Azerbaijan Participated in Informal Video Conference of Several OPEC + Countries

Several OPEC + member countries, including Azerbaijan, held a small video conference on April 21 to discuss the situation on the oil market.

Saudi Arabia and Russia, which lead the OPEC + alliance, did not participate in the discussion, although earlier the spokesman for the Russian President announced the importance of such formats.

The initiator of such an informal meeting was the Minister of Energy of Algeria and the President of the OPEC Conference, Mohamed Arkab.

The participants agreed on regular contacts and praised the decision to adjust production taken on April 12 by 23 OPEC + countries, reaffirming their commitment to fulfill the obligations undertaken in May.

Recall that, in May-June, Azerbaijan under the OPEC + deal should keep production at the level of no higher than 554 thousand barrels of oil per day, which is approximately 90-100 thousand bpd less than expected in April.

In general, in May-June, OPEC + countries will decrease oil production by 9.7 million bpd (by 23% from the level of October 2018 taken as a basis), from July to the end of 2020 - 7.7 million bpd (by 18%), then, until May 2022 - 5.7 million bpd (14%).

Saudi Arabia and the Russian Federation agreed to reduce their production to 8.5–9 million bpd.

Earlier, the Minister of Energy of Saudi Arabia, Prince Abdulaziz bin Salman, said that together with other countries that are not involved in the OPEC + deal, in particular with the United States, the total reductions in May will amount to 19.5 million bpd compared to April, of which OPEC + countries will account for 12.5 million bpd. Another 7 million bpd is expected to be removed from the market by other producers, partly by a decrease in production and partly by pumping oil into strategic storage facilities, which contributes to increased demand.

However, many analysts believe that in May, excess oil demand will amount to 25 million bpd, that is, there will still be an excess of “black gold”.

Fatih Birol, Executive Director of the International Energy Agency (IEA), on Tuesday called on OPEC + member countries to reduce production “as soon as possible” and consider the possibility of a deeper reduction.

However, countries believe that they can’t start reducing production right now, without waiting for May 1, because April oil volumes are already provided for export contracts.

“Pressure on the market will continue until the OPEC + agreement comes into force in May, until the countries that have not concluded the agreement reduce their production, and until the restrictive measures related to Covid-19 are eased,” Russian Energy Minister Alexander Novak said on April 21.

Note that on Tuesday, Brent crude oil futures (Azerbaijani oil is also tied to it) fell below $ 20 / barrel for the first time since March 2002. And on April 20, the price of OPEC basket crude oil (13 grades) fell to $ 14.19 / barrel, which is more than $ 4 per barrel lower than on the previous trading day, and is the lowest in OPEC reports since 2003.

The record low figure on April 20 also demonstrated the fact that the problem of excess supply and the rapid depletion of warehouse space is not only in the United States. Note that on April 20 there was a historical descent to negative territory for WTI futures for American oil at NYMEX trading.

According to the IEA, in April, oil demand is 29 million bpd lower than April 2019.

Goldman Sachs believes that 33 mln bpd should be removed from the market in order to begin the restoration of balance.

The crisis at the oil market is partly due to competition for market share. Saudi Arabia lowered its official selling price to Asia by $ 4.2 / barrel for its Arab Light oil, which shows that competition for market share remains, and strategies to protect market shares from oil producers are likely to manifest themselves differently in the coming weeks.

For example, oil producers may try to conclude medium- and long-term supply agreements with China, since the PRC is gradually lifting quarantine restrictions, which means that its refineries can increase oil consumption.

That is why many analysts believe that the OPEC + deal of April 12 may not be viable.

Optimists are confident that if oil-producing countries comply with agreed reductions, then it is likely that the consequences of the OPEC + agreement will be possible in the second half of this year. Restrictions on oil supply may begin to increase the price of oil as demand increases.

However, do not forget about the oil storage factor.

Some of the largest oil importers in the world are preparing to purchase additional oil in order to maximize its strategic reserves, and oil producing countries can put some of the oil in storage, which would also help to balance the market in the short term.

However, onshore oil storage prices in North America and Asia rose in April 2020, and rental rates for these large VLCC tankers rose sharply.

It is possible that the deal reached by OPEC + on April 12 will delay the speed at which oil storage facilities peak, and the time gained will allow the development of new strategies for market balance.

Azerbaijani oil is currently trading at an average of $ 20 / bar, but there have been short-term spot sales of Azeri BTC Blend at $ 11-16 / barrel.

At this price, Azerbaijani oil was sold in 2002, and the peak price was fixed in 2008 - more than $ 130 / barrel.

According to analysts, the price for the reference Brent in 2020 is unlikely to be higher than $ 35-40 / barrel, while Fitch considers this price acceptable for Azerbaijan.