Oil Becomes More Expensive. Should We Be Happy about That?

Baku / 06.01.18 / Turan: The oil market started in 2018 with a successful "run" to new highs for 2.5 years: according to Bloomberg, last Thursday the price of Brent at the auctions in London exceeded $ 68 per barrel for the first time since May 2015. The American standard WTI went up by 3.9% - to 62.21 dollars per barrel, also having registered a peak since the summer of 2015.

A new record was demonstrated by Azeri LT CIF Azerbaijani oil. In the world market, its price rose by $ 0.65, or 0.93%, to $ 70.54 / barrel. The minimum price for Azeri LT CIF was fixed in December 2001 ($ 19.15), and the maximum price - in July 2008 ($ 149.66).

Recall that the budget of Azerbaijan for the current year was based on the forecast of oil prices at $ 45 per barrel. Treasury revenues are projected at 20.127 billion manats, and expenses - at 21.047 billion manat. As it can be seen from the above statistics, today the real oil quotes in the world market significantly exceed the forecasted indicator set in the budget, and such a positive trend promises a noticeable increase in foreign exchange earnings to the country and a reduction in the deficit imbalance in the treasury.

Of course, the prospect of replenishing the budget, increasing investment in the real economy, reducing inflation, appreciation of the national currency is encouraging. However, to what extent will these expectations work, how long will the price of oil remain on this high, and what are the factors that cause this jump?

Independent analysts are rather cautious in their forecasts. Vugar Bayramov, Chairman of the Center for Economic and Social Development, advises to observe further developments in the market.

"It is yet difficult to say if the prices will move above $ 70 per barrel. It is not clear how the US will react to such high prices and how they will affect the growth rate of production overseas. The market participants are also waiting for this. As for the OPEC +, I think most of them, including Azerbaijan, are happy with the range of $ 60-70 per barrel. But there are political points," the expert said.

Continuing the topic, the economist Natik Jafarli noted that, at the national level, the rise in prices for "black gold" is a positive phenomenon. Foreign currency earnings are growing in the country's budget, which increases the opportunities for implementing new investment projects.

"The rise in oil prices per dollar for each barrel brings Azerbaijan an additional $ 400,000. Last year, oil was sold on average for $ 50 per barrel. Today, this figure exceeds 70 dollars. The difference is 20 dollars. This means an additional profit of $ 8 million. Of course, it's good. But the intrigue is how long the price will continue to rise. How will the world market behave in a few days and a few months?" Jafarli wonders.

According to the expert, the current prices for oil are not a corporate collusion of the OPEC + countries, which agreed on the extension of the agreement to reduce production by the end of 2018. Behind the process, there are political events in the world. Against the backdrop of massive riots in Iran, fighting in northern Iraq and Syria, rocket attacks on Yemen, and pipeline explosions, oil prices behave "nervously".

To increase oil prices, there should be an economic background: a reduction in the production, or an increase in the demand for energy. Today, there are no changes in these areas. Therefore, it is unlikely that prices in the world market will remain long at the current levels.

"I think the price countdown will begin soon. In February-March, oil prices may drop to $ 50 per barrel. To influence the national economy, such a price trend should be long-term to make changes in the priorities of the forthcoming economic programs. In this situation, the only positive point is an increase in the country's foreign exchange reserves. But in Azerbaijan there is a negative practice: with the growth of foreign currency incomes, our government begins to spend much more, and budgetary expenses increase, which leads to an acceleration of inflation and a rise in prices in the consumer market. In all likelihood, in 2018 these processes will continue," Jafarli predicts. -0-