Oil production freeze is only the first step

Oil production freeze is only the first step
Updated 16 February 2016

Oil production freeze is only the first step

Oil production freeze is only the first step

LONDON: Oil ministers from Saudi Arabia, Russia, Venezuela and Qatar announced on Tuesday an agreement to freeze their oil output levels provided other major producers follow suit.
The deal would freeze Saudi and Russian production at the record rates reported in January and is unlikely to be accepted by Iran in its current form since the country escaped from sanctions only last month.
The agreement is provisional (depending on adherence from other oil producers) and unambitious (freezing rather than cutting production), which has led some commentators to dismiss its importance.
But experience suggests production agreements are normally reached in stages, often after several earlier attempts have failed or been only partially fruitful.
Successful agreements often exploit the temporary weakness of specific producing countries and at least some past participants have reserved the right to increase output beyond agreed levels in future.
Successful production agreements are usually of limited scope and duration, deferring more complicated and intractable issues about production allocations for later.
In that sense, the production freeze announced in Doha could be seen as a stepping stone toward a more ambitious and comprehensive deal in a few months' time.
The depth and duration of the price slump have taken all producers by surprise and are inflicting intense pain on all oil companies and exporting countries.
OPEC's original strategy of maintaining high production envisioned a modest and brief drop in prices that would quickly curb output from US shale formations and other high-cost producers and then restore the organization's market share.
The strategy may now be working, with reports of a downturn in US shale output and a sharp drop in non-OPEC exploration and production spending.
But the strategy has proved far slower and costlier than any OPEC member thought when prices started to slide in 2014.
There are still doubts about how quickly the market will rebalance and whether prices will recover, with most observers predicting no rebalancing until the second half of 2016, 2017 or even 2018.
OPEC's strategy has inflicted a "good sweating" on the oil market but also on members of the Organization of the Petroleum Exporting Countries itself.
The good sweating has in turn made most OPEC and non-OPEC producers more flexible and amenable to the idea of a production agreement, at least in principle.

DECLARING VICTORY
There is a strong incentive to declare the current strategy a success — and then quietly modify it. Key oil producers have already traveled some distance along this path.
Saudi Arabia and its close allies the UAE and Kuwait have stressed in recent weeks the strategy is working, and that they can weather the downturn, but indicated greater openness to production cuts in future.
Russia has also signaled it might be prepared to join in any eventual production agreement in some unspecified way.
Venezuela, one of the hardest-hit producers, has been marshaling support for a modest production-freezing agreement, culminating in Tuesday's Doha deal.
If most countries have sent mixed and confusing signals about their willingness to reach a deal, that reflects sound negotiating strategy as well as the extent of the remaining disagreements.
Until now, no country wanted to be the first to make a concrete production-limiting offer for fear of weakening its negotiating position.
The deal announced in Doha is incomplete in that it relies on concessions by other countries that were not party to the agreement, and may not restrict output enough to restore market balance.
But its significance is that it indicated at least a subset of the most important oil-exporting countries may be ready to do a deal.

IRAN: ABSENT PARTY
Iran will probably reject the deal in its current form (as might Iraq) since it would constrain the country's output at an unacceptably low sanctions-era level.
From a Saudi perspective, one of the deal's attractions is that it shifts some of the responsibility for continued overproduction and price weakness onto Iran.
The focus will now shift to Tehran and away from Riyadh and Moscow.
The form of Iran's rejection is what matters. Iran could reject the deal outright and announce it will maximize its production unilaterally.
Or Iran could accept "voluntary" limits on its production in the short term while announcing its intention to increase output later.
There is nothing to stop Iran agreeing "voluntarily" to restrict its exports in 2016, or even increasing them but below some projected baseline, while reserving the right to increase them further in 2017 or beyond.
Uncertainty about just how much Iran can actually produce once freed from sanctions is one reason Saudi Arabia and its allies have wanted to defer any talk of production cuts until mid-2016.
However, there are plenty of permutations available for creative diplomacy. Diplomacy is not about resolving irreconcilable differences but finding a formula that enables them to be put aside for a while so everyone can share short-term gains.
In this case, the question is whether OPEC members and Russia can put aside the bigger question of long-term market share to secure a short-term boost in oil prices and revenues.
Key to this is whether a deal now or later in the year can remove some of the current and expected surplus barrels from the market.
The way to judge Tuesday's deal in Doha is not whether it is a comprehensive solution to the oversupply problem but whether it makes an eventual broader deal more likely.
No one knows for certain whether a deal is possible, but the likelihood appears to have climbed in recent weeks, which is why oil prices have bounced off recent lows.

— John Kemp is a Reuters market analyst. The views expressed are his own.


Saudi fintech startup secures $1.2m seed funding

Saudi fintech startup secures $1.2m seed funding
Updated 26 January 2021

Saudi fintech startup secures $1.2m seed funding

Saudi fintech startup secures $1.2m seed funding
  • The Kingdom has proved to be a fruitful market for investment in startups

RIYADH: A Saudi financial technology company has raised $1.2 million in seed funding.

Hakbah’s success comes six months after the Riyadh-based startup received regulatory approval from the Saudi Central Bank (SAMA) to operate in the Kingdom.

The specific investors behind the financing have not been revealed.

Founded in late 2018 by Naif AbuSaida, Hakbah specializes in alternative saving and savings groups.

On its LinkedIn profile, the firm describes its mission “is to digitize financial habits by developing innovative savings products that help increase financial inclusion, support a non-cash society, and bridge the gender gap in savings.”

Hakbah graduated from the DIFC Fintech Accelerator Program 2019 in Dubai.

The Kingdom has proved to be a fruitful market for investment in startups. Saudi Arabia recorded a 35 percent year-on-year increase in the number of investment deals in the technology startup sector last year, according to a new industry report.

A study by data research platform Magnitt found that the Kingdom accounted for 18 percent of the 496 investment deals throughout the Middle East and North Africa (MENA) region last year.

Saudi Arabia, the UAE, and Egypt were the largest markets, accounting for 68 percent of total deals. However, while the Kingdom saw the number of investment deals increase by more than one-third, the UAE and Egypt witnessed volume decreases of 17 percent and 10 percent, respectively.

When it came to the monetary value of the deals, Saudi Arabia recorded a surge of 55 percent year-on-year to $152 million.

Nabeel Koshak, CEO at Saudi Venture Capital Co., said: “Saudi Arabia is witnessing an increase in the quality and quantity in the deal flow of startups. I am thrilled by the distinguished entrepreneurs who are creating fast growth and scalable startups.

“Despite the slowdown of (the coronavirus disease) COVID-19, Saudi Arabia saw a record increase in venture capital funding (55 percent) in 2020 compared with 2019.”

In its predictions for this year, Magnitt forecast that Saudi Arabia would overtake Egypt by total number of investments and capital deployed and become second only to the UAE in the rankings.