Last week in oil: The big Brent recovery as Iran sanctions loom

the close of last week, the Brent crude price had risen to $75.82 a barrel, with WTI (Nymex) also up late on Friday. (AFP)
Updated 25 August 2018

Last week in oil: The big Brent recovery as Iran sanctions loom

RIYADH: At the close of last week, the Brent crude price had risen to $75.82 a barrel, with WTI (Nymex) also up late on Friday.
Oil prices rose amid the fall in US crude inventories by 5.84 million barrels, the biggest drop in four weeks. Cushing, Oklahoma inventories were at multi-year lows, 40 million barrels down since mid-May. This was attributed to record-high US refining use amid healthy refining margins, and the summer driving season’s robust demand. Also, there has been a disruption of Syncrude production in Alberta since June.
The recovery in oil prices last week was also due to a tightening market as a result of the upcoming Iranian oil supply disruption.
Further tightening in the market came as S&P Global Platts figures showed sharply lower oil exports from Iran for the first half of August, down to 1.68 million barrels per day compared to July exports that averaged 2.32 million barrels per day.
In addition to the lack of upstream investment and new technologies, as the European oil supermajors have walked away from investing in Iranian upstream projects, Iran’s old oil fields are operating under severe production constraints and despite any cutback in exports, those fields will not be mothballed.
Instead they will keep pumping oil at a slow and steady pace. Iran will return to the 2012–2015 scenario, where it accumulated crude in floating storage vessels waiting for sanctions to end. This is the only way Iran can maintain production from its old wells. While Iran will still be producing, there will be fewer buyers.
Together, China and India have been the two largest purchasers of Iranian crude at about 1.2 million barrels per day. Unlike during the previous 2012-2015 sanction period, both China and India are trying in advance to navigate to other suppliers to partially replace Iranian crude. During the previous sanctions, China and India slightly trimmed their Iranian oil imports, but oil-to-goods swaps continued. When Iran had fewer customers both nations benefited from deeper discounts and took advantage of better terms. These trade swaps took years to settle.
It’s already clear that China and India are adopting different strategies in regard to Iranian oil. China is one of the biggest buyers of US oil exports. However, given the current China-US trade dispute, the Asian giant does not want to lose its Iranian crude imports. China has already been hit with the loss of Venezuelan crude, due to the collapse of production in the beleaguered South American nation. Now, China is indicating that it is still willing to purchase crude from Iran, even going so far as to switch to shipping the crude on vessels owned by the National Iranian Tanker Co.
On the other hand, India needs to maintain easy access to the US financial system and to do so it must aim to comply with the US sanctions policy. Like China, India has also lost access to 300,000 barrels per day of crude from Venezuela. It is aiming to purchase more oil from the US, Mexico, Azerbaijan and the Arabian Gulf, but replacing nearly 600,000 barrels per day of Iranian crude is a major undertaking. It seems that the economies of China and India are both vulnerable to the tightening oil market and uncertainties over supplies later this year, when US sanctions against Iran will start to bite.


Aramco profits fall in tough quarter, but sees partial recovery from COVID-19 impact

Updated 09 August 2020

Aramco profits fall in tough quarter, but sees partial recovery from COVID-19 impact

  • Aramco see’s “partial recovery” from pandemic impact
  • Aramco president says company remains resilient

DUBAI: Saudi Aramco, the world’s biggest oil company, reported a net income of $6.57bn for the second quarter of 2020, the period which witnessed the most volatile oil market conditions for many decades.

The result, announced to the Tadawul stock exchange in Riyadh where the shares are listed, compared with income of $24.7 bn last year.

Amin Nasser, president and chief executive, said: “Despite COVID-19 bringing the world to a standstill, Aramco kept going. We have proven our financial resilience and operational reliability, setting a record in our business operations, while at the same time taking steps to ensure the health and safety of our people.”

Aramco’s dividend - a big attraction for the investors who bought into the world’s biggest initial public offering last year - will remain as pledged, Nasser added. Cash flow in the quarter amounted to $6.106 bn.

““Strong headwinds from reduced demand and lower oil prices are reflected in our second quarter results. Yet we delivered solid earnings because of our low production costs, unique scale, agile workforce, and unrivalled financial and operational strength. This helped us deliver on our plan to maintain a second quarter dividend of $18.75 billion to be paid in the third quarter,” he said.

Aramco said the loss was “mainly reflecting the impact of lower crude oil prices and declining refining and chemicals margins, partly offset by a decrease in production royalties resulting from lower crude oil prices and a decrease in the royalty rate from 20 per cent to 15 per cent, lower income taxes and zakat as a result of lower earnings, and higher other income related to sales for gas products.”

Sales and revenue in the period - which saw oil prices collapse on “Black Monday” in April - fell 57 per cent to $32.861 bn from the comparable period last year. 

Nasser said he was cautiously optimistic that the world economy was slowly recovering from the depths of the pandemic lockdowns.

“We are seeing a partial recovery in the energy market as countries around the world take steps to ease restrictions and reboot their economies. Meanwhile, we continue to place people’s safety first and have adapted to the new normal, implementing wide-ranging precautions to limit the spread of COVID-19 wherever we operate.

“We are determined to emerge from the pandemic stronger and will continue making progress on our long-term strategic journey, through ongoing investments in our business – which has one of the lowest upstream carbon footprints in the world,” he added.

Aramco expects capital expenditure to be at the lower end of the $25bn to $30bn range it has already indicated for this year.