Our Analytics 13 november — 15:31

Trump's new strategy may hit Azerbaijan as well (Our comment)



OPEC ministers discussed at a meeting in Abu Dhabi the possibility of a new reduction in production next year amid fears due to rising oil reserves. They are concerned that the US continues to update the record for oil production. Over the past week, the volume of production soared immediately to 400 thousand barrels per day, now the Americans produce 11.6 million barrels of oil daily, said the Department of Energy of this country. This suggests that oil in the country is already in excess, and commercial reserves are growing for the seventh week in a row. In the penultimate week alone, they grew by almost 6 million barrels, while petrol (gasoline) reserves rose by almost 2 million barrels. And we wrote more than once about how oil stocks and distillates in the USA influence oil quotations.

American oil production is growing and growing

And the current growth in stocks was no exception: against this background oil futures went down. The price for a barrel of Brent blend at some point last Friday was around $71, and Western Texas WTI fell to $61 a barrel. True, there was a slight recovery later, but the decline in quotations over a short period of $10 or more agitated the oil countries and companies. And the experts again began to analyse and predict, mixing the geopolitical, economic and other situations into one hardly solved tangle. And although today the quotes are rising somewhat, discussions on this topic continue.

Recall how two years ago the world community celebrated the victory of OPEC+ over Washington: the cartel achieved a decrease in oil production by the oil producing countries by 1.8 million barrels per day and, thus, price increases for it. But the struggle for prices on the world market continued. The White House was unable to achieve obedience from its main partner in the oil market - Saudi Arabia, not to mention Russia - the main enemy. And it began to increase its own production, forcing OPEC and Russia to think about a new round of reduction.

Russia and Saudi Arabia in recent months have also begun to increase production and brought it to record levels. In September, the Saudis brought the figure to 10.5 million barrels, and Russia - to 11.54 million barrels per day. Since June, Saudi Arabia has increased oil production by 500 thousand barrels per day, and Russia - by almost 400 thousand barrels per day. And although prices still continued to rise, OPEC+ participants already planned to discuss the possibility of reducing production for 2019 during the meeting of the ministerial monitoring committee of the organisation in Abu Dhabi on November 11. And it was not difficult to understand their alarm: although US sanctions against Iran remove significant amounts of raw materials from world markets, a fresh surge in shale oil production in the United States threatens to create a new oversupply next year. Many members of the cartel were already concerned about the growth of stocks.

Trump and King Salman

Events went ahead of alarming expectations of oil producers. The volatility of oil prices already reflects these concerns. The cost of Brent for January delivery fell by about 15% from a four-year high reached in early October. A proposal to reduce production in 2019 was made by Saudi officials, noting that after increasing production in recent months, global oil reserves began to grow again, which is difficult to explain. The year before, the Saudis also came forward with such a proposal and achieved their goal without fearing the wrath of the White House. But a few months ago, it was the Saudis who took the initiative to increase production (as called for by US President Donald Trump) in order to 'stabilise the market.'

The Saudis and Russians seem to have listened to Trump's advice, although in reality they apparently were led astray by the desire to earn some extra money amid high oil prices. Saudi Arabia, for example, is now again calling for a reduction in production in spite of all the same requirements by Trump. A country with huge ambitions is completely dependent on oil; it is now in an unenviable situation. The new decline in oil prices could ruin the country's budget, which a couple of years ago many were jealous of. Therefore, it rushes for assistance to the United States, then to Russia, with the help of which it now wants to get out of the crisis situation. By the way, the alliance with the Saudis is very profitable for Russia itself: its economy, which is experiencing difficulties from the American sanctions, can be saved only by high oil quotations.

In the meantime, negative sentiment prevails in the oil market, Brent crude quotations from mid-October fell from $85 to $70 per barrel. The correction took place against the backdrop of a revaluation of previous expectations about the impact of US sanctions on Iranian oil exports, as well as a real increase in oil production by leading oil-producing countries. In addition, Trump issued temporary permits for the import of Iranian oil to Greece, India, Italy, China, Taiwan, Turkey, Japan and South Korea, while increasing oil production in the United States.

But this is not in the long-term interests of either Russia, or Saudi Arabia, or other oil-producing countries, including Azerbaijan. Russia has already lost part of the proceeds from the drop in oil prices; Saudi Arabia, in spite of an active confrontation with Iran, also needs consistently high oil prices. Russia and Saudi Arabia have actually alowed themselves to be led by President Trump, who had previously made demands to OPEC countries to increase oil production, which did harm to themselves and other oil-producing countries, but helped the United States. They dropped oil prices in just one month, lost billions in revenues and led to the losses for less affluent oil-producing countries in Africa and South America.

Putin and Salman think only about oil

Therefore, it was to be expected that OPEC+ would have to, at a minimum, limit oil production in 2019, if the alliance sets a goal to keep Brent's value at a level above $70 per barrel. Because at current prices, the United States alone is able, due to production growth, to cover all the growth in oil demand in the world next year. But just on the eve of the ministerial meeting, the United States being interested in lowering oil prices not only broke up their own production to possible maximums and actually abruptly nullified their sanctions against Iran, making some countries - importers of Iranian oil an exception.

OPEC+, of course, didn’t like it very much, and at the very beginning of the monitoring committee meeting in Abu Dhabi, many ministers frankly supported production cuts. Although the final decision turned out to be more balanced, but one thing is clear: OPEC+ definitely will not increase production in 2019. True, Trump is unlikely to like this, bragging about how he manages to solve US problems at the expense of adversary Russia and ally Saudi Arabia. Like, it was he who gave a break to some countries in terms of buying Iranian oil and does not want oil prices to rise above $100 a barrel.

But no matter how the struggle for oil prices between Washington and OPEC+ turns around, experts are more and more inclined to think that oil quotes below $70 per barrel are unlikely to fall. And this cannot but rejoice the Azerbaijani ordinary person in the street, who long ago understood that the country's budget and, consequently, the well-being of the population almost entirely depends on world oil prices. Oil prices are rising - and the country's economy is growing, oil prices are falling - expect high inflation, or even devaluation of the manat. This has been finally realised by the people...

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