"Kaspi" publications

"In any case, oil prices will rise"

Ilham Shaban doesn't think OPEC is able to play an important role in shaping oil prices

Oil prices have started to go down again in international markets. The other day, the price of a barrel of "Azerilight' brand oil dropped by $1.65 or 4.81% to $32.61. Jeff Currie, head of commodities research at Goldman Sachs, has stated that the oil prices will continue to fall. According to him, the reason for this is the excessive oversupply of oil market and in this situation, the prices will not only not rise but will rapidly fall until a barrel of oil cost only $20. However, CEO of BP Robert Dudley was more optimistic and said the oil prices would be around $40 dollars in the middle of the year and around $50 towards the end of the year. Theodore Karasik, Senior Advisor to Risk Insurance Management in Dubai and an analyst of geopolitical affairs in the Middle East, has stated that the oil prices will reach $55 only in 2017. As we see, the price of oil in global markets is not stable and experts give conflicting predictions about it. But what do Azerbaijani experts think about it, what do they predict and how do they assess the global processes? Ilham Shaban, head of Oil Research Center and an economist, answered the questions of "Kaspi" on this issue.

- Ilham, foreign experts make different predictions with regard to oil prices. As someone who is a researcher in this field, what do you think?

 - International Energy Agency released its report for February two days ago. The report revealed very unpredictable results. First one was that, global oil production did not decline in January. Oil production continued to increase, particularly in OPEC countries. In non-OPEC countries, there's a decrease in oil production. To be honest, this is not a big decrease. But three big oil producers - Saudi Arabia, Iran and Iraq continues to produce more oil. At a time when oil market is oversupplied, the fact that these countries increase their oil production is a sign that oil prices will go down. International Energy Agency shows that, the demand for oil will decrease by a hundred thousand barrels. After the report was released, the global oil prices began to fall. The price of West Texas oil fell to $29. Brent oil price dropped below $33 and is now set at $31. The price of Brent oil was $36.77 on 26 January. At the same time, International Energy Agency reports predicts a pessimistic direction for the oil prices for current year.

 - At a time when oil prices are falling, the demand for energy in China and Europe is also decreasing . This, of course, has an impact on oil prices as well. So a question arises, why did the demand for energy in the countries I mentioned decline? Is this a political game or does it have any economic basis?

 - It isn't a very complicated matter. The thing is, Chinese economy have implemented too many infrastructure projects in recent years. For example, there were so many railroads being built in China in a year that it was more than all railroads built in the world in a year combined. And you need iron and steel to build railways. And to produce steel, you need energy. China was buying oil and gas to supply this energy. The second factor has something to do with carrying out construction work. Aluminum is widely used in construction and number one producer of aluminum in the world is Australia. Aluminum consumption went down 5 times all of a sudden. As a result, the national currency of Australia collapsed. On the other hand, copper, steel and iron production fell. In general, they were spending hundreds of millions of dollars on infrastructure projects. It has to come to an end and the end was predicted. After oil prices began to drop in 2014, these predictions started to come true. As for Europe, the demand for energy hasn't increased there since 2010. If we equate energy with oil, the demand for it has dropped to 1985 levels. It shows that, alternative energies are being applied in the West on a large scale. In Denmark, alternative energy supplies 90% of demand for thermal energy. It used to seem unthinkable. 40% of the country's demand for energy is met by alternative sources of energy. Many countries don't regard alternative energy as their main demand for energy, they also prioritize using energy rationally. For example, in the past, to carry out a certain task you would use a kilowatt energy, nowadays they only use half of it. This and other factors reduces the demand for energy in China and Europe.

 - Foreign experts think that, Saudi Arabia, who wants to weaken the USA, Russia, Iran and cause economic and political crisis. What do you think, what factors play a bigger role in sharp decline in oil prices, political or economic?

 - There are, of course, political reasons as to why oil prices are falling. Some countries rely on their rich currency resources. On the other hand, they have no alternatives to selling oil. And most importantly, those countries are entering a competition in Gulf with their arch-enemy Iran. That's why they don't want to lose their place in the oil market to anyone.

 - Starting from 16 February, Iran will start exporting large amounts of oil to Europe. How can this factor affect the regional processes as well as big economic projects?

 - If you mean TAP and TANAP when you mention the economic projects in the region, I don't think they would be negatively effected by Iran selling oil to Europe. Because said projects are a priority for Azerbaijan. Those projects are funded by the Oil Fund. And the countries participating in the projects are funding themselves. The main issue is, the companies should have the means to fund it and they can fulfill their obligations. Azerbaijan will be able to fulfill its obligations under the project. At the moment, the construction is its second phase and 20% of work is completed. "Shahdeniz" project is almost done. It is a very pleasing situation. Some 15 thousand people are working on this project. If you start a project, there is no point halting it. Reputable big companies have made a decision about launching these projects and they are also supported by the state. As for the influence of Iran's oil export on the region, Caspian countries are oil-gas rich and they are dependent on oil. Iran is the only country in this region who have a developed non oil sector. Being under constant economic sanctions, and unable to sell its oil has led Iran to develop other sectors of economy. So Iran can survive even when oil prices are down. The same cannot be said about Russia, Kazakhstan, Turkmenistan. Azerbaijan has also prospered for 15 years due to oil revenues. But we are facing a new reality and entering a difficult era in the light of falling oil prices. We have to reconcile with this fact.

 - Can OPEC regulate the oil prices by some administrative means ?

- Although OPEC produces a third of all oil in the world, this organization has not been able to play an important role in shaping global oil prices since 21th century. The main actor here is the USA. Energy Administration of the US has the power to influence global oil market by 3% when it announces weekly energy reserves of the country. But when OPEC adopts certain decisions, nothing changes in the market.

 - The production of shale oil in the USA is declining. Can this decline lead the US to produce more oil and thus raise the price of oil in global market?

 - It is true that shale oil production is declining in the USA and this is a steady process. Some shale deposits and wells that sell oil at $35 and even $40 are shutting down. But there is one issue, the profitability of operating wells in the USA is high. If you remember, it was projected that if the oil prices drop below $50 in 3 months, the production of shale oil in the USA would be completely stopped. But due to the profitability factor, this scenario did not come true.

Despite the shutting down of more than a thousand wells, the oil production hasn't decreased. Because the profitability of oil fields is too high.

- It is predicted that oil prices will be $40 in mid-year and $50 close to the end of the year. What do you think about this?

 - I have observed and researched oil market for 20 years. Usually when making predictions on oil, it would be negative, positive, negative-normal and positive. There were times when the difference between the predictions were only 2 dollars and later it rose up to $5. But the difference between predictions for the current year has exceeded $15. What it means is, there are many scenarios and even the participants of the oil market find it difficult to predict which scenario will come true. It is difficult for me too to make a prediction about this. But in any case, oil prices will rise. But the reality is, at present the $50-60 oil will be the highest range. But at the same time, it is difficult to say the prices will be stable. We can't say the exact price of the oil in 4-6 months. It can drop to $25 and it can rise to $40. It can rise and fall again. Because when we are talking market prices, not only production, but also floating barges, the high volume of oil on the ground should also be taken into account. When the situation improves or there is a pessimistic prediction about the future, sellers try to sell those ground reserves in a short time. As a result, the oil prices sharply changes in 3 days. That's why broken lines in oil price figures always goes on and prices fall and rise. I assume these factors will prevent the stabilization of oil prices in a year and half.


Rufik Ismayilov




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