Production cuts dilemma for Opec and Russia ahead of Vienna summit

The stage for Vienna may be set at the G20 meeting in Buenos Aries where the world’s most powerful oil players have an opportunity to come to a loose agreement. Above, the Vienna State Opera. (AFP)
Updated 01 December 2018

Production cuts dilemma for Opec and Russia ahead of Vienna summit

  • OPEC and its allies are under pressure to slash production after a price collapse
  • The oil price has fallen 30 percent to around $60 per barrel since early October

LONDON: OPEC and its allies face a dilemma when they meet in Vienna, Austria on Dec. 6 to decide on a strategy that could shape the oil market in 2019.
They are under pressure to slash production after a price collapse that has sparked memories of the rout in 2014/16.
But how tightly should they turn off the taps? Too much and the price may rise too sharply, further incentivising shale production in the US.
Too little, and the price could fall further making it more difficult for Gulf economies to balance their budgets.
The oil price has fallen 30 percent to around $60 per barrel since early October. Fears of a supply crunch have subsided since President Trump disclosed that countries such as China could continue to import Iranian oil for at least six months – despite the re-imposition of US sanctions on Tehran.
Combined with slowing global economic growth and a surge in US shale production, the Iranian waivers convinced the market that supply would exceed demand and the price has plummeted.
It was only around six months ago that Saudi Arabia and others boosted supplies to allay market fears that the hobbling of Iranian exports and strong global growth would lead – inexorably- to a supply crunch.
Now, there is talk once again of a supply glut and the old story line that the price will be “lower for longer” has resurfaced.
As a consequence, OPEC and its allies known as OPEC + with KSA and Russia being the leading players – are considering cutting production to support prices when they meet in Austria.
But a complicating factor for OPEC and Riyadh, in particular, is that President Trump has called on the Kingdom to keep prices low for the benefit of his working-class voter base in the US.
OPEC, it appears, must perform a geopolitical trapeze act, as well as an economic one, linked to guesstimates about future supply and demand trends.
There are different views about what the final communique from Vienna will say.
Speaking to Arab News, Riccardo Fabiani geopolitical analyst at London-based consultancy Energy Aspects said: “There is definitely pressure from the White House on Saudi Arabia to roll back promises of cutting production…or to soften production cuts. The trouble is KSA can’t go back to their allies and say actually ‘we are now not cutting production’.
Fabiani said the pressure to avoid a price crash “is stronger than the pressure coming from the White House, so eventually there will be a production cut because it is what KSA, OPEC and Russia need and want”.
The extent of the cut is “the political game” that will be played from here on in, he added.
This weekend’s G20 meeting in Buenos Aries could afford the world’s most powerful oil players an opportunity to come to a loose agreement, setting the stage for Vienna. After all, those three nations collectively speak for a third of global oil production. But whether a broad consensus can be found is questionable.
At an oil ministers summit in Nigeria on Wednesday Saudi Arabia Energy minister Khalid Al-Falih said the Kingdom would not cut oil output on its own to stabilize the market, and Nigeria and Russia said it was too early to signal whether they would join any production curbs, according to a Reuters report.
Shakil Begg global head of oil research at Thomson Reuters told Arab News that Opec would “probably make a gesture, they might change quotas around, or something like that”, but he thought the market could rebalance without any adjustment as demand would strengthen in the winter months and there are currently problems linked to “physical supplies actually reaching the market”.
Countries such as Venezuela, Iraq and Angola were supplying less than earlier projections, he said. “We monitor vessel tracking, crude oil exports, and they fell in October to probably the second lowest level this year to around 24/25 million OPEC barrels a day,” said Begg.
But he agreed that some form of co-ordinated action from within the broad OPEC group was on the cards.
“The issue is whether they can make a symbolic gesture to reduce output. But they must also scrutinize how much oil is reaching markets via export,” said Begg.
Adrian Del Maestro oil and gas strategy director a PwC Stategy& [subs: correct title] told Arab News: “Most analysts think that a supply cut is inevitable, but who takes that hit is another conversation.
He added: “KSA will want to deliver cut in a way that has the minimum amount of geopolitical fallout.”
The oil picture, he said, is different than in 2014 — 2016 when several US oil producers became financially distressed when the oil price collapsed.” 
Del Maestro said: “Innovation and efficiencies have lowered break-even prices dramatically. That means the US tight oil sector can today survive at a lower price point — in the $40s to $50s price range. In 2014-16 they needed about $70.”
He said Saudi Arabia needs between $70 and $80 to balance its national budget, although other analysts have suggested the Kingdom would prefer $80-plus.
Giovanni Staunovo, an analyst at UBS said in a note to clients: “The size of any potential cut will depend on how much oil demand growth slows down, how much Iranian supply falls due to US sanctions, and how fast US supply rises.”
Writing in the Financial Times, Christyan Malek, JPMorgan’s head of oil and gas research in London said the latest oil rout would serve as a stark reminder for Gulf countries to stay the course on fiscal consolidation or risk economic failure in a volatile oil market. “If they succeed, a positive corollary is that OPEC countries will invest the excess cash windfall into incremental oil capacity and long-term economic diversification away from oil.” said Malek.

China flags up UAE as Silk Road mega-hub with $300m port deal

Updated 37 min 34 sec ago

China flags up UAE as Silk Road mega-hub with $300m port deal

  • Cosco has invested an initial $300 million in CSP Abu Dhabi Terminal
  • The expansion plan foresees a capacity of 9.1 million TEU by 2023

ABU DHABI: China, the world largest trading nation, has thrown its weight behind Abu Dhabi as the Middle East hub for its Belt and Road Initiative (BRI) in an alliance with the UAE capital’s Khalifa Port.

Cosco, the Shanghai-based, state-owned group that ranks among the biggest shipping companies in the world, has invested an initial $300 million in the CSP Abu Dhabi Terminal, the first step in an investment program that could help make it one of the biggest ports in the Arabian Gulf over the next five years. Additional investment is pledged.

The expansion plan foresees a capacity of 9.1 million TEU (20-foot equivalent units, the standard measurement in the global container industry) by 2023. Jebel Ali, just 50 km away in Dubai, is currently by far the biggest port in the region with capacity of 22.1 million TEU.

China’s BRI is a state-sponsored strategy to enhance land and sea trading infrastructure in Asia, the Middle East and Africa via multibillion-dollar investments in trading hubs across the eastern hemisphere.

The Cosco-Abu Dhabi deal was unveiled at a ceremony at the port attended by prominent UAE and Chinese leaders.

Sheikh Hamed bin Zayed Al-Nahyan, chief of the Abu Dhabi Crown Prince Court, said: “China and the UAE share a strong and long-standing bond across a variety of ties, including economic, cultural, and trade and investment, and a common vision of a stable and prosperous future for our peoples and the world.”

He Jianzhong, China’s deputy minister of transport, said: “(The) terminal is the latest major achievement from China and the UAE’s joint efforts to implement ‘the 21st-century Maritime Silk Road’ in the ports and shipping industry.”

The deepwater, semi-automated container terminal includes the largest container freight station in the Middle East, covering 275,000 square meters.

“The state-of-the-art facility offers facilities for full and partial bonded container shipments, the full range of container packing services, short-term warehousing for deconsolidated cargo, as well as easy connectivity with container terminals in Khalifa Port,” a joint statement said.

The terminal has a design capacity of 2.5 million TEU and will begin with a handling capacity of 1.5 million TEU, with 1,200 meters of quayside. The water depth of the terminal is 16.5 meters, allowing it to accommodate mega-vessels typically carrying in excess of 20,000 TEU.

Ning Jizhe, deputy director of China’s National Development and Reform Commission, a state planning organization, said: “This inauguration ceremony is not only a milestone in the cooperation of China’s ‘Belt and Road Initiative,’ but also a good start for China and the UAE’s pragmatic cooperation in other key areas.”

Trade ties have been growing between China and the UAE since a visit by Abu Dhabi Crown Prince Mohammed Bin Zayed Al-Nahyan to Beijing three years ago. Chinese President Xi Jinping visited the UAE last summer.

The deal with Cosco is aimed at attracting foreign investment into the UAE via the Khalifa Industrial Zone of Abu Dhabi (KIZAD), the huge logistics and manufacturing zone that borders the port.

China’s BRI is one of the most ambitious infrastructure projects in history, but has been criticized by some observers for leaving the partners of Chinese companies in debt.