shares of the Saudi giant are sold at one of the international stock exchanges - New York, London, Hong Kong or Tokyo. So, the best that the country's authorities can do for now is to maintain oil prices high.

According to analysts, if OPEC+ refused to have an in-depth reduction in oil production, the year would end at $60-64 per barrel, and a sharp drop in oil prices would not have occurred. A new deal to reduce production will allow closing the year in the range of $64-68 per barrel.

"Riyadh decided to play safe and provide support for oil quotations. The Kingdom will continue to do everything to ensure that Saudi Aramco remains as expensive as possible, which means that the cost of Saudi Aramco will find permanent support in the actions of the authorities in the oil market," Anton Pokatovich, Chief Analyst of BCS Premiere said.

Cooperation of leaders

But no matter what drives Riyadh, the main thing is that the final result meets the interests of all parties to the transaction, and rising oil prices just provide a high level of export revenue for oil-producing countries. Apparently, for this reason, the decision to further reduce oil did not cause heated debates. The position of Russia, a leader among non-member states of OPEC and a strategic partner of Saudi Arabia, also played an important role in this matter. Actually, the position of Moscow was more or less clear already in mid-November, when Russian President Vladimir Putin at a press conference in Brazil announced the need to continue further cooperation with OPEC countries.

"We have established a very constructive dialogue with OPEC. We understand the reason for such a tough stance, including that of our friends in Saudi Arabia: with the IPO Aramco. Everyone understands this. But it is not important. They have their own current interests, and we should respect this decision, as we currently do," Mr. Putin noted.

"Russia affects the global energy market, it has a serious effect, but we achieve the greatest effect when we work together with other major producers. Only coordinated steps bring the optimal effect for global energy markets. In this sense, we will continue to work with Saudi Arabia, with the Persian Gulf countries, with the OPEC countries within the framework of the system that was created in recent years, OPEC+," Vladimir Putin said.

Thus, Moscow’s refusal of new OPEC and non-OPEC decisions to reduce production was unlikely, even despite the desire of local oil producers to postpone discussion of this issue until next spring. The consent to the proposal of the Russian side to exclude condensate from oil production calculations was a kind of compromise to reach a consensus on new quotas for OPEC+.

Azerbaijan's position

According to the OPEC+ agreement, Azerbaijan agreed to reduce production by an additional 7,000 bpd.

"Azerbaijan joined the OPEC+ deal to further reduce oil production to support the regulation of the global oil market. In particular, Azerbaijan is committed to reduce production by another by another 7,000 bpd. So, we will maintain daily oil production from January 1, 2020 at the level of 769,000 bpd," the Ministry of Energy of Azerbaijan stated.

In his speech at the ministerial meeting of the OPEC+ countries, the Minister of Energy of Azerbaijan, Perviz Shahbazov, noted that forecasts for the development of the world economy and the oil market, as well as a number of geopolitical factors "indicate the need for regulatory measures for 2020 as well."

"We have managed to balance the market. Today we continue this to the benefit of both producing countries and consumers. That is why we agreed on a small new reduction, which will start the next year," Shahbazov said.

However, to be prepared for the worst turn of events, the government of Azerbaijan set the price of oil at $55 per barrel in the budget for 2020 compared to the budget of 2019, when the price was at $60. A cautious approach to planning the budget for next year can be explained by the fact that the situation in the oil market is still uncertain. The treasury of Azerbaijan did not suffer losses in 2019. On the contrary, the forecast fully justifies itself, since the average oil price during the year exceeded $60 per barrel.

"We have set the price of oil in the state budget for 2020 at $55 per barrel, although Azeri Light sells at $70. We did this to increase revenue. If we set the price of oil at $65, then this money would go to the state budget as transfers from the State Oil Fund and would be used. However, this is not necessary," Azerbaijani President Ilham Aliyev said.

It is worth mentioning that more than half of the state budget revenue for 2020 is expected from the oil sector (₼13.53 billion, or 56%). At the same time, it is expected that revenues from income tax from oil and gas companies operating in Azerbaijan under PSAs will be ₼750 million, which is 15.4% less than the forecast for 2019. The tax plan for SOCAR for 2020 will not change and will reach ₼1.45 billion.

In a word, almost all oil-producing countries, including Azerbaijan, are satisfied with current oil price forecasts for 2020. Wrapping up the results of 2019, we can confidently say that cooperation in the OPEC+ format has been very productive. The parties to the deal are close to achieving their goal, which is to rebalance the oil market. So far they have successfully kept oil prices at a level optimal for both producers and consumers. The next extraordinary meeting of OPEC+ ministers is scheduled for March, by which time the fate of the deal to reduce oil production will become clear. However, it is possible to assume with a greater degree of probability that the OPEC+ deal will be extended, and the changes can only affect the terms and quotas. In any case, there is space and time for manoeuvres.

Oil price forecasts for 2020

According to the forecasts of leading financial institutions and rating agencies, the price of Brent in 2020 will not fall below $58 per barrel.

- The World Bank expects that the price of oil (weighted average for the brands Brent, WTI and Dubai) will drop from $60 per barrel in 2019 to $58 in 2020.

- Analysts at RBC Capital suggest that in 2020, WTI will cost $58 per barrel against $62 per barrel. Similar estimates for Brent are worse at $63.5 per barrel (previously $67.5 per barrel).

- According to Fitch, in 2020 the average prices for Brent and WTI will reach $62.5 per barrel and $57.5 per barrel, respectively. In 2021, the same brands will cost $60 per barrel and $55 per barrel, respectively.

- Analysts at JPMorgan maintained their forecast for the average oil price next year for Brent at $59.09 per barrel and for WTI at $54.59 per barrel. These estimates are based on the assumption that the OPEC+ transaction will be extended until the end of 2020.

- One of the shocking forecasts came from the Danish investment bank Saxo, which suggests that in 2020 OPEC and Russia, seeing a slowdown in shale oil production in the US due to low investment returns, will announce a new reduction in production. At the same time, the next stage of the Saudi Aramco IPO will provide its desired rating for investors outside of Saudi Arabia. Taken aback, the oil market will rush to cover short positions, and the price of Brent will return to $90 per barrel.

- Goldman Sachs updated the forecast for the average spot price of a barrel of Brent oil in 2020 by increasing it to $63 from the previously forecasted $60.