OIL CRYSTAL BALL

Azerbaijan 2016 | ENERGY | FOCUS: OIL FORECAST

The global oil forecast calls for subdued optimism alongside a healthy dosage of patience for Azerbaijan.

While it is certainly true that this economic era in Azerbaijan has been characterized largely by the rapid expansion of non-oil sector development and investments, the fact remains that oil plays an overwhelmingly large role in the national economy. As further proof of the strong financial connection, the global free fall of the price of a barrel of oil by 3-4 times was ultimately responsible for the Central Bank of Azerbaijan's decision to introduce a floating exchange rate regime and to abandon its currency peg on the dollar. The country was losing revenue and quickly burning through its foreign currency reserves in an attempt to keep the value of the manat at a steady level. The country's financial institutions spent billions in the effort to keep the manat propped up against the low oil price and the government was forced to redo the 2016 state budget, fixing the price of oil at $25 per barrel instead of the initial state forecast of $50. Despite this reality, the bulk of foreign investment flows to Azerbaijan was still focused on the oil sector in 2015, which shows that many investors feel strongly that this low oil price is merely a passing phase. Thus, analyzing the current oil market prices and trends is a hot science right now.

In its January 2016 report, the World Bank lowered its oil cost predictions from $51 in October of 2015 to a $37 price per barrel average over the year 2016. The World Bank based this analysis on a variety of trends and international economic factors, including the fact that while supply continues to grow, demand is not keeping apace. This is most importantly the case in emerging economies. An interesting fact cites that these emerging market economies, which have entered into economic slumps as of late, have been the principal drivers of growth in the commodities markets since the year 2000. China is a particular focal point in this discussion, as it is the world's second largest crude oil importer (behind only the US). Some are calling into question the effects of the economic turbulence that have been seen in the country over the past year. China's crude imports decreased by almost 5% compared to the year before, which is also another worrisome sign. In addition, the resumption of Iranian oil output on the international market will further complicate the situation of the already weak demand. Financial services corporation Morgan Stanley also decreased their forecast on the average price of a barrel of oil from $49 to $30 for the year 2016 and investment giant JP Morgan also projected a 2016 forecast of $31.50.

An interesting historical perspective and point of view to keep in mind, this is certainly not the first time the global oil markets have dipped this low. While the price did fall at a fast rate in this instance, a comparable phenomenon happened in 2009, with oil prices suddenly dropping by $100 per barrel compared to the year before. After 2009, oil prices started to slowly creep back up. In addition, the price of a barrel of oil was under $60 for almost the entire period of 2000-2005, before widely jumping around for the next decade. In fact, from the end of 2009 until the big drop of 2014, the price of oil never dipped below $60 per barrel (based on Brent prices) and averaged almost $100 per barrel during this time. A poll of 13 investment banks taken by The Wall Street Journal reveals that they do not think that oil prices will reach $70 per barrel again until 2018, and the aggregate average of all these banks' predictions puts the oil price as posting modest, but significant growth to $46 per barrel as early as 4Q2016. While the ups and downs of this famously volatile market are important to keep in mind when discussing the future, economists at the World Bank agree that the price of oil will indeed stage an increase, but this rise will not be as substantial of an increase as the market has seen in years past. The low prices in the oil market will also help encourage Azerbaijan's advancements in other important economic areas.