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
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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.


India suspends Kashmir border trade with Pakistan

Updated 19 April 2019
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India suspends Kashmir border trade with Pakistan

  • Kashmir has been on edge since a February suicide attack that killed 40 Indian paramilitaries
  • India said it had reports that trade on the border was being “misused by Pakistan-based elements for funnelling illegal weapons, narcotics and fake currency”

NEW DELHI: India has suspended trade across its disputed Kashmir border with Pakistan, alleging that weapons and drugs are being smuggled across the route, as tensions simmer between the nuclear-armed neighbors.
Kashmir has been on edge since a February suicide attack that killed 40 Indian paramilitaries and brought the two countries to the brink of war with cross-border air strikes.
On Thursday, India’s government, which is in the middle of a tough national election, said it had reports that trade on the border was being “misused by Pakistan-based elements for funnelling illegal weapons, narcotics and fake currency.”
It also said many of those trading across the Line of Control, which divides Kashmir into zones under Indian and Pakistani control, had links to militant organizations.
The home ministry said trade would be suspended until a stricter inspection mechanism is in place.
The cross-border trade is based on a barter system, with traders exchanging goods including chillies, cumin, mango and dried fruit.
It began in 2008 as a way to improve strained relations between New Delhi and Islamabad, who have fought two of their three wars over the disputed region.
The Indian Express newspaper said Friday that 35 trucks carrying fruit traveling from the Indian side of the border had been stopped after the government order.
Trade on the border has been suspended before, including in 2015, when India accused a Pakistani driver of drug trafficking.
The latest move comes after India withdrew “Most Favoured Nation Status” — covering trade links — from Pakistan after the February attack, which was claimed by the Pakistan-based Jaish-e-Mohammed Islamist group.
Islamabad has denied any involvement in the attack.
India’s Hindu nationalist Prime Minister Narendra Modi has made national security a key plank of his re-election campaign, pointing to the recent flare-up of violence as he battles the center-left opposition Congress party.
He is seeking a second term from the country’s 900 million voters in the mammoth election which kicked off on April 11 and runs till May 19. The results will be out on May 23.