Where Iran stands against Saudi Arabia in oil war?

Traditional rivals, Saudi Arabia and Iran, continue to fight to prove their supremacy in OPEC. Neither of them is ready to miss any opportunity to cause damage to the other and crude oil seems to be their most trusted weapon.

With Saudi Arabia ready to sabotage any chances of a production freeze, Iran has followed suit by thwarting attempts by Saudi Arabia to introduce a production ceiling on OPEC production the recent in the recent meeting in Vienna.

Iran, which is close to its pre-sanction levels of production, had earlier agreed to become part of any discussion being part of production freeze. However, in the latest meeting, Iran refused to adhere to any production ceiling, which led to OPEC abandoning the idea.

Iran has been quick in boosting its output soon after lifting of sanction and boosting its market share faster than anticipated. It is being said that Iran has resorted to offering large discounts to its Asian customers, undercutting the Saudi Arabia and Iraq.

According to media reports, Iran shipped 2.3 million b/d in April 2016 the highest level since 2012. These figures are 15 percent higher than the International Energy Agency (IEA) forecast. Iran has been successful in its strategy until now, but increasing its market share further might prove difficult.

Meanwhile, Saudi Arabia is attempting to cement its market share in the wake of this increased production from Iran and Iraq. Saudi Arabia has been attempting to transition away from being an oil-dependent economy, its transformation depends on the successful listing of Saudi Aramco.

The struggle for supremacy between the two nations doesn’t show any signs of abating, and there is no clear winner in this showdown. Though Saudi Arabia has large reserves, it is burning them at a fast rate. On the other hand, experts believe that the Iranian economy is better equipped to withstand lower oil prices because its economy is more diversified and has an educated and hardworking population.

Though Saudi Arabia will never accept, Iran is better equipped to cope with the long-term upheaval because it is less dependent on oil than Saudi Arabia, having raised more through general taxation than through oil duties over the years.

The fight between the two for supremacy in the Middle East region is unlikely to end anytime soon. Currently, supply outages to the tune of 3.5 million b/d are supporting the oil prices by creating a balance between demand and supply.

Once Nigeria, Libya, and Canada resume pumping at their normal levels, the effects of the struggle between Iran and Saudi Arabia will be felt. If both increase production, the world will be once again flooded oil, pulling prices back to around US$35/barrel levels.

Both the countries are involved in proxy wars in Syria, Yemen and Bahrain. Gone are the days when the United States was a friend of Saudi Arabia, in fact it has become a foe now. Iran is supported by Russia and United States seems least interested in the affairs of Middle East. On the contrary, it is feared that Saudi Arabia may have to face the brunt of 9/11. 

Speculators trying to drive oil market

After oil price touched US$50/barrel mark, speculators seem to have entered the market once gain. The situation is ideal because glut is shrinking due to outages. Speculators have started talking about consumption.  I have a gut feeling that outages in Nigeria are part of the usual geopolitical mantra.

The hype about rising demand is paving way for the resumption of output by Shale rigs. Saudi-Iran animosity is also being spread by main stream media, only to divert attention from atrocities of Israel against Palestinians.

According to Oil & Energy Insider, crude prices closed and opened above US$50 per barrel this week, the first time that has happened in 2016. The highest supply outages in years have rapidly shrunk the global surplus. Prices fell back on Friday due to a stronger dollar Speculators were prompt in pocketing profit. The EIA reported inventory drawdown.

It is being portrayed that oil demand is on the rise and the supporting argument is a record gasoline consumption in the US. Demand by refineries is nearing record highs as the world takes advantage of cheap fuel. This sounds dubious because gasoline demand should have jumped when price was hovering below US$40 per barrel.

Top analysts are not convinced that oil prices will move higher, arguing that the rally could be running out of steam. Supply outages in Canada are starting to be resolved. Also higher oil prices could restart some drilling in the shale patch. The dollar could strengthen, putting downward pressure on prices. And oil inventories are still at record highs.

The Trans Niger Pipeline was shut down lately due to a leak, taking another 130,000 barrels per day offline. The pipeline carries Bonn Light and is run by Shell, Eni, Total, and the Nigerian National Petroleum Corporation. Shell declared force majeure on Bonny Light in May when another pipeline that carries the oil stream, the Nembe Creek Trunk Line, was damaged by an attack. The Nembe Creek conduit, however, was just repaired, which could bring back 75,000 barrels per day.

Oman sold US$2.5 billion in bonds on Wednesday, as it seeks to improve its financial position. The Emirate not a member of OPEC went to the debt markets for the first time in more than twenty years, a sign of how badly it has been damaged from low oil prices.

The move comes after some of Oman’s neighbors issued new bonds earlier this year – Qatar sold US$9 billion in debt and Abu Dhabi sold US$5 billion. Saudi Arabia is also expected to turn to the bond markets, perhaps selling as much as US$15 billion worth of bonds. IMF has warned that the Gulf States to need to do a lot more to cut spending to hold onto their currency pegs.

Bloomberg reports that some oil traders are buying contracts that will only pay out if oil surpasses US$100 per barrel at some point in the next few years. The contracts do not suggest that such an outcome is necessarily likely, but only that some traders view it as a potential profitable position.

The traders buying new contracts are aimed at making people believe that today’s severe cutbacks in exploration and development will create the conditions for a supply shortage somewhere down the line. 

Pakistan market witnesses 36 percent decline in daily turnover

The benchmark of Pakistan stock market remained range bound during the week ended 10^th June. The market experienced selling pressure before end of the week and closed at 36,941 level, down by 0.76%WoW. Budgetary measures supported agri‐industries, cements contended with an adverse tax levy, while blue chip textile plays rallied on improved expectations of healthier margins brought on by tax relief.

News flow moving the markets included: 1) PTA declared Telenor Pakistan, the only operator that had submitted a bid, as winner of its 850MHz spectrum (3G/4G) auction with base price of US$395 million, 2) PSO inked an agreement with China East Resource Import and Export Corporation (CERIECO), the EPC contractor for SECMC to supply HSD to Thar Mining Project Block II, 3) the GoP borrowed Rs131 billion through an MTB auction, where cut‐off yields, 4) PPL is expected to pay 10% of wellhead gas price as lease extension bonus to the government of Baluchistan for the Sui field with accompanying CAPEX of PkR20bn into exploration activities during the lease period, and 5) Directors of Pakistan LNG Terminals Limited (PLTL) gave approval for a LNG services agreement to set up a second LNG terminal in Karachi.

Top performers at the bourse were: PPL, HCAR, FCCL and 4) PSMC, whereas laggards LOTCHEM, ASTL, AICL and SNGP. Corresponding with Ramadan, average daily turnover fell 36%WoW to 151.9 million shares, with KEL, FCCL, PIBTL and EFERT being the volume leaders.

Next week remains a cliffhanger for markets, as MSCI is set to release the result of Pakistan's inclusion bid for the EM club on 14^th June (early morning Wednesday in Pakistan). Uncertainty may prevail in early trading, with the possibility of not graduating giving rise to negative sentiment and stoking fears of a sell‐off. In this backdrop analysts suggest following a cautious stance in value heavy propositions centered on Oil & Gas (PSO, PPL) and Banks (HBL, UBL).

Engro Corporation (ENGRO) recently executed a much‐awaited divestment transaction of Engro Fertilizers (EFERT) as part of its strategic initiatives to diversify its portfolio and meet capital allocation requirements for Engro Thar. ENGRO sold 295 million or 22.2% shares of EFERT by way of a private placement at a strike price of Rs65.47/share, reducing the company's shareholding in EFERT to 56.6% or 753.5 million shares from current holding of 78.8%. The impact of the transaction on ENGRO is material, resulting in a sizable cash inflow of Rs19.3 billion or Rs36.87/share a one‐time gain of Rs31.24/share in its unconsolidated book. Additionally, removal of exemptions on inter corporate dividend for companies availing group relief in Budget FY17 should be disadvantageous to earnings of holding companies like ENGRO, in our view. That said, analysts remain optimistic on the company's outlook over the long term, driven by a well‐diversified business portfolio including high growth potential energy projects (EPTL and SECMC).

AKD Securities has initiated coverage on Cherat Cement (CHCC). The Company has remained in the limelight owing to its 1.3 million tons per annum (tpa) Brownfield cement expansion (expected to be operational by the start of CY17) being the first in line under current expansion cycle. Cherat cement shall likely be a beneficiary of 5‐year tax holiday on its new plant's operations under the government's incentives to promote investment. Additionally, Cherat cement is setting up a 6MW WHR on its new line that will likely help in reducing reliance on grid electricity and contribute in operational after tax savings of Rs1.52/share from FY18 and onwards. These measures are expected to result in attractive 3‐year earnings CAGR of 17%. In light of this, CHCC has posted CYTD/FYTD returns of 29%/33%.

Pakistan Budget disappoints public

I am placing some excerpts from the editorial published in Pakistan’s leading English daily newspaper dawn.com and also a commentary by country’s leading brokerage house, akdsecurities.com.  Dawn has termed the budget speech of finance minister as one most lethargic one the country has seen in many years. Not only the mood within parliament, but the budget proposals themselves evoked little more than weary nods.

But the apathy showed mostly in the proposals to lift revenues and rejuvenate collapsing sectors. The budget sees growing recourse to withholding taxes, turnover taxes and transaction taxes, whereas income and consumption are dropping off the taxman’s radar. These are not only regressive measures, signaling defeat in the larger struggle by PML-N government has seen as its own to broaden the tax net.

While going through details of the new tax measures may show where the incremental revenue will come from, the budget speech left little doubt that the incumbent government has comprehensively run out of ideas on tax reforms, and broadening the tax base has been lost as a priority.

PML-N began its term with tall promises to reform the power sector, broaden tax base, widen tax net and contain losses of public-sector enterprises. All that proved to be bombast, and in the closing years of its rule, the party presents a haggard look.

The government faces a daunting challenge to address the collapse in exports and agriculture, but the government came up with nothing more than more price inducements in the form of reduction in fertilizer prices or incentives in the form of zero rating of sales tax on textile exports.

One can only hope that these measures help will lift these vital sectors from the doldrums, but doubts hang heavy. The contradiction is that the revenue measures the government has resorted weigh on growth by squeezing existing taxpayers more, so whatever energy the price inducements can inject into these moribund sectors might be negated with the deleterious effects of the measures.

AKD Securities report says that the he fourth PML-N budget retains its resolve of macroeconomic stability and growth tilt by stimulating laggard sectors like Agriculture and Textile, while also promoting a documented tax base. Picking up from last year, brokerage house is encouraged by the 21% higher Federal PSDP allocation, which provides an increasing pivot towards infrastructure activities.

FY17 GDP growth target of 5.7% seems ambitious due to FY16 likely to post 4.7%. While stock market related taxation regime has been immaterially tweaked, corporate related tax measures like: 1) higher incidence of taxation on Insurance sector, 2) extension of the super tax regime for another year with a new provision which proposes to exclude Brought forward depreciation and business losses and 3) removal of tax exemption on inter-corporate dividends for companies availing group taxation relief can together materially impact business sentiments.

The budgetary implications on the market should be neutral to negative where all eyes should now be focused towards the upcoming MSCI-EM reclassification announcement on 14th of this month.

Economic targets for FY17 seem ambitious but challenging. The fiscal deficit target of 3.8% necessitates aggressive tax collection efforts. With external repayments starting next year, reliance on domestic sources for funding the deficit is likely to further exacerbate. However, on-going fiscal consolidation efforts can consequently give rise to concerns regarding necessary allocation for CPEC projects planned for completion by FY18.

 Proposed reduction in urea prices by Rs390/bag is a key positive enabling the manufacturers to clear sizable inventory stockpiles. Textiles should also benefit where recent budgetary measures, in addition to availability of gas and exemption from load-shedding are likely to improve the operating environment. With budgetary implications on the market expected to be neutral to negative in nature, investors are advised to realign portfolios towards Cements, Fertilizers, Textiles and Power sectors.

Is recent oil rally sustainable?

I may sound a little outrageous saying that no one was surprised at the outcome of the latest OPEC meeting. No matter how many times OPEC and non-OPEC ministers meet to reach any accord on production guidelines, the oil glut will continue. Analysts try to create hopes that prove short-lived. Every one of these failures and subsequent price drops offers new opportunities for exploration and production companies around the globe.

I am also convinced that oil price after the bottoming in February. Backtracking of prices that seem to plague nearly every other analyst is the outcome of vested interests. Most of them talk about recent hike in oil price, now up more than 85 percent from those February lows. I believe that temporary outages from Nigeria and Venezuela as well as the Canadian fires and rollover of production in Iraq and rise of price to US$50/barrel is temporary.

In my last blog I have stated categorically that OPEC has become an impotent entity. However, some of my energy sector analysts still insist that, OPEC led by Saudi Arabia still has the potential to drive oil prices. I would once again reiterate that Saudi Arabia alone just can’t set price direction.

Many western analysts tend to term Iran, a game spoiler as it has declared categorically not to be part of any effort to contain its production unless lost market share is attained. These analysts fail to take into account that in total export of OPEC, even if Iran achieves 4.5 million barrel daily output, it will have no power to influence oil prices.

I may go to the extent of saying that oil producers are trying to make Iran an escape goat. Those who have the capacity to set direction of oil price are United States, Russia and certainly Saudi Arabia. The point to be noted that energy analysts often mention number of rigs being closed in the US. However, they also forget to mention that a decline to around 320 rigs from peak of over 1900 rigs has not made the corresponding reduction in US oil production. In fact its stockpiles hover above 500 million barrels. Oil output of Russia and Saudi Arabia also hovers at historic peaks. Therefore, an additional output of couple of million barrels by Iran just can’t make any difference.

I will conclude my reiteration that analysts of funds are trying to create storm in a cup to recover their losses. As many shale producers are inching towards default, they have to create a hype that oil prices are on the rise. Touching of US$147 price was unnatural and the realistic level over the next couple of years will be US$50.

The tail piece is that mega oil companies (seven sisters) have witnessed reduction in profit, but the world at large has benefited from low crude prices. The big economies have also been the biggest beneficiaries but analysts working for the big funds have been trying to mislead the public at large.