Saudi Arabia breaking away from the US orbit

The geopolitics of oil has been upended in just three years, with the emergence of a Saudi Arabia-Russia link that has the potential to cause a raft of problems for the US economy.

This month’s OPEC Plus decision to cut crude output — for the second time since US President Joe Biden flew to Saudi Arabia last summer seeking a boost — may be just the start, says Ziad Daoud and Courtney McBride report.

The April 02 announcement lifted oil prices by about US$5 a barrel and crude on Wednesday went on to hit the highest closing price this year. It was already clear last week that recession risks were bigger than they otherwise would have been — because consumers spending more on energy will have less cash left for other stuff — and inflation would be higher. 

But even more significant is what the OPEC Plus move says about the likely path of oil prices over the coming years. The bigger takeaway is that Saudi Arabia is breaking away from Washington’s orbit.

Saudi Arabia sets oil production levels in coordination with Russia. And there’s a newly tight relationship with the other giant US strategic rival — China. That was on display when Beijing brokered a deal to ease tensions with the Saudis’ regional rival, Iran, with the US out of the loop.

In other words, Western influence over the oil cartel is at its lowest point in decades. Most analysts now anticipate that crude prices will average above US$80 a barrel over the coming years — well above the US$58 seen over the 2015-21 period.

For the global economy writ large, lower oil supply and higher prices is bad news. The major exporters are the big winners, of course. For importers, like most European countries, more expensive energy is a double blow — dragging on growth even as inflation rises.

The US falls somewhere in between. As a major producer, it benefits when prices rise. But those gains — unlike the pain of higher pump prices — aren’t widely shared.

 

Will Joe Biden succeed in reining in oil prices?

The United States is pulling out various stops in an effort to get gas prices under control at the start of a busy holiday travel season. The administration is tapping into the strategic petroleum reserve and President Biden has called on the Federal Trade Commission to investigate whether oil companies are responsible for increased prices.

But the focus on gas prices has provided fuel for Republican attacks on Biden’s handling of the economy, and his energy policies in particular, at a time when the White House is hoping to rally support for ambitious climate goals in its roughly US$2 trillion spending plan.

There was a prediction that 53.4 million people will travel for the Thanksgiving holiday, a 13% increase from 2020 when many Americans opted not to travel with coronavirus cases and deaths surging around the country.

The busy travel season to come has put a spotlight on gas prices in particular amid broader concerns about inflation, something the White House has attempted to show it has under control.

“Obviously, the president does not control the price of gasoline -- no president does,” Energy Secretary Jennifer Granholm told reporters. “But what we’re seeing right now is this global mismatch between supply and demand. Oil production is lagging behind as the rest of the economy roars back to life after the shutdown.”

“So, we, in this administration, are leaving no stone unturned as we examine the market to figure out what's behind the high prices,” she said.

The White House has shown more urgency in recent weeks in publicly messaging how it is trying to provide relief for Americans grappling with inflation, particularly after the Labor Department released statistics showing consumer prices grew far faster than expected in October and that annual inflation had hit a 30-year high. That rise was in part a result of rising energy costs, and increased costs at the gas pump.

Biden last week wrote to the Federal Trade Commission requesting the agency look into whether oil companies were unfairly spiking prices at the pump.

And on Tuesday, the administration announced it would release 50 million barrels of oil from the nation’s Strategic Petroleum Reserve in coordination with several other countries in an effort to match supply with demand.

Experts have questioned whether either move will do much to meaningfully bring down prices immediately, and they cautioned other factors, like the course of the pandemic, are more likely to affect the trajectory in the months to come.

That has led some conservatives to question whether the White House’s actions on gas prices were more of a political maneuver as poll after poll has shown voters souring on Biden, particularly over his handling of the economy, with his approval ratings dropping into the low 40s.

“This is being done in order to use every tool at the president's disposal to lower the price of gas for the American people,” White House press secretary Jen Psaki said when asked if tapping into the strategic reserve was being done for political purposes.

Republicans have gone on offense over inflation for the last few weeks, and the Biden administration’s decision to release oil from the strategic reserve provided more fodder for attacks on its energy policies.

Former President Donald Trump and GOP lawmakers argued the Biden administration’s desire to shift away from fossil fuels and toward clean energy industries has led to problems at the pump.

“Today’s announcement is nothing more than a gesture. If the president and his administration wanted to make a real, long-term impact, they would work to maximize domestic production and expedite energy infrastructure like pipelines—not close federal lands to drilling and add a federal tax to methane,” Sen. Shelley Moore Capito, ranking member on the Senate Environment and Public Works Committee, said in a statement.

Sen. John Barrasso, the top Republican on the Senate Energy and Natural Resources Committee, accused Democrats of “waging a war on American energy.

Even Sen. Joe Manchin, who has opposed some climate initiatives in Biden’s Build Back Better agenda, called the release of oil from the reserves an “important policy Band-Aid for rising gas prices” while criticizing the administration's energy policy as “shortsighted.”

Biden in remarks Tuesday sought to assure the public that the US economy was on the upswing and a rise in prices would not be a long-term concern.

“I also want to briefly address one myth about inflated gas prices: They are not due to environmental measures. My effort to combat climate change is not raising the price of gas or increasing its availability,” Biden said in prepared remarks, arguing investments in electric vehicles, solar panels and other sectors would spur job creation and innovation.

“Let’s beat climate change with more extensive innovation and opportunities,” he added. “We can make our economy and consumers less vulnerable to these sorts of price spikes when we do that.”

Pakistan Petroleum profit likely to plunge by 40 percent

One of Pakistan’s pioneer exploration and production (E&P) Pakistan Petroleum Limited (PPL) is scheduled to announce its FY16 financial results on 17^th January 2017. During this period global crude oil price hovered at low levels. Therefore, the investors/shareholders await the result anxiously.

Pakistan’s leading brokerage house, AKD Securities has released its forecast hinting towards a decline in Earnings per Share (EPS) by 40 percent. The brokerage house attributes this potential decline to 44 percent decline in international oil prices. It has also hinted towards some other positives.

According to the brokerage house, PPL profit after tax for the period under revive is estimated to decline to Rs20.40 billion (EPS: Rs10.35) as compared to net profit of Rs34.25 billion (EPS: Rs17.37) for a year ago, a plunge of 40 percent.

Brokerage house has attributed this decline primarily to a 44 percent decline in average international crude oil price of USD41/barrel in FY16 as compared to USD73/barrel during FY15.

The report also suggests that PPL may also announce a final cash dividend of Rs2.75/share that would the full year payout to Rs5.00/share for FY16.

The story would begin with an expected fall in topline by 24 percent, to Rs79.13 billion in FY16 from Rs104.02 billion in FY15.  Other income is expected to decline by 30 percent to Rs5.32 billion owing to decline in short-term investments. Finance cost is expected to go up by 24 percent to Rs688 million owing to greater real discount rate set for the decommissioning obligations.

A decline in royalty expenses is likely to provide some relief. However, slide in crude oil price remains a key risk to declining revenues/earnings and consequently valuations.

Crude Oil: Maker and spoiler of fortunes

I just can’t resist sharing this Bloomberg story with the readers of my blog. 

Oil is so much more than a fuel. It’s a force even bigger than its $3.4 trillion market. It’s a weapon, a strategic asset, a curse. It’s a maker and spoiler of fortunes, a leading indicator and an echo chamber. All these roles have a part in setting oil prices. The result is a peculiar market that says as much about global economics and politics as it does about supply and demand.

The Situation

After four years when the highest average oil prices in history seemed to defy economic gravity, petroleum fell in mid-2014. It had risen to $107.73 a barrel that June, even as Americans and Europeans drove fewer miles in more efficient cars, curbing consumption of gasoline, the biggest source of oil demand. Meanwhile, supply expanded as the sustained higher prices made techniques such as deep water drilling and fracking pay off. Those fundamentals started to register in the summer, as Chinese imports sagged, Europe teetered on the brink of recession, and the stronger U.S. economy made barrels priced in dollars relatively more expensive. Instead of stanching the glut by pumping less oil, Middle East exporters engaged in a price war to defend their market share. The price had dropped to $42.03 in March, the lowest since 2009, as U.S. storage tanks brimmed with oil. Then came a rebound above $50 a barrel after the conflict in Yemen. The price collapse had forced high-cost drillers in North Dakota and Texas to idle rigs while international giants like BP, Shell and Halliburton cut thousands of workers and billions of dollars in spending. Those developments led OPEC to declare its strategy a success at its June meeting and to maintain current production levels. With several members eager to increase their own production, Iran poised to ramp up exports after reaching a nuclear agreement with six world powers, and shale output proving surprisingly resilient as drillers cut costs and focused on the best terrain, the supply glut showed little sign of abating.

Crude Oil: Maker and spoiler of fortunes

I just can’t resist sharing this Bloomberg story with the readers of my blog. 

Oil is so much more than a fuel. It’s a force even bigger than its $3.4 trillion market. It’s a weapon, a strategic asset, a curse. It’s a maker and spoiler of fortunes, a leading indicator and an echo chamber. All these roles have a part in setting oil prices. The result is a peculiar market that says as much about global economics and politics as it does about supply and demand.

The Situation

After four years when the highest average oil prices in history seemed to defy economic gravity, petroleum fell in mid-2014. It had risen to $107.73 a barrel that June, even as Americans and Europeans drove fewer miles in more efficient cars, curbing consumption of gasoline, the biggest source of oil demand. Meanwhile, supply expanded as the sustained higher prices made techniques such as deep water drilling and fracking pay off. Those fundamentals started to register in the summer, as Chinese imports sagged, Europe teetered on the brink of recession, and the stronger U.S. economy made barrels priced in dollars relatively more expensive. Instead of stanching the glut by pumping less oil, Middle East exporters engaged in a price war to defend their market share. The price had dropped to $42.03 in March, the lowest since 2009, as U.S. storage tanks brimmed with oil. Then came a rebound above $50 a barrel after the conflict in Yemen. The price collapse had forced high-cost drillers in North Dakota and Texas to idle rigs while international giants like BP, Shell and Halliburton cut thousands of workers and billions of dollars in spending. Those developments led OPEC to declare its strategy a success at its June meeting and to maintain current production levels. With several members eager to increase their own production, Iran poised to ramp up exports after reaching a nuclear agreement with six world powers, and shale output proving surprisingly resilient as drillers cut costs and focused on the best terrain, the supply glut showed little sign of abating.

Source: Bloomberg

The Background

Through the mid-20th century, a group of multinational oil giants known as the Seven Sisters (including the companies that became Exxon Mobil, Chevron and BP) dominated the market. Controlling the barrels from the wellhead to the gasoline tank, they traded mainly with each other on confidential terms; there was no open market. Countries with oil fields wrested more control with the formation in 1960 of the Organization of Petroleum Exporting Countries. The cartel’s Arab members used their power for political and economic ends, shocking the global economy with an embargo in 1973. Prices spiked again in 1979 because of the Iranian revolution. In the 1980s, OPEC infighting, the emergence of new suppliers and the development of futures exchanges gave rise to new market-based prices. Today the international benchmark is Brent crude from the North Sea. The U.S. benchmark, West Texas Intermediate crude, started trading at less than the Brent price in 2010 as supplies of shale oil became plentiful. In 2013, the European Union raided offices of Shell, BP and others to investigate possible manipulation of reference prices produced by the publisher Platts.

The Argument

As the world industrializes and consumes more energy, each new barrel of oil costs more because the cheapest and easiest oil has already been pumped. This observation gave rise to a theory called “peak oil,” which holds that world production will eventually max out and decline as oil fields deplete. Skeptics of this notion point to the technological innovations that let U.S. producers extract oil and gas from previously impermeable shale, unlocking vast new resources, albeit at greater expense; the issue isn’t quantity but cost. The other variable is demand; no one knows oil’s future as consumers grow more efficient and switch to alternative fuels such as natural gas and renewable power. Oil supplied 31 percent of the world’s energy in 2012, down from 46 percent in 1973. There may come a day when oil gets cheap because it’s unwanted. That’s the argument often advanced by advocates of divestment. They warn of a financial crisis caused by a bursting “carbon bubble” of inflated energy-company valuations after fossil-fuel prices rise to account for the costs of contributing to global warming.

 

Source: Bloomberg

The Background

Through the mid-20th century, a group of multinational oil giants known as the Seven Sisters (including the companies that became Exxon Mobil, Chevron and BP) dominated the market. Controlling the barrels from the wellhead to the gasoline tank, they traded mainly with each other on confidential terms; there was no open market. Countries with oil fields wrested more control with the formation in 1960 of the Organization of Petroleum Exporting Countries. The cartel’s Arab members used their power for political and economic ends, shocking the global economy with an embargo in 1973. Prices spiked again in 1979 because of the Iranian revolution. In the 1980s, OPEC infighting, the emergence of new suppliers and the development of futures exchanges gave rise to new market-based prices. Today the international benchmark is Brent crude from the North Sea. The U.S. benchmark, West Texas Intermediate crude, started trading at less than the Brent price in 2010 as supplies of shale oil became plentiful. In 2013, the European Union raided offices of Shell, BP and others to investigate possible manipulation of reference prices produced by the publisher Platts.

The Argument

As the world industrializes and consumes more energy, each new barrel of oil costs more because the cheapest and easiest oil has already been pumped. This observation gave rise to a theory called “peak oil,” which holds that world production will eventually max out and decline as oil fields deplete. Skeptics of this notion point to the technological innovations that let U.S. producers extract oil and gas from previously impermeable shale, unlocking vast new resources, albeit at greater expense; the issue isn’t quantity but cost. The other variable is demand; no one knows oil’s future as consumers grow more efficient and switch to alternative fuels such as natural gas and renewable power. Oil supplied 31 percent of the world’s energy in 2012, down from 46 percent in 1973. There may come a day when oil gets cheap because it’s unwanted. That’s the argument often advanced by advocates of divestment. They warn of a financial crisis caused by a bursting “carbon bubble” of inflated energy-company valuations after fossil-fuel prices rise to account for the costs of contributing to global warming.