Iran forgetful of past as oil prices strengthen

Production outages in some OPEC countries are adding to the upward pressure on oil prices. (Reuters)
Updated 16 September 2018
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Iran forgetful of past as oil prices strengthen

The upward momentum of oil prices has returned. In the week ending Sept. 14, the Brent crude price rose to $78.09 per barrel and WTI hit $68.99. The Brent/WTI spread continues to widen significantly. From $5.50 at the end of July and $7.60 at the end of August, it closed at $9 per barrel on Friday. This is mainly attributed to the very low inventories at Cushing, Oklahoma, which are 33.2 million barrels lower than last year’s levels. This has resulted in heavy discounting of the price of WTI at Midland compared to WTI at the US Gulf Coast. The wider Brent/WTI spread is also attributed to concerns about the upcoming sanctions on Iran that will take effect on Nov. 4.

Iranian oil exports have tumbled to nearly 1.7 million barrels per day, the lowest output in more than two years. There is resulting unease that refiners’ demand is exceeding supply. Tightness in the oil market became evident after the price structure for Brent shifted into backwardation after flirting with contango for most of the previous four months, signaling a tightening of the spot market. Backwardation is when the current price of oil is higher than a distant futures contract. It is seen as a sign of higher immediate demand and a lower oil supply.

This week, backwardation strengthened further, with prompt-month prices higher than forward prices. This does not incentivize the stockpiling of crude. Backwardation market structure is a bullish factor that increases prompt trading activities and draws down inventories. That is a real concern when global oil inventories have already declined.

One country is trying to take advantage of the tight oil market. Iran believes that US sanctions will be unable to reduce Iranian oil exports to zero. Its position is that the global oil market is already tight and rival producers cannot make up the shortfall. However, Iran has neglected to consider Saudi Arabia’s spare capacity of 2 million barrels per day. It has also conveniently forgotten that Saudi Arabia substituted most of Iran’s shortfall in oil output during the 2012-2015 sanctions. Iran is behind much of the rumor-mongering in regard to the imminent rise in oil prices. In truth, the market is tight but oil prices are stable in the range of $72 to $78 per barrel. This is a result of Saudi Arabia’s influence in working with OPEC+ for the good of the global economy.

Outages in some OPEC countries are adding to the upward pressure on prices. Though the US Energy Information Administration (EIA) reported that Libyan crude production jumped in August by 290,000 barrels per day, to 950,000 barrels per day, Libya’s oil production has been volatile and unstable. Major outages at several Libyan ports in June created anxiety that helped push up prices. Output fell from around 1 million barrels per day earlier this year to as low as 660,000 in July.

The EIA also reported that Venezuelan production sank to just 1.26 million barrels per day, continuing its freefall as a result of the country’s economic collapse. Such low exports are tragic for a country with some 300 billion barrels of proven reserves. Unfortunately, due to years of underinvestment, there is currently no hope of Venezuela raising production.

In Iraq, the situation is difficult as well. The protests in Basra, where most Iraqi production and export facilities are located, have created tension in such a tight market. As yet, the violence has not affected oil production, which reached 4.55 million barrels per day in July, and exports recently hit a record of 3.59 million barrels per day. It takes nerves of steel to safely navigate such market conditions. 

• Faisal Mrza is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalmrza.


‘Don’t be too optimistic’: Huawei employees fret at US ban

Updated 26 May 2019
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‘Don’t be too optimistic’: Huawei employees fret at US ban

  • This week Google, whose Android operating system powers most of the world’s smartphones, said it would cut ties with Huawei
  • Another critical partner, ARM Holdings, said it was complying with the US restrictions

BEIJING: While Huawei’s founder brushes aside a US ban against his company, the telecom giant’s employees have been less sanguine, confessing fears for their future in online chat rooms.
Huawei CEO Ren Zhengfei declared this week the company has a hoard of microchips and the ability to make its own in order to withstand a potentially crippling US ban on using American components and software in its products.
“If you really want to know what’s going on with us, you can visit our Xinsheng Community,” Ren told Chinese media, alluding to Huawei’s internal forum partially open to viewers outside the company.
But a peek into Xinsheng shows his words have not reassured everyone within the Shenzhen-based company.
“During difficult times, what should we do as individuals?” posted an employee under the handle Xiao Feng on Thursday.
“At home reduce your debts and maintain enough cash,” Xiao Feng wrote.
“Make a plan for your financial assets and don’t be overly optimistic about your remuneration and income.”
This week Google, whose Android operating system powers most of the world’s smartphones, said it would cut ties with Huawei as a result of the ban.
Another critical partner, ARM Holdings — a British designer of semiconductors owned by Japanese group Softbank — said it was complying with the US restrictions.
“On its own Huawei can’t resolve this problem, we need to seek support from government policy,” one unnamed employee wrote last week, in a post that received dozens of likes and replies.
The employee outlined a plan for China to block off its smartphone market from all American components much in the same way Beijing fostered its Internet tech giants behind a “Great Firewall” that keeps out Google, Facebook, Twitter and dozens of other foreign companies.
“Our domestic market is big enough, we can use this opportunity to build up domestic suppliers and our ecosystem,” the employee wrote.
For his part, Ren advocated the opposite response in his interview with Chinese media.
“We should not promote populism; populism is detrimental to the country,” he said, noting that his family uses Apple products.
Other employees strategized ways to circumvent the US ban.
One advocated turning to Alibaba’s e-commerce platform Taobao to buy the needed components. Another dangled the prospect of setting up dozens of new companies to make purchases from US suppliers.
Many denounced the US and proposed China ban McDonald’s, Coca-Cola and all-American movies and TV shows.
“First time posting under my real name: we must do our jobs well, advance and retreat with our company,” said an employee named Xu Jin.
The tech ban caps months of US effort to isolate Huawei, whose equipment Washington fears could be used as a Trojan horse by Chinese intelligence services.
Still, last week Trump indicated he was willing to include a fix for Huawei in a trade deal that the two economic giants have struggled to seal and US officials issued a 90-day reprieve on the ban.
In Xinsheng, an employee with the handle Youxin lamented: “I want to advance and retreat alongside the company, but then my boss told me to pack up and go,” followed by two sad-face emoticons.