How Saudi Arabia’s New Year ‘present’ got oil back above $60

Employes of Aramco oil company at work in Saudi Arabia's Khurais oil processing plant. Since Jan. 5, when Prince Abdul Aziz bin Salman, the Kingdom’s energy minister, announced a surprise extra production cut of 1 million barrels per day (bpd), Brent is up around 15 percent. (AFP/File Photo)
Employes of Aramco oil company at work in Saudi Arabia's Khurais oil processing plant. Since Jan. 5, when Prince Abdul Aziz bin Salman, the Kingdom’s energy minister, announced a surprise extra production cut of 1 million barrels per day (bpd), Brent is up around 15 percent. (AFP/File Photo)
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Updated 11 February 2021

How Saudi Arabia’s New Year ‘present’ got oil back above $60

Employes of Aramco oil company at work in Saudi Arabia's Khurais oil processing plant. Since Jan. 5, when Prince Abdul Aziz bin Salman, the Kingdom’s energy minister, announced a surprise extra production cut of 1 million barrels per day (bpd), Brent is up around 15 percent. (AFP/File Photo)
  • Brent crude touched $60 a barrel on Feb. 8, a level it last saw in early 2020 before the coronavirus crisis struck
  • Kingdom’s production cut move of Jan. 5 was the result of a careful analysis of global oil-market dynamics

DUBAI: Saudi Arabia’s New Year “present” to global oil markets has had an electrifying effect on the price of Brent crude, the global benchmark. Since Jan. 5, when Prince Abdul Aziz bin Salman, the Kingdom’s energy minister, announced a surprise extra production cut of 1 million barrels per day (bpd), Brent is up around 15 percent.

It touched $60 a barrel on Feb. 8, a level Brent crude last saw back in early 2020, when the coronavirus crisis was still just a distant and uncertain speck on the horizon of the world economy.

The “present” — as Alexander Novak, Russia’s deputy prime minister, called the unilateral Saudi cut — was all the more valuable because it came at a time when new variants of the virus were emerging, the second wave of infections was raging, and more economies were going into some form of renewed lockdown, further dampening oil demand.

Without the cut, there was the real possibility that the oil price could have gone into reverse, heading back into the $40 range and wiping out all the benefits of months of self-discipline on the part of oil producers, collaborating under the OPEC+ alliance led by Saudi Arabia and Russia.

While even the most cynical of oil analysts recognize the benefit that has come from the surprise cut, there has been an ongoing debate as to Saudi Arabia’s motives. Was there a deeper reason behind the self-denial?

In a new analysis, Bassam Fattouh, director of the Oxford Institute for Energy Studies (OIES), and Andreas Economou, senior research fellow, have dissected the decision in the context of global commodity markets.

Their analysis — coming from one of the world’s most respected independent energy think-tanks — sheds new light on the strategy underlying the “Saudi surprise.”

Prince Abdul Aziz’s “big news” came during a fractious meeting of the OPEC+ alliance, with Russia and a few other producers apparently determined to stick to a previously agreed plan to increase production by 500,000 a day.




Without the Saudi cut, there was the real possibility that the oil price could have gone into reverse, heading back into the $40 range and wiping out all the benefits of months of self-discipline on the part of oil producers. (Alamy)

With an eye on the fragile global market, Saudi Arabia wanted to postpone that increase, and had the support of most of the rest of the OPEC+ group. But there had been growing tensions within the organization, with Russia in particular keen to pump more oil and maximize revenue, and the UAE also sending signals that it was of the same mind.

Prince Abdul Aziz said the Kingdom was acting unilaterally in its role as “guardian of the oil industry,” adding: “We do this willingly and with the purpose of supporting our economy and the economies of the OPEC+ countries.”

But conspiracy-minded oil-watchers jumped to all sorts of conclusions, as the OIES experts describe.

Some observers considered Saudi Arabia’s decision as political rather than “technical.” Others argued that it looked “more like a capitulation to a Russian oil ministry that drove a hard bargain.”

Others said that it was a symbolic olive branch to the new US administration of President Biden to boost the Kingdom’s reputation as a responsible player in global markets, and that it would cost Saudi Arabia much needed long-term revenue.

Fattouh and Economou examine these suggestions, but instead reach the conclusion that there are “alternative and more straightforward (but certainly less exciting) explanations.”

First, the cut reflected the Kingdom’s strategic priority of being prudent and flexible in the face of uncertain markets. If global oil demand fell as a result of new lockdowns, the cut would help keep supply and demand balanced and mitigate a build-up in stocks worldwide.

If demand turned out better than expected, the cuts would bite deeper into global inventories, still historically high after the demand devastation of 2020.




An oil tanker at the port of Ras Al-Khair, about 185 kilometres north of Dammam in Saudi Arabia's eastern province overlooking the Gulf. (AFP/File Photo)

“In other words, the Saudi cut would help bring forward the rebalancing process by a few months if demand turned out to be stronger than feared. Reducing overground stocks allows Saudi Arabia more flexibility to respond to demand uncertainties,” the OIES said.

Second, the cut also asserts Saudi leadership and willingness to act independently, but in a less spectacular way than last spring, when a temporary breakdown of the Saudi-Russia agreement led to a brief but serious “oil price war” that rattled global markets.

“It is becoming increasingly clear that Russia and Saudi Arabia have different perspectives on market dynamics,” the OIES authors said, pointing to Russia’s preference for restoring output and keeping prices within a $45-$55 price range.

Russia is worried about a resurgence in US shale output as prices recover, and is especially concerned about the competition in the European market, where American exports have been growing at Russia’s expense.

Saudi Arabia, perhaps with more of a focus on the big markets in Asia, which are generally recovering faster than the rest of the world from lockdown recessions, does not want to risk the rebalancing process and wants to reduce global stocks.

To that degree, the January result was a “compromise” aimed at “constrained optimization” of output and maintaining OPEC+ cohesion.

Third, the Saudi cut has the key effect of widening the Kingdom’s policy choices and flexibility of response. If economic demand rises sharply, it can ramp up output, but if it turns out weaker, Saudi Arabia can gradually feed the barrels back onto the market as conditions allow.




Aerial view of the Ras Tanura Saudi Arabia Oil Refinery. (Alamy)

This could be a key factor in response if, for example, OPEC+ decides to extend its cuts further into the year, and could set a “floor” under oil prices of around $50 even if demand is significantly impacted again.

OPEC+ would therefore have a whole range of options, and would be less vulnerable to the kind of short-selling by speculative investors that has caused volatility in oil in the past and is currently chasing chaos in various equity and commodity markets.

Prince Abdul Aziz has made his distaste for speculators known on several occasions, vowing to make them “ouch” if they try to derail the careful calculations of OPEC+.

Now, having demonstrated at least twice in the past 12 months that the Kingdom is willing to take big actions to have maximum impact — what one analyst called “shock and awe” tactics — he is in a better position to carry through that threat.

Has the Kingdom suffered in financial and economic terms by the big “surprise” cut? That depends on the future scenario for oil prices, OIES said, and is by no means as clear-cut as some analysts have predicted.

If Saudi Arabia had not cut the 1 million barrels extra, and OPEC+ had gone through with the Russian-sponsored to increase output by a combined 500,000 a day, it is fairly certain that oil would now be around or below the $50 level, and would have taken longer to climb out of that range.

The Saudi decision was to go into force from Feb. 1 for two months, but the price effect of the cuts was evident from the day it was announced.

It has lasted at the time of going to press, and could very well provide a lift for prices for the remainder of the year.




Saudi Arabia, perhaps with more of a focus on the big markets in Asia, which are generally recovering faster than the rest of the world from lockdown recessions, does not want to risk the rebalancing process and wants to reduce global stocks. (AFP/File Photo)

“In short, the revenue loss is not a foregone conclusion and one can easily show that under certain assumptions, the revenues could indeed turn out to be higher,” OIES said.

Any change in policy necessarily involves risks, and the Saudi surprise is no exception. By giving a boost to oil prices, other producers could be more inclined to cash in and go for a quick increase in output; perceived “special treatment” for Russia could be viewed as detrimental to OPEC+ unity; the cut and resulting price rise could lead to a resurgence of American oil output at a time when the world economy is still fragile owing to the pandemic recession, OIES said.

Finally, Fattouh and Economou ask whether the change in policy means that Saudi Arabia has returned to the status of “swing producer” it gave up in the 1980s in a bid to protect the oil price at the cost of market share.

The OIES authors respond that the conditions are very different now, and that the Kingdom has made it clear that the cuts are of only limited duration. “For a swing producer to be effective, it needs to swing all the time, and it needs to swing in all directions,” they said.

Saudi Arabia has insisted it has no intention of playing that permanent role again. But then again, as the “Saudi surprise” has shown the Kingdom will not hesitate to use “shock and awe” tactics when market conditions dictate.

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Twitter: @frankkanedubai


Oil prices rise over 1 percent as fresh virus curbs threaten demand recovery


Oil prices rise over 1 percent as fresh virus curbs threaten demand recovery

Updated 06 August 2021

Oil prices rise over 1 percent as fresh virus curbs threaten demand recovery


Oil prices rise over 1 percent as fresh virus curbs threaten demand recovery


LONDON: Oil prices rose about 1 percent on Thursday on increasing Middle East tensions, but fresh movement restrictions imposed by countries to counter a surge in COVID-19 cases threatened the demand recovery.

Brent crude oil futures rose 78 cents, or 1.1 percent, to $71.16 a barrel, after earlier dipping below $70 for the first time since July 21.

US West Texas Intermediate (WTI) crude futures traded 80 cents, or 1.2 percent, higher at $68.95 a barrel.

The growing regional tensions come as nuclear talks between Iran and Western powers that would ease sanctions on Tehran’s oil exports appear to have stalled.

“With tensions brewing among Iran and world powers over last week’s drone attack, it seems nuclear deal talks will be lengthy and unlikely to provide imminent sanction relief for Iran,” said Edward Moya, senior analyst at OANDA.

Offsetting the geopolitical tensions, concerns over the recovery of global oil demand grew amid a surge in coronavirus cases.

Both benchmarks fell for a third day in a row to a two-week low on Wednesday, partly due to the spread of the coronavirus delta variant.

Japan is poised to expand emergency restrictions to more prefectures while China, the world’s second-largest oil consumer, has imposed curbs in some cities and canceled flights, threatening fuel demand.

“China is now facing its most challenging COVID-19 crisis since the initial outbreak was brought under control,” analysts at consultancy FGE said in a note on Thursday.

In the US, the world’s biggest oil consumer, COVID-19 cases hit a six-month high with more than 100,000 infections reported on Wednesday, according to a Reuters tally.

Analysts at investment bank UBS, however, said they expect oil prices to resume their upward trend despite pandemic concerns, projecting Brent crude will trade between $75 and $80 per barrel in the second half of 2021.


Saudi Ports Authority records 
growth in activities in first half of 2021

Saudi Ports Authority records 
growth in activities in first half of 2021
Updated 06 August 2021

Saudi Ports Authority records 
growth in activities in first half of 2021

Saudi Ports Authority records 
growth in activities in first half of 2021

RIYADH: The Saudi Ports Authority (Mawani) announced on Thursday that all areas of its activities had seen growth during the first half of 2021.

The announcement reflects the Kingdom’s economic recovery from the COVID-19 pandemic.

In terms of containers, Mawani handled 3.6 million TEU (a measure of volume equivalent to a 20-foot cargo container) during the first half of the year — a jump of 5.18 percent year-on-year. Transshipment containers increased by 24.49 percent to 1.4 million TEU, while it handled a total of 138 million tons of cargo.

The number of passengers grew by 0.61 percent year-on-year to 288,000, and Mawani handled 429,000 imported cars.

BACKGROUND

In July, Saudi Ports Authority announced investment opportunities in partnership with the private sector to develop and operate multipurpose terminals in eight of the nation’s ports.

The authority also recorded an increase in the number of ships received at the Kingdom’s ports, which received 6,037 vessels — an increase of 6.6 percent over the same period last year.

Mawani launched four shipping lines in 2020 to help increase Saudi ports’ connectivity with their international counterparts.

In July, the authority announced investment opportunities in partnership with the private sector to develop and operate multipurpose terminals in eight of the nation’s ports, in line with the objectives of Saudi Vision 2030, which include making the Kingdom a leading global logistics platform and connecting hub.

The build-operate-transfer (BOT) contracts on offer are for terminals in Jeddah Islamic Port, King Abdulaziz Port in Dammam, Ras Al-Khair Port, Jizan Port, Yanbu Commercial Port, King Fahad Industrial Port in Jubail, King Fahad Industrial Port in Yanbu, and Jubail Commercial Port.

One of the goals of Saudi Vision 2030 is for transport and logistics to contribute 10 percent of the country’s GDP by that date, up from its current 6 percent, following the implementation of the Kingdom’s new strategy for the sector.

 


Pent-up travel demand helps Lufthansa halve losses


Pent-up travel demand helps Lufthansa halve losses

Updated 05 August 2021

Pent-up travel demand helps Lufthansa halve losses


Pent-up travel demand helps Lufthansa halve losses


FRANKFURT: German airline Lufthansa said on Thursday it halved its losses in the second quarter compared to a year ago, as travel restrictions eased over the coronavirus pandemic and passengers returned.

Europe’s largest airline group said its net loss between April and June came in at €756 million ($890 million) compared with 1.5 billion euros last year, when travel worldwide was halted by COVID-19.

Increased bookings saw the company record a positive cash flow in the second quarter for the first time since the start of the health crisis.

“We have been able to stop the outflow of funds in the current phase of reviving our business and generate a positive cash flow for the first time since the beginning of the pandemic,” said CEO Carsten Spohr.

“In June alone, the number of bookings was more than twice as high as at the beginning of the quarter,” the company said.

Lufthansa said it still expected to operate at 40 percent of its pre-crisis capacity this year, leaving its projection unchanged.

Flight capacity will increase to 50 percent in the third quarter, on the back of continued recovery in demand in Europe, increased business travel and the opening up of further markets, such as North America.

Following an announcement from the US that the country would begin to allow vaccinated foreigners to travel to the country at some point, Spohr said in a conference call that Lufthansa was planning on the change to be implemented at the “end of September.”

In terms of the risk posed to the business by the spread of the more-infectious delta variant, Spohr said that the progress of the vaccination campaign was “more important” for the sector.

As a result, Lufthansa expects to book positive operating, or underlying, profit later this year on its path back into the black.

Earnings before interest, tax, depreciation and amortization (EBITDA), a yardstick closely watched by analysts, was still severely negative in the second quarter, with the company registering a loss of about €400 million in the second quarter.

Lufthansa, which also includes Austrian, Swiss and Brussels Airlines, was saved from bankruptcy last June by a German government bailout.

Lufthansa’s chief financial officer Remco Steenbergen said the company was discussing with investors about how to raise the capital needed to pay down the state aid the group received, and said the final figure would be “significantly less” than the €3 billion to €4 billion previously mooted.

The company is in the throes of a painful restructuring to slash costs that will include thousands of job cuts, with 30,000 already axed since the start of the pandemic.

As part of the recovery plan, the airline will slash its current fleet of 800 aircraft to 650 by 2023.


JP Morgan launches bitcoin fund; Uruguay mulls letting businesses accept cryptos

JP Morgan launches bitcoin fund; Uruguay mulls letting businesses accept cryptos
Updated 05 August 2021

JP Morgan launches bitcoin fund; Uruguay mulls letting businesses accept cryptos

JP Morgan launches bitcoin fund; Uruguay mulls letting businesses accept cryptos

DUBAI, RIYADH: The second-largest cryptocurrency after bitcoin, Ethereum, recorded gains early on Thursday as investors anticipate a major upgrade that is aimed to improve and optimize the digital currency.

Its price was up by around 8 percent over the last 24 hours, according to Forbes.

Ether traded at $2,687.71 at 5 p.m. Riyadh time on Thursday, according to data from Coindesk.

Bitcoin traded lower, falling by 2.78  percent to $38,035.85.

In other developments, a report by Pymnts and Bitpay showed consumers in the US are increasingly interested in using cryptocurrencies for their payments.

“The report analyzes a census-balanced survey of 8,008 US consumers who were current and former cryptocurrency owners and cryptocurrency nonowners between Feb. 8 and Feb. 23, 2021,” the report said, cited by Bitcoin.com.

It found that 93 percent of crypto users would consider making purchases using cryptocurrency, while 59 percent of non-crypto owners said they are interested in using it for their purchases in the future.

In Europe, French asset manager Melanion Capital received regulatory approval to launch an exchange-traded fund (ETF) tracking bitcoin price for investors across the region.

Another act to regulate the industry is from a senator in Uruguay who introduced a bill to allow businesses to accept cryptocurrencies as payments.

The bill will provide “legal, financial and fiscal security in the business derived from the production and commercialization” of crypto, CoinDesk has reported.

JP Morgan has launched an in-house bitcoin fund, and has begun pitching it to private bank clients.

Google’s new ad policy for financial products and services has gone into effect – and it allows some crypto ads.

In the East, Hong Kong is seeing a rise in crypto-related crimes, according to Bitcoin.com, with authorities saying it could be due to the increasing popularity of crypto investments.

But in China, a global leader in the crypto scene, these crimes have decreased significantly in recent years.


Saudi Maaden shifts to profitability in the second quarter, year-on-year

Saudi Maaden shifts to profitability in the second quarter, year-on-year
Updated 05 August 2021

Saudi Maaden shifts to profitability in the second quarter, year-on-year

Saudi Maaden shifts to profitability in the second quarter, year-on-year

RIYADH: The Saudi Arabian Mining Co. (Maaden) turned in profits after zakat and tax, at about SR1.1 billion ($2.94 billion) in the second quarter of 2021, compared to losses of about SR434.15 million in the second quarter of 2020, the company announced in a statement on the Saudi Stock Market (Tadawul).

Maaden’s profits increased by 45.1 percent in the second quarter of 2021, compared to profits of about SR761.15 million in the first quarter, while revenues rose by 11.95 percent to SR6.1 billion.

The company attributed its shift to profitability year-on-year to the increase in the average prices achieved for all products except industrial minerals, despite the decrease in the quantities sold of gold, ammonia and alumina.

Profitability was also due to the increase in net profit attributable to Maaden’s stake in joint ventures and the increase in other revenues, despite the decrease in income from term deposits.