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Azerbaijani expert: Oil market can stabilize only after some restrictions lifted

Oil&Gas Materials 11 April 2020 11:55 (UTC +04:00)
Azerbaijani expert: Oil market can stabilize only after some restrictions lifted

BAKU, Azerbaijan, April 11

By Nargiz Ismayilova - Trend:

The market can gradually stabilize most likely only after removing restrictions on the movement, social and economic activities of people which are globally applied to varying degrees due to the COVID-19 pandemic, representative of Azerbaijan’s State Oil Company (SOCAR) Ibrahim Ahmadov told Trend.

According to Ahmadov, the uncertainty over the pandemic development impedes to understand how the demand for oil will change in the coming months. The experts predict at least a global recession in the second quarter of 2020.

“Along with measures to contain the pandemic, efforts of all countries are now also aimed at preventing the transition from such a recession into a long-term economic depression. Oil producers will most likely rest upon short-term forecasts of global economic growth or slump. Therefore, we can assume that the level of market regulation by OPEC + may be revised in the coming months,” the expert said.

“The issue is that the daily oil production decrease by 10 million barrels, which has been conditionally planned yet, is only 10 percent of the global production volume, while the drop in oil consumption amid the coronavirus-caused recession is estimated by some traders at 30-35 million barrels per day,” he noted.

“It means that in order to achieve a balance between the supply and demand, a 2-3 times drop in the demand from the currently planned figures is necessary. This is despite the fact that the cut in daily production by 10 million barrels in a short time is an unprecedented event," he said.

According to Ahmadov, from the information available today, it follows that the agreement to reduce oil production was conditionally adopted and depends in particular on whether Mexico will confirm its quota.

“In any case, the current quotas will not yet be able to balance supply and demand. The current planned reduction is most likely a forced measure stipulated by technical necessity, because major producers even at a low price have difficulties with timely sale of oil produced, which will soon be nowhere to be kept,” the expert said.

“On the other hand, the current decline in oil consumption in the world isn’t a final decision and it’s not excluded that the quarantine restrictions can be gradually lifted in some countries, which is now ongoing, for example, in China,” he noted.

“In this case, an increase in the demand rather than a decrease in supply could stabilize the market and there would be no need for a large additional cut in oil production. Due to the fact that the oil price in the short term will not return to the level of the beginning of this year, some of non-conventional oil producers may go bankrupt," he explained.

“For example, a slight decrease in production levels in the US is expected due to the unprofitability of oil production from tight reservoirs, i.e. shale oil. Namely by this the US grounded their formal non-alignment with the negotiations and the agreement of the OPEC + countries, because they are somehow predicted to decrease production," he said.

According to Ahmadov, the decrease and increase in the level of production at conventional fields is sometimes a complicated process associated with additional costs for the producers.

"Therefore, it may be more profitable for the producer to wait a short period of time even at low prices than, for example, to reduce and increase the production every week”, the expert noted.

“Based on this, I think we can assume that oil producers will attentively follow up on the development trend of the demand until the beginning of summer, when the next planned OPEC + video conference will be held. Thus, I will assume that the natural decline in shale oil production, due to its unprofitability at the current price, as well as the dynamics of the pandemic development, quarantine measures and, accordingly, the level of demand in the global market, will be the main determining factors in OPEC + policy from summer to the end of the year," he added.

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