ACCEPTABLE PRICE

While Europe is trying to find a solution to the ongoing gas crisis amid direct accusations against Russia, a key UN climate conference (COP26) was held in Glasgow, Scotland. Participants discussed the urgency to abandon traditional fuels in favour of renewable energy sources as the most effective way to avoid a climate catastrophe.

Meanwhile, the OPEC+ member states were looking for an equally important solution for themselves and the global oil market – follow-up measures after December 2021. They had to make a reasonable choice between the original plan to continue increasing oil production by 400,000 barrels per day (bpd), or agree to US proposal of doubling the production volume up to 800,000 bpd. In the end, OPEC+ decided to follow their own scenario of a gradual increase in oil production in the coming months.

Climate VS fuel

A large group of public financial institutions from different regions, including from the US, the EU, Canada, and Great Britain, recently pledged to end government funding and support for overseas fossil fuel projects by the end of 2022. On November 4, nineteen countries, including the US, Canada, Denmark, Italy, Finland, as well as five development institutions, signed a so-called historical document at the UN COP26 conference in Glasgow.

Investments in agreed projects carry both social and economic risks, the signatories said in a joint statement. The document contains, however, a clause making the agreement not binding and exceptions are possible, Reuters notes. Germany did not join the agreement. Likewise, China, Japan, and South Korea have made significant investments in overseas fossil fuel projects.

At the same time, in 2016-2020, the supporting states have jointly invested almost $18 billion (€15.5 billion) annually in the production of fossil fuels, Oil Change International NGO found out.

“This is the first political commitment to phasing out funding not only for coal, but also for oil and gas production. If this initiative is implemented, $18 billion will be redirected from fossil energy to renewable energy sources annually,” Jing Zhu, director of the US Center for Biodiversity's Energy Equity Program, said.

Civil society organisations, however, do not look enthusiastic about the agreements. At a press conference, German NGO Urgewald and Climate Action Network expressed their concerns about the current situation in the energy market. At least 506 oil and gas companies plan to add 190 billion barrels of oil equivalent to their production portfolios over the next seven years, according to Urgewald. “At least 96% of gas and oil producers intend to expand their assets. The industry is holding to a course of reckless expansion, with about half of new projects based on the dirtiest methods of extraction,” added a representative of the organisation.

Jing Zhu also argues that G20, despite loud statements about clean energy, is also moving in the opposite direction. “In 2018-2020, G20 member states provided $188 billion for the production of fossil fuels, which is 2.5 times more than they invested in renewable energy sources. And it's just awful.”

“In everyone’s interest”

While the participants of the Glasgow summit were looking for proper solutions to keep the global temperature rise at 1.5 degrees by the end of the century, a group of 23 oil-producing countries, OPEC+ member states, had to decide on a plan for oil production in December.

Bloomberg noted that the US, India, Japan, and a number of other large oil consumers are actively campaigning to convince oil exporting countries to increase oil production due to concerns about high prices that already passed $85 per barrel.

Moreover, Bloomberg even admitted that a new refusal to increase oil production could lead to a conflict between OPEC+ and the US. On October 31, the US President Joe Biden called the state of affairs wrong, in which "Russia, Saudi Arabia, and other major producers are not going to pump more oil so that people have gasoline, for example, to get to work."

However... The next meeting of the OPEC+ ministers took place on November 4. Judging by how quick they adopted the final decision, there were no ‘dissidents’ among the OPEC+ members. They unanimously agreed to increase oil production by another 400,000 bpd next month. After all, the situation on the oil market and prices for oil do not cause serious concern, rather the opposite.

On July 18, 2021, OPEC+ agreed to gradually increase production by 400,000 bpd monthly, starting from August, in order to neutralise the restrictions of 9.7 million bpd agreed previously amid the COVID-19 pandemic. The agreement is valid until the end of 2022. The Saudi Minister of Energy, Prince Abdulaziz bin Salman, called the decision to increase oil production correct because, according to forecasts, commercial oil reserves will begin to grow in December, which will continue throughout the first quarter. After all, OPEC+ will increase oil production, and in winter the demand for oil usually slows down. “Just think about it – OPEC+ will add more than 1 million bpd in December, January, and February, which will be enough to cover the demand,” said bin Salman.

According to Kuwaiti Minister Mohammed Al-Fares, in 2022, according to all forecasts, the oil market will be in surplus.

UAE Energy Minister Mohammed Al-Mazroui noted that an oversupply in the oil market could become noticeable as early as in 1Q2022. “Therefore, our decision to maintain the pace of the production recovery starting from December is justified,” he said.

Deputy Prime Minister of the Russian Federation, Alexander Novak, noted that the oil market is recovering, but still remains under pressure, while the reserves are growing. He noted that although OPEC+ is increasing production, there will be a seasonal decline in demand in the winter months.

The Saudi Minister of Energy also commented on the possibility of increasing the demand by gas consumers, who, due to too high prices for it, begin to burn fuel oil at power plants. “We are limited in supporting the power generation sector. Many analysts calculated that the maximum that the oil market can offer to support the energy sector is 600,000 bpd, of which 500,000 bpd have already been provided,” minister said.

Meanwhile, despite the first unsuccessful attempt, the US is still determined to convince OPEC+ to increase oil production beyond the plan. At a press conference on November 6, Joe Biden said that large oil-exporting countries will inevitably increase production, but he could not promise they would do this sufficiently to solve the problem of high global energy prices.

Rising prices

Meanwhile, oil prices continue to rise. Although it is not expected that they rise to $100 per barrel yet, the price of Brent still remains above $80 per barrel. In general, since the beginning of the year, the oil price has increased by about 1.6 times - from $50 to $80 per barrel, which is a matter of concern among consumers. Goldman Sachs believes that by the end of the year, the price of Brent may rise to $90 per barrel. They note that there is not enough supply on the oil market and an increase in volatility is expected. “New differences of opinion between OPEC and the US presidential administration, threat of sales from the US Strategic Reserves, as well as the potential resumption of negotiations with Iran will increase the volatility of the oil market in the coming weeks, especially given the decline in trading by the end of the year,” said Goldman Sachs statement.

According to the Saudi Minister of Energy, the significant rise in oil prices was caused by the rise in the price of gas and coal, which reminds him of the famous feature film Wag the Dog. According to him, 28% of the rise in oil prices is caused by a general sudden increase in the entire energy sector.

He noted that the current global energy crisis is caused by the lack of infrastructure, production, as well as various restrictions. He emphasised the need to follow three principles when making decisions on energy sources: energy security, economic growth, and counteraction to climate change. “We, OPEC+, believe that these three pillars should govern everything we do... Otherwise, we will continue to see what is going on now,” Abdulaziz bin Salman said.

Alexander Novak believes that the current oil price (around $80 per barrel) is an objective reflection of the market situation. He also believes that there are many factors on the market that raise the price, as well as uncertainties that can lower it, including seasonal decrease in oil demand, pressure on demand due to the spread of the Delta strain of COVID, and increase in commercial oil reserves in some countries.

Meanwhile, BofA experts raised their forecast for Brent quotations next year from $75 to $85 per barrel and in 2023 - from $65 to $75 per barrel. “Even if the oil market is relatively balanced in 2022 and 2023, oil reserves in the OECD countries are very small to meet the steadily growing demand in 2025-2030,” BofA experts stated.

Meanwhile, Fitch Solutions predicts a fall in Brent prices in 1H2022 amid expectations of a slowdown in demand and an increase in stocks next year. "From 2022, market conditions will become more difficult due to a slowdown in demand growth and a potential increase in production by OPEC+, the US, and Iran," the agency stated.

According to Fitch Solutions, the average Brent price will be $72 per barrel in 2022 and $73 per barrel in 2023.

Contribution to economy

At the November summit of OPEC+ Azerbaijan supported the plan of the member states to increase oil production in December by 400,000 bpd. “We believe that this is the most optimal solution for maintaining stability,” explained the Azerbaijani Minister of Energy Parviz Shahbazov. According to Mr. Shahbazov, this decision will help prevent volatility in the market.

He added that the oil price at $60-70 per barrel is acceptable for Azerbaijan and for the global economy. “We don't need too high prices. Prices may be high today, but OPEC+ is increasing production every month. I think this will affect prices,” Mr. Shahbazov said.

Amid high oil prices, the recovery of the Azerbaijani economy is proceeding faster, the European Bank for Reconstruction and Development (EBRD) notes.

“The GDP growth rate in January-September 2021 reached 4.8% due to the growth of the non-oil sector by 6.2%. At the same time, Azerbaijan is gradually increasing oil production as part of the OPEC+ deal. Therefore, the growth in the oil and gas sector in January-September reached 1.4%. High oil prices and the increasing oil production will support the national economy until the end of 2021,” EBRD review said.

EBRD estimated that favourable oil prices provided a current account surplus in Azerbaijan’s balance of payments.

Analysts of Bank of America predict that the price of Brent crude by the end of July next year may reach $120 per barrel. This seems quite a lucrative figure, as it can help the State Oil Fund of Azerbaijan, for example, increase its profit. However, we still remember the cases when the rise of prices to $100 per barrel turned into a crushing fall soon afterward. Most likely, the quotations will remain above $80 per barrel for a few more weeks, but further growth looks unlikely. Given the subsequent decisions of OPEC+ to increase oil production, the scenario of price reduction to a comfortable level for both producers and consumers at $70-73 per barrel is more realistic. However, this should not be expected until 2022.