MARKET AVOIDED SHOCK

It’s been a year since OPEC+ participants made an unprecedented and difficult decision to reduce the daily oil production by a total of almost 10 million barrels (mbd) to the level of October 2018. On April 12, 2020, oil producers agreed to maintain this agreement in effect until May 2022, subject to a gradual increase in production. Therefore, the global economy can go through the difficult lockdown period practically ‘without blood’.

In spring, the global oil market stabilised so much that OPEC+ took the most unexpected decision of the last six months - to gradually increase production by 2.1mbd until August.

Sharp turn

Before the OPEC+ meeting slated for April 2021, Western media outlets reported that the participants were determined to make a decision to maintain the April production level, while Saudi Arabia was ready to extend its voluntary production limits of 1mbd.

At the beginning of the meeting, many OPEC+ member states expressed their support for maintaining production at current levels. Although some of them were not averse to increasing it, but were also ready to join the general consensus. However, the whole discussion took place before the leaders of the deal, Russia and Saudi Arabia, announced their own plans.

Saudi Oil Minister Prince Abdulaziz bin Salman and Russian Deputy Prime Minister Alexander Novak have again called for caution. “The situation in the oil market is improving, the economy continues to recover, which has a positive effect on the demand. The vaccination campaign gives hope for a positive outcome, but the uncertainty of situation with the COVID-19 pandemic in Europe remains. In this situation, it is important that we keep track of events and prevent both overheating of the market and significant deficit,” said Mr. Novak.

Amid the above statement, it would be quite logical for OPEC+ to extend the deal on the current terms, but unexpectedly for everyone the Saudi prince proposed to change the angle of negotiations and consider not reducing but increasing the production.

As a result, OPEC+ voted to increase the production in May by 350,000bpd, by the same amount in June and by another 440,000 bpd in July. In general, OPEC+ plans to reach in May-July the production levels that have previously been set for January 2021. Saudi Arabia will return to the market 1mbd of its oil in contrast with the earlier decision to limit its production.

“This is a good decision. Now nothing worries us or our colleagues in OPEC+. However, if the market situation gets worse, we can always turn back,” Abdulaziz bin Salman said.

The Saudi minister reassured the rest of the member states that his country will return the expected 1mbd of oil in portions. Thus, the impact on price volatility will be less noticeable.

According to Russian minister Novak, the OPEC+ ministers reserve the right to revise the decision at the next meeting slated for April 28.

In addition, there are some concerns about the dynamics of oil demand, including in OPEC. “Yes, the forecast for demand growth has indeed been lowered by 300,000 barrels. But this is only 300,000, not 3 million barrels daily. This shows how prudent our OPEC secretariat is. They are simply more conservative than most international institutions. The volume of demand that they presented is sufficient to recommend the relief over the next few months,” the prince said.

Positive outlook

The market’s reaction to the OPEC+ decision to loosen restrictions was positive – the price of Brent raised by $2 reaching $65 per barrel. However, the first decade of April ended with a slight decrease in prices ($63.14 per barrel). Market had experienced additional pressure due to the strengthening of the US dollar, as this makes it unprofitable for holders of other currencies.

According to analysts, global oil prices this year will remain at the level of $50-70, which is a good news. Investors are concerned about an increase in coronavirus cases in Europe, Brazil and India.

“When the incidence rises in dense countries such as India and Brazil, it only creates more problems for oil demand, as containment measures will limit the consumption of vehicle fuel,” said Louise Dixon, an analyst of Rystad Energy.

Hans van Cleef, senior oil analyst at ABN Amro, believes that "the upward potential of oil prices looks limited", as OPEC+ will partially restore production. However, he noted that "investors see the light at the end of the tunnel and therefore maintain their long positions."

The US Department of Energy forecasts that the average price for Brent crude will be $62 and $60 per barrel in 2021 and 2022, respectively. "Average monthly oil prices for Brent in March were the highest since the end of 2019 - $70 per barrel. However, prices subsequently fell, which partly reflected a slowdown in global oil demand growth due to increase in the number of COVID-19 cases, especially in Europe,” the US Energy Security Administration said.

International Monetary Fund (IMF) was more restrained in its estimates, but, nevertheless, improved the forecast of the average global oil prices for 2021 by $8.5 ($58.5 per barrel). In January, IMF forecast was at $50.03 per barrel. IMF believes that the risks to the global oil price are insignificant, and the prices tend to rise due to the reduction in investments in oil exploration and production. Thus, the factors leading to decline in oil prices, namely a slowdown in the demand recovery and the high level of reserves, are losing their influence on price dynamics.

At the same time, if the oil price remains at $70 per barrel, non-OPEC+ producers, such as the United States, will return to the market, which will again put pressure on prices.

In addition, it is likely that Iran returns to the market, as it returned to the negotiating table on the Joint Comprehensive Plan of Action on the Iranian nuclear program.

Nevertheless, the forecast for prices is positive. If they remain at the level of $50-60, this will also limit the developers of shale oil to intensify production again.

What about Azerbaijan?

Under the new OPEC+ deal, Azerbaijan will increase oil production by 25,000bpd in May-July 2021, which will reach 603,000bpd in May, 610,000bpd in June and 620,000bpd in July – against the obligations to maintain the production level at 595,000 in January-April.

“Our main goal is to ensure a balance in the oil market that meets common interests. I think that this time the OPEC+ decision will contribute to efforts to balance the dynamics of the market,” Azerbaijani Minister of Energy Parviz Shahbazov said.

By the end of 2020, the production of oil condensate in Azerbaijan showed a decline of 7.8% (34.6 million tons), considering Azerbaijan’s participation in the OPEC+ deal.

At the same time, the share of condensate in the total volume of oil production reached 12.2%, or 4.2 million tons (an increase of 7.9%). Thus, the remaining 87.8%, or 30.4 million tons, was oil (a decline of 9.6%). Considering the relief measures within OPEC+, Azerbaijan can expect a slight increase in oil production and export this year. This is possible mainly due to the Azeri-Chirag-Guneshli block, as well as due to the commissioning of new wells in the fields developed by SOCAR.

More than 88% of the foreign currency inflow into Azerbaijan is a result of the export of its raw energy products. So, the growth in oil production and export, as well as the high level of oil prices, will have a positive effect on the national economy of the country, stability of the national currency, ensuring a surplus in Azerbaijan's balance of payments.

“Growing global oil prices have a positive effect on the balance of payments and maintain the balance in the foreign exchange market. Influenced by such expectations as the OPEC+ agreement and the global economic recovery, the average oil price in 2021 exceeded $60 per barrel and $67 since March. Leading think tanks slightly improved their forecasts of oil consumption and prices for the current year,” the Central Bank of Azerbaijan noted.

In addition, the rise in oil prices contributes to the growth of revenues of the State Oil Fund of Azerbaijan (SOFAZ). Its budget for the current year is based on the oil price of $40 per barrel. Moody’s Investors Service expects the growth of the SOFAZ assets if oil prices maintain at $45-65 per barrel. “Despite the pandemic, SOFAZ's foreign currency assets and investments in liquid markets continued to grow in 2020. Based on the medium term assumptions ($45-65 per barrel), the volume of SOFAZ assets is likely to continue to grow over the next few years, unless there is a sharp increase in transfers to the government,” Moody’s analysts believe.

In general, with the current situation on the market, the upcoming OPEC+ ministerial meeting on April 28 will not change anything. We can hardly expect a return to restrictions. There are no factors in the oil market that can raise concerns of the cartel and make it to introduce bailout measures. Therefore, the oil-producing countries will only confirm their intentions to increase production in the next three months within the established quotas, although certain adjustments are possible.