Weekly Energy Recap: Too early to gauge trade tension fallout on oil markets

Trade and geopolitical tensions are competing to influence the price of oil. (Reuters)
Updated 19 August 2018

Weekly Energy Recap: Too early to gauge trade tension fallout on oil markets

  • Oil prices have moved in narrow band since June
  • Brent/WTI spread widens over week

Brent crude finished the week at $71.83 per barrel while WTI dropped to $65.91 as the Brent/WTI spread widened to $5.92 per barrel.
Oil prices fell as a result of market sentiment impacted by hypothetical fears over lower global economic growth.
Brent crude price fell below $72 for the first time since mid-April 2018.
Oil prices have moved in a narrow band since early June 2018.
The Brent price had been hovering between $73 and $78, until it dropped to nearly a four-month low at the middle of the week, then recovered by the week’s closing.
Oil fell after both OPEC and the International Energy Agency’s (IEA) monthly oil market reports forecasted lower growth in oil demand.
This was claimed to be a result of the major downside risk on economic growth amid US-China trade tensions.
These are reportedly impacting emerging economies across Asia as a strengthening dollar weakens their local currencies, and thus reduces purchasing power for transport fuel.
On the other hand, the IEA reported that oil consumption for plastics and other petrochemicals will keep demand growing and elevated for decades as this is driven by population growth and urbanization.
After oil inventories in the US fell to the lowest level since February 2015, last week, the US Energy Information Administration (EIA) reported an unexpected significant build up in US commercial crude oil inventories of 6.8 million barrels. This brought oil inventories slightly back above the five-year average.
The drawdown in US refined products inventories came on the back of US refineries running at a record capacity. On average they refined 18 million barrels per day for the first time, in order to meet high gasoline demand for the summer season.
This was an increase of 383,000 barrels per day on the previous week’s average.
Analysts are also making much about Saudi Arabia’s output cuts for July 2018. Last month the Kingdom lowered output by 200,000 barrels per day to 10.288 million bpd. My perspective on this is that it has nothing to do with potentially lower economic growth as a result of trade disputes between the US and China, nor emerging market turmoil.
Instead, as the world’s swing producer, the Kingdom must track the output of other OPEC nations and adjust its production accordingly. This is exactly what happened after Libyan oil output recovered and exceeded one million barrels per day for the first time since last June. Consequently, Saudi Arabia reduced production.
Saudi Arabia, as the only swing producer, changes its crude oil production to meet fluctuations in market demand. In reality, it’s far too early to know what influence trade tensions will have on economic growth. It will take time for such impacts to materialize and weigh on the market fundamentals.


INTERVIEW: Philip Morris International mideast chief on using hi-tech to progress toward a smoke-free future

Updated 18 August 2019

INTERVIEW: Philip Morris International mideast chief on using hi-tech to progress toward a smoke-free future

  • Tarkan Demirbas tells Arab News how smart technology will woo 9 million Gulf smokers and reduce risk

Alongside politics and religion, there is one other dinner party subject virtually guaranteed to push people to opposing extremes: Smoking.

In much of the world — especially the West but increasingly in the Middle East and other emerging markets — tobacco has been marginalized to the point where smokers feel shunned and lonely in many social environments, banished to pavements or poorly ventilated kiosks in airports.

After a series of multi-billion dollar lawsuits around the globe for the undoubted bad effects smoking has on health, Big Tobacco — the giant multinational companies that made billions out of the nicotine habit but neglected to say exactly how bad it was — is nowhere near as big as it once was.

All of which leaves Tarkan Demirbas with something of a challenge. He is vice president for the Middle East of one of the biggest tobacco companies, Philip Morris International (PMI).
Think Lucky Strike and the Marlboro Cowboy, legends of the industry and of marketing before grim, litigious reality overtook
the business.

BIO

BORN • 1968, Erzurum, Turkey.

EDUCATION • Bogazici University BSc Industrial engineering. • University of West Georgia, MBA.

CAREER  • Senior management positions at PMI in Hungary, Colombia, Malaysia, Singapore, Switzerland. • Vice President Middle East.

Demirbas is on message for the new anti-tobacco era. “There is no doubt that the best way to reduce the risks of smoking is to not smoke or use any nicotine product at all,” he said recently at an event in Dubai’s Capital Club, an oasis of tobacco-friendliness in the anti-smoking desert of the Dubai International Financial Centre.

On the surface, that seems a strange line from somebody who for the past 15 years has been promoting PMI’s products around the world, from southeast Asia through Budapest and on to Bogota with a stint at PMI’s Swiss HQ along the way.

But it coincides with a new direction PMI has taken. The new buzz-phrase in the company is “a smoke-free future.”

PMI launched the initiative with a “commitment and ambition to replace cigarettes as soon as possible with better alternatives to smoking for the millions of men and women who would otherwise continue to smoke.”

That might sound like turkeys voting for Christmas, but there is a sound business logic, as Demirbas explained. “The reality is that the vast majority of smokers simply do not quit. Even the World Health Organization’s own predictions forecast that there will continue to be more than 1 billion smokers by the year 2025,” he said.

“This is why a growing number of experts believe that public health policies should not be based solely on discouraging initiation and encouraging cessation, but need to leverage the potential of scientifically substantiated smoke-free products for the benefit of smokers and public health,” he added.

Technology is key to the campaign, and the product that PMI has come up with is IQOS. The Dubai event marked its regional launch. Imagine a slim mobile phone with a stubby cigarette sucking out of one end, encased it in a stylish carrying case-cum-charger, and you have an idea of IQOS.

Unlike other electronic smoking devices which vaporize nicotine juice, avoiding the harmful effects of the pathogens produced by burning tobacco, IQOS stays with the weed but does not burn it.

By heating tobacco sticks — called Heets — that look like mini-cigarettes to 350 degrees Celsius, the nicotine that smokers crave is released, but the tobacco is not burnt. Demirbas cites respected scientific sources as well as PMI’s own research indicating that 95 percent of the harmful by-products of tobacco are avoided.

Amid jokes that the Marlboro Cowboy would find it hard to use IQOS and ride his horse at the same time, nicotine-hooked cigarette smokers at the event said the result was pretty close to the “real thing.”

There is potentially a big market to go for, globally as well as regionally. Worldwide, some 150 million people use PMI’s tobacco products, still overwhelmingly traditional cigarettes. By 2025, he aims to get 40 million of those onto heated tobacco products like IQOS.

“This year, our priority is to go deeper into existing launch markets. We are encouraged by the results to date, including that there approximately 8 million smokers who have completely abandoned cigarettes and switched to IQOS. Japan is the best example of IQOS’ success, where we have achieved nearly 17 percent of the national share of the market,” he said.

IQOS is currently in nearly 50 markets, including Japan, Korea, Canada, a number of European countries such as Germany, the UK and Spain, as well as Russia, Ukraine and Colombia.

PMI passed a significant milestone in its campaign to go global with IQOS when the American Federal Drug Administration authorized IQOS and other variants. It will market its products in the US in partnership with Altria, the big investor which has made a commitment to the “smoke-free future” with multibillion dollar funding of Juul, the market leader in the worldwide vaping craze.

 “There are 40 million American men and women who smoke. Some of them will quit, but most won’t, and for them IQOS offers a smoke-free alternative to continued smoking,” Demirbas said.

Progress towards smoke freedom remains elusive in China, the world’s biggest market, where PMI markets Marlboro and in turn promotes traditional Chinese tobacco brands around the world.

The UAE joined the list of countries heading smoke-free last year when an IQOS stand appeared in Dubai International Airport’s duty free section. The UAE was ambivalent about the value of trying to lure smokers off tobacco and onto safer products, with the Emirates’ health authorities warning against the use of e-cigarettes and vaping devices. 

But the IQOS airport stand was a sign of a change of heart, and was followed by public pronouncements that vaping would also be made legal. Users in the UAE had previously resorted to some pretty furtive measures to get their nicotine fix, but non-tobacco nicotine products appeared to be here to stay, judged by the large numbers of people seen sucking on devices in many outdoor public places.

After the UAE launch, non-cigarette nicotine is going mainstream. The Heet sticks will be on sale for around DH20 (SR20) per pack — roughly the same as a pack of Marlboro — in most traditional smoking shops, while the devices — retailing at around Dh250 — will be sold in Carrefour supermarkets and, eventually, branded flagship stores.

Demirbas sees the UAE as a testing ground for expansion into other Middle Eastern markets, with Saudi Arabia high on the list of targets. PMI already knows there is an appetite for its device in the Kingdom from the large numbers of Saudi citizens buying them at Dubai airport.

At the airport, they have to present national ID cards or passports as proof of age — 18 is commonly the age limit for buying tobacco products in the Gulf region — as well as making a declaration that they are already smokers who wish to quit cigarettes. “I stress that we are trying to convert existing smokers, not trying to get anybody started on nicotine,” Demirbas said.

“From a public health standpoint, we see great potential for reduced risk products in Saudi Arabia. In our view, it is important to set the right regulatory framework to ensure companies adhere to best practices and comply with local legislation with the adult consumers of these products in mind, particularly as alternative forms of nicotine consumption are being recognized in leading global markets, including Saudi Arabia,” he said.

“Our ultimate goal is to convert all the 9 million adult smokers across the GCC, who would not otherwise quit, to IQOS,” he added.

PMI faces significant competition in its mission. Juul, the trendy but controversial device that has grabbed a big slice of the global market as the “iPhone of the vaping business.” Several other vaping products already have a foothold and a cachet that could be challenging for PMI.

At the Capital Club, the test audience for the IQOS launch was a mixed band of cigarette and vape users who gave the new product serious consideration. Some were sold on it straight away, others said they would give it a try and were gifted samples by PMI. The stylish look of the new product was a big selling point for the tech-style savvy consumers.

Others were put off by the charging process that has to be carried everywhere and used between smokes. One complained that the taste was simply too similar to the cigarettes he had been trying to kick for years.

As Big Tobacco seeks to reposition itself in the new anti-smoking age, the multibillion dollar nicotine industry will always be controversial. Maybe IQOS will be the hi-tech product that helps millions finally kick the smoking habit. Demirbas hopes so.

“We’ve invested $6 billion in it. It’s the most advanced technology there is,” he said.