Is Azerbaijan ready for new period of oil market’s history?
Baku, Azerbaijan, Nov. 28
By Vagif Sharifov -Trend:
Oil production will be maintained at 30 million barrels per day, OPEC decided during a meeting in Vienna, November 27.
Trend Agency's Deputy Director General Vagif Sharifov discussed this issue with UK's first radio station dedicated to providing information on handling money and investments - Share Radio.
First of all, as of now, what is the situation with oil prices?
This week, world oil prices have fallen to the lowest level in four years. Brent crude fell more than $6 to $71 per barrel. WTI futures for January are already on the level of $68 per barrel. Aside from that, firstly, it means that a number of countries, such as Nigeria and Angola will be in trouble, because their state budget is oriented on the price of $110 per barrel at minimum. The situation on the oil market has a falling tendency.
Was OPEC's decision unexpected and what consequences can it have?
OPEC believes that the current oil prices are still at an acceptable level for some cartel countries, and do not pose a threat to their economies. The cartel members plan to wait and see how the market behaves, and reacts to the volume of 30 million barrels per day. But of course, the oil prices fell sharply yesterday after OPEC's announcement. Brent crude futures fell below $72 per barrel, right after Kuwaiti minister of oil announced that the quotas remain the same. Traders reacted with decrease, since keeping the oil production level means the market will be oversupplied by about 1.1 million barrels per day. OPEC said it decided to keep the oil production to restore the market balance. However, considering the situation with OPEC countries, whose budgets are oriented on $100 per barrel, it's not really clear what balance we're talking about.
What is the market's reaction to that decision?
Quite original was Canada's reaction, as the government there said "We have to get off the oil train". Moreover, Alberta's minister of finance told reporters that "We have to get to a position where we're not listening to OPEC to decide on how many schools we're going to build". Actually, they talk like this because the oil price has dropped by almost 30 percent since June, and they understand that this may cause financial problems.
The market today doesn't know how to explain what's going on. OPEC's decision will probably result in falling of oil prices. They can even fall up to $65 per barrel, with a floor set to $60. And only after that, a few years later, they may stabilize to the level of $80. And in order for them to stabilize, it will be necessary to cut down the production on the level of about 1.5 million barrels per day, no less. It is clearly obvious that the new period of oil market history has begun. And this is a difficult time for countries, whose finances highly depend on exactly high oil prices. With current prices, such countries as Iran, Venezuela, Nigeria, Iraq, Libya, Russia will face budget deficit, and that in turn will force them to actively use their currency reserves.
A lot of people see this as a challenge to the US shale boom, what is your take on that?
The rise of US shale is similar to the dotcom boom of the late 90's, and it will lead to many companies failing. The main problem with shale oil is its cost. Much of America's shale oil is expensive to produce and the industry is comprised of numerous small companies which were forced to leverage their operations with debt to fund the high cost of drilling wells through a process known as hydraulic fracturing, or fracking. But the price for oil should be very high and in the long term to make the production of shale oil effective.
Any predictions for the world economic outlook in the next year taking into account the decision of OPEC?
OPEC believes that the recovery of the world economy will continue slowly, with growth forecast at more than 3 percent for this year and more than 3.5 percent for the next year. Most of the oil producing countries, excluding Azerbaijan, Kuwait will face state budget deficit because of low oil prices. For example, Finance Minister of Azerbaijan Samir Sharifov said that falling of the prices even to $60 per barrel will not create problems for Azerbaijan's state budget in the upcoming years.
On the other hand, IMF believes that the world economy may never bounce back to the growth pace, which was witnessed before the financial crisis. They see at least two main short-term risks: tensions in the Middle East and issues between Russia and Ukraine. In any case, there are no signs of global recession to occur in 2015.
Edited by CS
Vagif Sharifov, is an oil markets expert, development director at Trend Agency. Follow him on Twitter:@VagifSharifov