Saudi Arabia

Saudi Arabia is pushing for an oil production cut among its fellow OPEC nations as well as other big producers such as Russia. In China, Beijing is pushing local governments to cut steel overcapacity.

Saudis: Let’s Make a Production Cut Deal

The Organization of Petroleum Exporting Countries will probably revive talks on freezing oil output levels when it meets non-OPEC nations next month as top exporter Saudi Arabia appears to want higher prices, according to OPEC sources, although Iran, Iraq and Russia present obstacles to a deal.

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Riyadh sharply raised expectations for a global production deal between on Thursday when Energy Minister Khalid al-Falih said Saudi Arabia will work with OPEC and non-OPEC members to help stabilise oil markets.

China Vows to Accelerate Steel Capacity Cuts

China should quicken capacity cuts in its bloated steel and coal sectors, the country’s top economic planning agency said on Tuesday, putting pressure on local officials to meet annual targets despite some worries the steps could hurt economic growth.

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China has promised to slash steel capacity by 45 million metric tons and coal capacity by 250 mmt this year, as it tries to rejuvenate two industries suffering from slowing demand and a massive supply glut.

The sale process of Tata Steel U.K. continues and tensions between Iran and Saudi Arabia continue to plague any OPEC production deal.

Cameron Insists Tata Steel UK is Getting Offers

Tata Steel has received a number of serious offers for its businesses in Britain, Prime Minister David Cameron said on Wednesday as steelworkers marched past Downing Street to put pressure on the government to get a deal.

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The U.K. steel industry has been hit by cheap Chinese imports, high energy costs and a global supply glut and in March Tata said it wanted to sell its remaining plants in the country, putting 15,000 jobs at risk.

Iran-Saudi Conflict Still Plagues Any OPEC Deal

The Organization of Petroleum Exporting Countries‘ thorniest dilemma of the past year — at least the one purely about oil — is about to disappear. Less than six months after the lifting of Western sanctions, Iran is close to regaining normal oil export volumes, adding extra barrels to the market in an unexpectedly smooth way that was helped by supply disruptions from Canada to Nigeria.

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Yet, Saudi Arabia is still unhappy with Iran and its production threatening its Mideast oil leadership and dominance. OPEC meets next week.

It would seem Iran is not the only major Middle East economy on the cusp of radical change. If the espoused wishes of deputy crown prince Mohammed bin Salman al-Saud (or MbS as the media have got into the habit of calling him) are realized, the desert kingdom is in for a period of change over the next decade that would be unprecedented in it’s recent history.

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Certainly, oil has transformed the kingdom since it was first commercially extracted in 1938 but the culture of Saudi society has been carefully nurtured, protected, even shielded — one might say — from the corrupting influence of the outside world.

Group of big fuel tanks. Ras Tanura oil terminal, Saudi Arabia

A group of fuel tanks in the Ras Tanura oil terminal in Saudi Arabia. If Prince Mohammad has his way, this will someday be a thing of the past in the kingdom. Source: AdobeStock/eugenesergeev.

Yet the days of a close compact between the House of Saud dynastic monarchy and the religious Wahhabi clerical establishment that, in exchange for control over education and the judiciary, has provided the rulers with legitimacy, may be seeing the beginning of its end.

The Prince’s Plan

The new King Salman’s son, Prince Mohammad, believes Saudi Arabia has been addicted to oil, an addiction that has cost it dearly in terms of economic development and progress. Trying to look into the future, he clearly feels Saudi Arabia needs to face up to the march of time before it is too late. Read more

We wrote this week about the agreement by Russia and Saudi Arabia to limit production at January levels in the face of a record global oil glut.

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Needless to say, the oil price promptly dropped 3% as the market saw the statement for the hollow, face-saving attempt that it was. Saudi Arabia and the rest of the Organization of Petroleum Exporting Countries (OPEC) have long said they will only consider production cuts if non-OPEC members — for which, read Russia — and new entrants, read Iraq and Iran, will also limit output.

In this corner, the Organization of Petroleum Exporting Countries, led by Saudi Arabia and its government largesse. Source: Adobe Stock/Alexlmx

In this corner, the Organization of Petroleum Exporting Countries, led by Saudi Arabia and its government largess. Source: Adobe Stock/Alexlmx.

Freezing output at January levels still leaves the world in surplus and will do nothing to change that situation. Russia’s oil production hit a post-Soviet-era high in January of 10.8 billion barrels per day so, although output for the whole of 2016 is not expected to rise beyond 2015 levels, that is still record output.

Fighting Out of South America, Africa, the Middle East: OPEC

Meanwhile, Saudi Arabia produced 10.2 million bpd in January, below the most recent peak of 10.5 million bpd set in June 2015, but as this graph from Bloomberg shows, even freezing at January levels would be meaningless in the face of strong output from Iraq and the prospect of an additional 1 million bpd from Iran over the coming months.

Bloomberg_Oil Production by country

Source: Bloomberg

Fighting Out of the US, Canada, Brazil: Tight/Tar Sands/Deep-Water Oil

OPEC has made no secret of the fact that it is trying to squeeze out of the market what it perceives to be higher-cost producers; such as US tight oil, Brazilian deep water and Canadian tar sands producers, by driving down the price below the new upstarts’ cost of production.

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Today in MetalCrawler, major oil exporters Saudi Arabia and the Russian Federation talked about possible cuts in production to combat low, low prices caused by a worldwide glut. Final figures for 2015 showed that US construction had a great year.

Russia and Saudi Arabia Talk Oil

Senior OPEC and Russian oil industry officials had vague talks, Reuters reported, about possible joint action to remedy one of the worst supply gluts in decades, while Saudi Arabia signaled its resolve to allow the market to balance itself.

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The latest volley of comments highlighted the intensifying pressure of $30 a barrel oil prices on cash-strapped countries such as Russia, but did not appear to tilt the scales meaningfully towards any concerted action to reverse the price crash from the Saudis and their controlling bloc of votes in OPEC. The Saudis are said to have asked for more “cooperation” on any future production cuts.

US Construction Starts Up in 2015

Dodge Data and Analytics reported that, for the full year of 2015, residential construction was up 14% to $265.4 billion, beating 2014’s increase by 4%, and non-building (mostly civil projects such as utility work) rose an impressive 23% to $176 billion, bouncing back from last year’s 8% decline.

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By contrast, non-residential construction fell 8% to $204.2 billion, giving back some of the 2014 increase of 24% but still 14% higher than 2013.

Stock markets tumbled worldwide today as turbulence in China set off selloffs worldwide. In oil news, a diplomatic fight between Saudi Arabia and Iran could have major implications for oil production.

New Year Stock Selloff

China’s economic slowdown sent world stock markets tumbling on Monday, with Europe and the US following Asia sharply lower in a gloomy start to 2016.

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The Shanghai Composite Index dived 6.9% to its lowest level in nearly three months. The drop led the Shanghai and Shenzhen stock markets to halt trading for the remainder of Monday to avert steeper falls, according to the state-run Xinhua News Agency.

The Dow Jones Industrial Average briefly fell more than 450 points in mid-morning trade, down more than 2.5%, on pace for its largest percent decline on the first trading day of the year since 1932. The Dow also fell below the psychologically key 17,000 level in intraday trading.

Saudi-Iranian Row a Threat to OPEC?

The fallout over Saudi Arabia’s execution of a Shiite cleric is spreading beyond a spat between the Saudis and Iranians, as other Middle East nations choose sides and world powers Russia and China weigh in.

Relations between Saudi Arabia and Iran — two Middle Eastern powerhouses who are both founding members of the Organization of Oil Exporting Countries (OPEC) despite the fact that global bans have, until recently, limited Iranian oil exports — have deteriorated following Riyadh’s execution of Shiite cleric Nimr al-Nimr on Saturday.

Protesters in Iran’s capital, Tehran, stormed the Saudi embassy hours after the execution. The Saudis cut off all diplomatic ties with Iran soon thereafter and have since been joined in breaking off ties with Iran by Bahrain, which cited Tehran’s “blatant and dangerous interference.”

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The United Arab Emirates, meanwhile, announced it was “downgrading” its diplomatic relations with Iran. The UAE recalled its ambassador in Tehran and said it would also reduce the number of diplomats stationed in Iran.

As the oil price continues to fall, there was an interesting proposal doing the (unofficial) rounds ahead of last week’s Organization of Petroleum Exporting Countries meeting in Vienna.

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Detailed in a Financial Times article, the rumor was that Saudi Arabia would have been willing to cut output to support oil prices if other OPEC, and some non-OPEC producers, matched its cutbacks. Crucially, the rumor went, that would require Iraq, Iran and non-member Russia to cut back along with Saudi Arabia for the “deal” to be acceptable to the Kingdom.

At the end of the day, the other OPEC nations, Russia and the Saudis all decided not to cut output. Or at least they couldn’t come to an agreement to do anything other than stand pat.

OPEC oil ministers even dropped any reference to the group’s output ceiling for the first time in decades, highlighting disagreement among members about how to accommodate Iranian barrels of oil once Western sanctions are rolled back.
Source Telegraph Newspaper

Source: London Telegraph

Without a doubt, all those countries would have liked to have seen higher prices. Iraq’s production may have roared back after the war there, but at $43/barrel the country is still bankrupt and, according to a Telegraph article quoting RBC Capital Markets, it can’t even pay the salaries of its security forces. Read more

Steel imports into the US were up in October and Saudi Arabia is under pressure to turn off its spigots from fellow OPEC nations.

Steel Imports Up

Based on preliminary Census Bureau data, the American Iron and Steel Institute reported today that the US imported a total of 2,987,000 net tons (nt) of steel in October 2015, including 2,258,000 nt of finished steel, up 5.4% and 1.4%, respectively, vs. September final data.

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On the year-to-date, through ten months of 2015, total and finished steel imports are 33,889,000 and 27,438,000 nt, respectively, down 8% and 2% respectively, vs. the same period in 2014. Annualized total and finished steel imports in 2015 would be 40.7 and 32.9 million nt, down 8% and 2% respectively vs. 2014 if the same levels persisted in November and December.

Saudi Arabia Under Oil Pressure

OPEC members including Iran have decided Saudi Arabia’s effort to force out smaller US shale producers by overproducing and lowering global oil prices was a failure and are preparing to press the Saudis directly to pull back on production at the group’s meeting this week.

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The Wall Street Journal reports that discontent is even building inside Saudi Arabia over the strategy.

The big meeting is due in December, the eyes of the world will be upon the assembled dignitaries, will they be able to reach an agreement and what impact will that have on the world? Are we talking about the 2015 United Nations COP 21 Climate Change Conference in Paris?

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No, we are talking about OPEC’s summit in Vienna on December 4. In the short- to medium-term the price of oil will have a bigger impact on the citizens of the world than anything agreed to in Paris. OPEC is facing a revolt the likes of which has not been seen since the 1970’s. Many members, indeed most members are at a breaking point and Saudi Arabia has been accused of running the cartel for its own ends against the wishes of the majority.

The club is coming apart at the seems. Algeria’s former energy minister, Nordine Aït-Laoussine, is quoted in the Telegraph as saying the time has come to consider suspending his country’s OPEC membership if the cartel is unwilling to defend oil prices and merely serves as the tool of a Saudi regime pursuing its own self-interest. “Why remain in an organization that no longer serves any purpose?” he is quoted as saying.

The International Energy Agency (IEA) estimates that the oil price crash has cut OPEC revenues from $1 trillion a year to $550 billion, setting off a fiscal crisis that has far-reaching consequences, particularly in the Middle East already riven with sectarian unrest and four civil wars.

The widely accepted aim of Saud Arabia, and a small band of Gulf partners, is to drive US shale producers to the wall and thereby choke off the threat to OPEC’s dominance. If that is the case the battle is proving much harder than was probably anticipated. So far US output has only dropped by 500,000 barrels per day but still stands at 9.1 million b/d, much as it did this time last year. True, there is only so long hedging can keep some producers in business or technology can reduce costs, but the US Energy Department expects a loss of only 600,000 b/d next year, far from a collapse and by then OPEC will have foregone another half trillion dollars.

As the Telegraph points out, the infrastructure and technology in the US remain in place even if some shale producers go to the wall. If oil price move back up to $60+ new firms will come into the market and production will rise again. The US shale industry has become the new swing producer whether Saudi Arabia likes it or not.

Another less well debated target could be to check solar and wind power the paper suggests, both of which are terribly price dependent. The oil price does not directly impact electricity prices but certainly has an indirect effect by its impact on natural gas prices often linked to the oil price and hence natural gas or LNG’s ability to compete with renewables. But the move to renewable is inexorable, driven in some quarters by politicians desire to “do the right thing” and in others, such as China, by the knowledge that more of the same would result in such a widespread health risk that civil unrest could be the end result.

Source: Telegraph

Which brings us back to Paris, the two summits are not unrelated.

Attempts to limit carbon emission have already reduced oil demand. OPEC forecasts that oil demand will keep rising relentlessly, adding 21 million barrels of oil per day (b/d) to 111 million by 2040 as if nothing will change.

Yet, car producers the world over are not pouring billions into electric vehicles to be trendy, they know the internal combustion engine is, in the long term, a dead end. Paris will hasten that trend and as if in recognition the IEA says oil demand will be just 103 million b/d in 2040 even under modest carbon curbs. It would collapse to 83.4 million b/d if global leaders really grasp the nettle. Rather than try to drive other supply sources out of business, the Saudi’s would be better off maximizing their returns for as long as they can, it is after all a finite resource, both in terms of supply and in terms of demand.

Source: Telegraph

Source: Telegraph

The crunch though may be none of the above but the gradually collapsing geo-political state of the Middle East, as governments struggle to maintain budgets in the face of the oil-related revenue collapse.

Most petro economies have become used to huge government largesse, austerity in the form of salary reductions, a break on new hiring, reductions in subsidies or welfare payments could result in unrest in an area not noted for its calm debate in recent years.

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Unhappy populations right across the Middle East are more likely to turn to extremism if there are no jobs or prospects. As the paper points out Saudi Arabia, itsel,f has suffered five Isil-linked terrorist acts on it’s soil since May, several of them targeted at oil installations, probably as the terrorist organization also has an eye on raising the oil price. Isil is largely funded by oil revenues and no doubt is also facing a drop in income as a result of Saudi Arabia’s stance. Saudi Arabia is playing a high stakes game, a game that if I were the halftime coach I’d be instructing the team requires a change of tactics in the second half.

Saudi Arabia is taking a massive gamble on the world oil markets. Their “pump at any price” policy has driven oil down to below $50 per barrel and, so far, appears to be having the desired effect of squeezing out marginal producers, particularly in the shale industry, unable to cover costs at that level.

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Every spike above $50, as happened last week, is met by a wave of hedging from shale companies. Late last week, US producers locked in new production at north of $50 for 2016 and 2017 delivery. As prices reached about $53, any further rise was limited by sellers locking in prices. Even so only some 11% of expected 2016 production is forward sold according to HIS Energy, quoted in Reuters.

Source: FT

Source: Financial Times

The Saudis had hoped they could drive down the price enough to squeeze out higher cost upstarts like the US shale industry. Indeed, the US government is quoted in the FT reporting that after adding 1 million barrels per day per year of production in every year since 2012. Next year will see the first decline, from 9.3 million bpd to 8.9 million bpd. Read more