BAKU, Azerbaijan, April 5. The decision to reduce oil production worldwide not only increases the price of Baku's "black gold", but also expands opportunities against the background of increased demand.
Saudi Arabia and several OPEC+ countries have decided to reduce total production by 1.649 million barrels per day. The reduction will begin in early May and will last until the end of 2023. At the same time, Saudi Arabia said it had taken such steps to maintain stability in the global oil market and prevent further price declines.
Meanwhile, the US considers the decision of oil-producing countries irrational.
"Given the uncertainty in global markets, we do not consider it appropriate to reduce production under the current conditions," said a member of the US National Security Council.
According to the decision taken by OPEC+, Iraq will reduce daily production by 211,000 barrels, the United Arab Emirates (UAE) - by 144,000 barrels, Kuwait - by 128,000 barrels, Oman - by 40,000 barrels, Algeria - by 48,000 barrels, Kazakhstan - by 78,000 barrels, and Gabon - by 8,000 barrels. As for Russia, Moscow will follow its decision to reduce daily production by 500,000 barrels by the end of this year.
It’s important to note that a number of OPEC+ members have not participated in the decision on the restriction, since they are already producing "black gold" at a level below the agreed quota.
At the Ministerial Meeting of OPEC and non-OPEC Ministerial Meeting (ONOMM) held on October 5, 2022, it was decided to reduce daily oil production by 2 million barrels. Thus, the new quotas will remain in effect until the end of 2023.
Moreover, the Joint Ministerial Monitoring Committee of OPEC+ (JMMC) at a meeting on February 1, 2023, considered it acceptable to maintain existing agreements.
The next JMMC meeting will be held today. The UAE Minister of Energy and Infrastructure, Suhail Mohammed Al Mazrouei, at today's meeting in the format of a videoconference, confirmed that the main subject of discussion will be new quotas.
"There is no need to approve additional decisions of the organization's member countries on the reduction of production by JMMC or ONOMM," Al Mazrouei said.
After the organization decided to reduce production quotas, crude prices on the world market began to rise.
Along with West Texas Intermediate (WTI), Brent crude futures rose by an average of 7.12-7.14 percent from May through June.
Meanwhile, these processes will increase inflation in Western countries and force central banks to reconsider their interest rates.
De jure, the decision of OPEC+ members to reduce daily production quotas is considered voluntary and individual. However, de facto OPEC member countries, which occupy leading positions in global oil production, support the statement. Furthermore, countries that are members and do not have a large daily oil production will continue to act, but actually, it will not have a significant impact on either the market or prices.
Thus, the decision to reduce oil production quotas will not lead to a rapid increase in prices for "black gold" in the markets in the near and medium run. Because a significant increase in prices should exceed 10 percent of global demand for the level of reduction in oil production.
But either way, crude oil prices will inevitably rise by at least $10.
Under such conditions, it is possible to predict an aggravation of relations between Saudi Arabia, the world's largest oil producer, and the US, since rising prices on world markets will accelerate inflation in the US, and force the US Federal Reserve System to strike a balance between maintaining financial and economic stability in the country and raising the rate.
As for the impact of the OPEC+ decision on the post-Soviet countries, Russia and Azerbaijan will not suffer losses. On the contrary, the incomes of Moscow and Baku will increase.
Most of the oil that Russia supplies to the world market is Ural oil, and the oil that Azerbaijan sells is Azeri Light. Therefore, the reduction of oil production quotas will decline the discount between the main brands of oil sold on world markets and the price of Azerbaijani oil.
At the same time, due to Russia's decision to reduce daily production by 500,000 barrels, the demand of the EU countries for Azerbaijani oil will increase even more. Thus, it is logical that Azerbaijan, by selling its oil for more expensive price, will be able to buy oil cheaper than Russia.
Let's not forget that the main reason that the demand for crude oil on world markets has reached 100.9 million barrels per day since January this year is the growth of demand in the EU and India. And the main reasons for the increase in supply by 600,000 barrels per day, up to 100.9 million barrels, are non-OPEC countries.
The increase in oil prices during winter months has been due to the massive transition of the main consumers in the EU from natural gas to fuel oil, the reason for which was the rapid increase in natural gas prices due to the military actions in Ukraine.
As for predictions, since May, the demand for crude in the US and the EU may decrease by a maximum of 1.1 million barrels per day, since a recession in the US and an increase in inflation in the EU are expected this year.
When quarantine restrictions related to the COVID-19 pandemic in China weaken, the economy will begin to return to normal, and, as a result, demand for crude oil in China may reach 1.6 million barrels per day by the end of this year.
Presumably, the demand for crude oil on world markets by June will decrease to 100.1 million barrels per day, and the surplus of the reporting month will be 1 million barrels per day.
Thus, due to the end of the heating season and a decrease in demand for fuel oil, this month the world oil market will return to a surplus of 0.4 million barrels per day.
Furthermore, from May through June, the surplus will grow to 1.3 million barrels per day due to the recession in the US and inflation in the EU. Since the upcoming processes will have a serious impact on oil prices, it is possible to predict that prices for "crude oil" in the coming months will amount to $70-80 per barrel.
An increase in prices for Azeri Light crude oil supplied by Azerbaijan to world markets is inevitable, which causes an increase in the average volume of income.
Moreover, the average price of a barrel of oil in the state budget of Azerbaijan for 2023 was set at $50.
The lowest price for Azeri Light oil worth $15.81 was recorded on April 21, 2020, and the maximum price amounted to $149.66 in July 2008.
"Black gold" is mostly extracted within the contract with the Republic of Azerbaijan, Azerbaijan State Oil Company on joint exploitation of deposits of "Azeri", "Chirag" and a deep-water part of the deposit of "Guneshli" in the Azerbaijan sector of the Caspian Sea. The full share of the State Oil Company of Azerbaijan (SOCAR) in the contract is 25 percent