GROWTH IS WELCOME

The September summit of the OPEC+ ministers was remembered for the surprisingly quick and unanimous decision to continue increasing oil production according to the previously approved plan – 400K barrels per day (bpd) monthly. As the results of the first ten days after the meeting show, the oil market took this news relatively calmly: the day after the meeting, the price of November futures for Brent oil fell to $71.38 per barrel, now quotes exceed $73 per barrel.

Meanwhile, concerns remain about the ongoing pandemic, which is putting pressure on global global oil demand. On the other hand, the rate of vaccination against COVID-19 is increasing, which means that it is unlikely to return to tough lockdown measures experienced last year. Accordingly, a sharp drop in fuel demand in the foreseeable future is not expected either.

Furthermore...

During 2021, OPEC+ has cautiously reacted to the needs of the oil market for an additional supply. Thanks mainly to the efforts of Saudi Arabia, which voluntarily reduced production in excess of its obligations under the deal, and taking into account the growing demand for oil due to the easing of pandemic restrictions, in May commercial oil reserves fell below the average level of 2015-2019 - an indicator that OPEC+ uses formally to assess the effectiveness of its deal to restrict oil production.

In July, OPEC+ member states reached the level of restrictions at 5.8m bpd. It was initially assumed that it would continue until May 2022. However, in the same month, the deal was extended until December.

In addition, in August 2021, OPEC+ countries agreed to increase the monthly oil production by 400K bpd until the oil cuts are completely curtailed. Before they had to keep the cut of 5.8m bpd until May 2022, and then abandon it. Now they will gradually increase production until September 2022 in order to return the same volume to the market. Moreover, Saudi Arabia did not rule out that joint actions of the OPEC+ states were possible after 2022, if the market situation required it.

Ministers noted that while the impact of the COVID-19 pandemic continues to raise some uncertainty, market fundamentals have strengthened and commercial oil stocks in OECD countries continue to fall as the recovery accelerates.

Situation with prices also looks the best: it is higher than before the pandemic. Thus, if in January 2020 Brent oil was trading at $55 per barrel, then at the time of the summit it rose over $73. This made it possible to quickly reach an agreement to increase oil production in October 2021. Thus, next month, production under the OPEC+ deal will be increased by 400K bpd.

Also, the summit participants have also raised the issue of the fulfilment of their obligations to reduce oil production. With a new decision, the ‘losers’ of the deal were given a deadline until December 2021.

During the discussions on the future decisions on OPEC+ production levels, the Saudi Energy Minister Prince Abdulaziz bin Salman said that OPEC+ will monitor oil production in Iran (when the US oil sanctions are lifted), and other producers, as well as the development of the pandemic.

According to bin Salman, making a decision immediately before the end of 2022 means that OPEC+ will try to achieve a balanced market not only for the rest of the year, but also for the next one. “This gives the market clarity, direction, vision of where we are going,” the Saudi minister said.

Ministers also agreed to meet every month for the duration of the agreement, assess the situation, and determine the volumes of production for the next month, aiming to complete the oil cuts by September 2022.

Solidarity Azerbaijani style

Certainly, Azerbaijan supported new decisions of OPEC+. According to the Azerbaijani Minister of Energy Parviz Shahbazov, these agreements will help maintain a balance in the global oil market.

The baseline volume to cut oil production for Azerbaijan has not changed, and is still at the level of October 2018 (718,000 bpd). According to the new deal, Azerbaijan will increase oil production by 7,000 bpd monthly for the entire period of the deal. That is, by the end of this year, Azerbaijan will be able to increase production by 35,000 bpd.

In July 2021, Azerbaijan's production quota, excluding condensate, was 620,000 bpd. Thus, Azerbaijan will increase oil production in October by another 7,000 bpd (up to 640,000 bpd), and by the end of December this figure will reach 655,000 bpd.

At the same time, the Energy Information Administration of the US Department of Energy (EIA) expects that oil production (with condensate) in Azerbaijan in 2021 will reach 740,000 bpd (700,000 in 2020), and 800,000 bpd in 2022.

Although the share of the oil and gas sector in Azerbaijan's GDP has decreased in recent years, nevertheless, the share of the oil sector in budget revenues and exports remains high. So, in 2020, the oil and gas sector accounted for 29.9% of GDP, 56.7% of state budget revenues and 86.5% of exports. In 2021, authorities expect that the share of the oil and gas sector in GDP and state budget revenues will reach 33% and 54.1%, respectively.

The new OPEC+ deal will make it possible to maintain macroeconomic and fiscal stability in the country, since oil exports will generate more revenues when oil prices are above $70 per barrel. Especially considering the fact that the state budget of Azerbaijan for 2021 is based on the average oil price of $40 per barrel. Authorities decided to continue such a cautious approach and develop the draft state budget for the next year based on an oil price of $45 per barrel.

Prices under control

By the way, the Azerbaijani government has demonstrated caution in its own forecasts of global oil prices for the next five years. According to the basic scenario of the Ministry of Economy, the average oil price in 2021-2022 will be $55 per barrel, in 2023-2025 - $50 per barrel.

The US Department of Energy's forecast looks much more optimistic. They believe that the average price of Brent oil in 2021 and 2022 will be $68.61 and $66 per barrel, respectively.

“We expect production growth in OPEC+ countries, the US and other non-OPEC countries in 2022 to outpace the slowdown in global oil consumption and drive Brent oil prices down to an average annual level of $66 per barrel,” explains EIA.

Actually, should the OPEC+ oil production rate continues at the current rate, an increase in oil prices is not expected in the near future. On the other hand, both the leaders of OPEC+ states and other oil producers have repeatedly stated that $60-65 per barrel is optimal for both suppliers and consumers of oil. We should also take into account the factor of shale oil, which is produced intensively with each rise in oil prices. Excess oil supply to the market now and in the near future is definitely not necessary, therefore the OPEC+ states will most likely try very hard to prevent this, as well as a shock fall in prices.

“As of today, the parameters of the OPEC+ deal that will be in effect by the end of 2022 have been determined and I hope they will not change. I would not like to see oil prices above $100 per barrel again, as this can stimulate investment in ineffective projects and then again lead to what we have already gone through - the collapse of the market. $65-75 per barrel is comfortable for consumers and the OPEC+ member states are aiming to maintain it by regulating volumes,” Vagit Alekperov, President of the Russian LUKOil said.

The next meeting of OPEC+ ministers is slated for early October, when the parties must make a new decision on continuing or suspending the increase in oil production in November, as planned. There is no reason for taking a step back currently and by the end of the year, it is expected that OPEC+ members will give the green light to oil production.