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


Oman becomes fourth GCC country to introduce VAT

Oman becomes fourth GCC country to introduce VAT
Updated 16 April 2021

Oman becomes fourth GCC country to introduce VAT

Oman becomes fourth GCC country to introduce VAT
  • Tax starts April 16 at 5%
  • Zero-rated items include essential foodstuffs

OMAN: Oman introduced a 5 percent value-added tax (VAT) on Friday, the fourth Gulf Cooperation Council country to implement a so-called consumption tax.

It followed the UAE, Saudi Arabia and Bahrain. Saudi Arabia tripled its VAT rate to 15 percent last July to help fund its coronavirus relief efforts.

Oman has predicted it will raise OMR400 million ($1.04 billion) from the tax this year, equivalent to 1.5 percent of GDP, as it looks to narrow a widening fiscal deficit.

In June 2016, all six GCC states signed the Common VAT Agreement, pledging to introduce a 5% VAT rate. Kuwait’s parliament has pushed back the implementation date several times but the International Monetary Fund said last year that it expects it to be introduced by 2022. Qatar is expected to go ahead with VAT in the second or third quarter of this year and is said to be close to finalizing its tax administration system, Dhareeba.

Omanis had 6 months to prepare for the introduction of VAT, which may be followed by the Gulf’s first income tax in the coming years.

Goods and services exempt from VAT include financial services, health care, education, local passenger transport, bare land, resale of residential real estate and residential rents. Zero-rated goods and services include all exports, basic foodstuffs, medicine and medical equipment, investment in gold, silver and platinum, crude oil and derivatives and natural gas, among certain transport goods.


ADNOC to explore potential of hydrogen market with India

ADNOC to explore potential of hydrogen market with India
Updated 16 April 2021

ADNOC to explore potential of hydrogen market with India

ADNOC to explore potential of hydrogen market with India
  • Key to hydrogen economy will be aligning supply and demand - Al Jaber

RIYADH: The Abu Dhabi National Oil Company (ADNOC) sees a potential market for hydrogen in public and private Indian companies to serve the country’s growing demand for energy and need for cleaner fuels, said Sultan Ahmed Al Jaber, minister of industry and advanced technology and CEO of ADNOC.

“Today, India is one of our biggest and most important trading partners, particularly in the field of energy,” Al Jaber said during a high-level ministerial session at a virtual hydrogen roundtable on Thursday, WAM reported. “And as India’s demand for energy grows, we stand ready to help meet that demand by making the full portfolio of our products available to the Indian market.”

“Granted Hydrogen is still in its infancy, it could be a game-changer and a real opportunity to accelerate the broader energy transition, an opportunity that ADNOC and the UAE are well placed to capitalize on,” Al Jaber said. The “key to developing the hydrogen economy of the future will be aligning supply and demand,” he said.

ADNOC currently produces about 300,000 tons of hydrogen a year as part of its current industrial processes, and can become a major player in the developing blue hydrogen market, Al Jaber said.

The company is also exploring the potential of green Hydrogen through the Abu Dhabi Hydrogen Alliance, which was recently established by ADNOC, Mubadala Investment Company and ADQ, he said.


Sakani housing program served 70,000 families in the first quarter of 2021

Sakani housing program served 70,000 families in the first quarter of 2021
Updated 16 April 2021

Sakani housing program served 70,000 families in the first quarter of 2021

Sakani housing program served 70,000 families in the first quarter of 2021
  • Sakani beat target of 51,000 familes in Q1
  • Sakani announces launch of home finance app

RIYADH: Saudi Arabia’s Sakani program helped 70,000 families in the first quarter of 2021, surpassing its target of serving 51,000 families.

Sakani was formed in 2017 by the Ministry of Housing and the Real Estate Development Fund with the aim of facilitating home ownership in the Kingdom through the creation of new housing stock, allocating plots and homes to nationals and financing their purchase. It has a goal of reaching 70% home ownership by 2030.

Sakani revealed the data at an event in Riyadh on Thursday where it announced the launch of an online home finance app, SPA reported.

The program aims to serve 220,000 Saudi families this year, through the creation of 50,000 housing units, facilitating the reservation of 30,000 residential land plots and arranging 140,000 real estate loans, said CEO Marwan Zawawi.

More than 66,000 financing contracts were signed in the first quarter of 2021, supported by SR40 billion, a 23 percent increase compared to the same period of 2020. This brings the total number of families benefiting from the subsidized mortgage since its inception in mid-2017 until the end of the first quarter of 2021, to more than 487,000 families in various regions of the Kingdom, said Mansour bin Madi, general supervisor of the Real Estate Development Fund.

Sakani has enabled more than 350 thousand families to own homes to date, Bin Madi said.

About 178 infrastructure projects covering 244 million square meters have been developed at a cost of more than SR8 billion, said National Housing Company CEO Mohammed bin Saleh Al-Bati.

“In 2017, housing options under construction were limited, but now developers are racing to obtain licenses,” said General Supervisor of Real Estate Development Deputyship at the Ministry of Housing, Sultan Al-Sheikh. “Reservation of residential units on new developments is often complete within a few days and in some cases hours.”


Oil rises above $67 in fifth day of gains on demand hopes

Oil rises above $67 in fifth day of gains on demand hopes
Updated 16 April 2021

Oil rises above $67 in fifth day of gains on demand hopes

Oil rises above $67 in fifth day of gains on demand hopes
  • Brent on track for weekly gain of about 7%
  • U.S., China economic recoveries bolster sentiment

LONDON: Oil rose above $67 a barrel on Friday, gaining for a fifth session, as a stronger demand outlook and signs of economic recovery in China and the United States offset rising COVID-19 infections in some other major economies.
China’s first-quarter gross domestic product jumped 18.3% year on year, official data showed on Friday. On Thursday figures showed a rise in US retail sales and a drop in unemployment claims.
“Given the improving outlook for the world’s two biggest economies, there is little chance of the market’s feel-good glow being extinguished any time soon,” said Stephen Brennock of oil broker PVM.
Brent crude rose 26 cents, or 0.4 percent, to $67.20 a barrel by 0950 GMT, heading for a weekly gain of about 7 percent. US West Texas Intermediate (WTI) crude added 16 cents, or 0.3 percent, to $63.62.
New US sanctions imposed on Russia, one of the world’s top oil producers, over alleged election interference and hacking could also support prices.
“Though they do not affect the oil sector directly, they could lead to higher financing costs and general uncertainty in trade with Russia,” said Eugen Weinberg of Commerzbank.
Helping the rally this week, the International Energy Agency and the Organization of the Petroleum Exporting Countries (OPEC) both made upward revisions to oil demand growth forecasts for 2021.
Figures on Wednesday also showed US crude inventories fell by 5.9 million barrels.
Demand hopes offset concern about rising coronavirus cases in other big economies. India’s infection rate hit a record high while Germany’s chancellor on Friday said a third wave of the virus has the country in its grip.
Oil has recovered from pandemic-induced lows last year, helped by record cuts to oil output by OPEC and its allies, a group known as OPEC+.
Some of the OPEC+ cuts will be eased from May, with the group meeting on April 28 to consider further tweaks to the supply pact.


Ramadan harvest begins in Saudi Arabia’s city of roses

Ramadan harvest begins in Saudi Arabia’s city of roses
Updated 16 April 2021

Ramadan harvest begins in Saudi Arabia’s city of roses

Ramadan harvest begins in Saudi Arabia’s city of roses
  • Smallest vials sell for SR400 ($106).
  • Harvest falls during Ramadan this year

TAIF: Every spring, roses bloom in the western Saudi city of Taif, turning pockets of the Kingdom’s vast desert landscape a vivid and fragrant pink.
In April, they are harvested for the essential oil used to cleanse the outer walls of the sacred Kaaba in Makkah.
This year, the harvest falls during Ramadan.
Workers at the Bin Salman farm tend rose bushes and pick tens of thousands of flowers each day to produce rose water and oil, also prized components in the cosmetic and culinary industries.
The perfumed oil has become popular among the millions of Muslims who visit the Kingdom every year for pilgrimages.
Patterns of plants and flowers have long been part of Islamic art.
Known as the city of roses, with approximately 300 million blooms every year, Taif has more than 800 flower farms, many of which have opened their doors to visitors.
While workers pick flowers in the fields, others labor in sheds, filling and weighing baskets by hand.
The flowers are then boiled and distilled.
“We start boiling the roses on high heat until they are almost evaporated, and this takes around 30 to 35 minutes,” Khalaf Al-Tuweiri, who owns the Bin Salman farm, told AFP.
“After that we lower the heat for around 15 to 30 minutes until the distilling process starts, which lasts for eight hours.”
Once the oil floats to the top of the glass jars, the extraction process begins.
The oil is then extracted with a large syringe to fill different-sized vials, the smallest going for SR400 ($106).