Saudi Arabia’s big oil gamble will hurt the kingdom — but it’ll likely pay off

KEY POINTS
  • Oil at $20 per barrel was unimaginable a few months ago; now some forecasters are calling prices as low as $10 or even single digits as the world runs out of storage space and the global economy grinds to a halt.
  • But when the dust settles, many analysts believe it’ll be Saudi Arabia — even with its overwhelming reliance on oil revenue — that comes out on top.
  • The International Energy Agency expects global oil demand to contract by a stunning 20% this year, and Japanese bank MUFG estimates demand in April to plummet by 8.5 million barrels per day.
GP: Saudi Aramco oil processing facility in Saudi Arabia 200310 EU
A worker at an oil processing facility of Saudi Aramco, a Saudi Arabian state-owned oil and gas company, at the Abqaiq oil field.
Stanislav Krasilnikov | TASS | Getty Images

April is going to be a hellish month for the oil industry.

Already down more than 65% year-to-date, crushed by the coronavirus crisis and the Saudi-Russia oil price war, crude prices are set to tank even further when Saudi Arabia and others turn on the taps following the expiration of the OPEC+ output cut deal on April 1 that had reined in production to boost the market.

Oil at $20 per barrel was unimaginable a few months ago; now some forecasters are calling prices as low as $10 or even single digits as the world runs out of storage space and the global economy grinds to a halt.

But when the dust settles, many analysts believe it’ll be Saudi Arabia — even with its overwhelming reliance on oil revenue — that comes out on top.

The kingdom is willingly inflicting pain upon itself by slashing its selling prices and committing to increase production to more than 12 million barrels per day — a record amount — after a bid to cut output together with Russia failed. Its strategy now is going after maximum market share.

Despite the dire numbers, however, enduring months of fiscal pain while it pursues greater exports may ultimately pay off.

“Saudi will definitely be one of the winners on the other side,” Abhi Rajendran, director of research at Energy Intelligence, told CNBC. His call is based on the assumption that oil prices will rebound in 2021 post-coronavirus; his firm sees oil back up to $80 per barrel within three years.

Rajendran predicts Saudi Arabia’s market share will “definitely grow,” adding that “in a year or two they will have to increase production because the market will need it… and it will be ahead of the U.S. again in terms of volume.”

‘Short-term pain for long-term gain’

Still, many analysts expect production to drop after April when it becomes clear that the demand for all that crude just isn’t there.

Stephen Brennock of PVM Oil Associates described the Saudi policy as one of “short-term pain for long-term gain.”

“Like all oil producers, they will not be thrilled by the prospect of $30 oil for the foreseeable future… However, the ramp up in output and shipments will safeguard its long-term position in several key export markets,” Brennock said.

“I would not be surprised, at all, to see the oil market return to a tight supply environment in as soon as two years’ time,” John Kilduff, founding partner of advisory firm Again Capital, told CNBC.

… But the buyers could disappear

Still, with demand eviscerated by a world in lockdown fighting the spread of the coronavirus, the Saudis could fail to find enough buyers.

“If evidence reveals that Saudi Arabia can’t move all of that oil due to demand destruction from the coronavirus shutdowns then it could look very bad for the kingdom,” said Ellen Wald, president of Transversal Consulting and author of “Saudi, Inc.”

saudi crude production S&P snip 1.1585807293696

Indeed, the full economic blow of the global lockdowns hasn’t registered yet. Analysts at Dubai-based bank Emirates NBD warned that it will kick in “this quarter with the level of demand destruction likely to permanently alter the long-term trajectory for oil consumption.”

The International Energy Agency expects global oil demand to contract by a stunning 20% this year, and Japanese bank MUFG estimates demand in April to plummet by 8.5 million barrels per day.

Austerity for the kingdom?

China will likely be a top buyer for the cheap Saudi crude, but that may not be enough to make up for the demand drop from other major markets India and Europe. Plus, China getting discounted rates in April doesn’t guarantee they will keep buying from the Saudis in the future, Wald pointed out. “Unless Saudi gets someone to sign a long term contract, they haven’t ‘captured’ the market share,” she added.

The kingdom’s next moves to counter the oil revenue drop could include further borrowing, selling assets from its Public Investment Fund, accessing foreign cash reserves or even imposing austerity measures.

That could have wide-ranging consequences domestically, Wald believes. “There will very, very likely be more political repression because that will have to come with the hard choices.”

Oil extends gains on IEA growth forecasts, hopes for OPEC-US shale producer talks

CNBC

  • Oil prices extended gains on Tuesday for the fifth straight day.
  • The IEA said on Monday global oil demand was expected to grow in the next five years, while output from OPEC producers would rise at a much slower pace.
  • OPEC oil ministers, U.S. shale oil producers and other global oil industry leaders gathered in Houston as CERAWeek kicked off on Monday.

Oil fracking California

Getty Images

Oil prices extended gains on Tuesday for the fifth straight day, underpinned by robust demand forecasts and prospects for informal contacts sought by OPEC with U.S. shale oil producers at a key industry meeting in Houston this week.

International benchmark Brent crude futures climbed to $65.73 per barrel at 0138 GMT, up 19 cents, or 0.29 percent.

U.S. West Texas Intermediate (WTI) crude futures advanced to $62.74 a barrel, up 17 cents, or 0.27 percent.

The International Energy Agency (IEA) said on Monday global oil demand was expected to grow in the next five years, while output from producers in the Organization of the Petroleum Exporting Countries (OPEC) would rise at a much slower pace.

The IEA said the United States would supply much of the world’s growing oil demand over the same period as its shale oil production was set to surge. U.S. crude production has risen to more than 10 million barrels per day (bpd), overtaking top exporter Saudi Arabia. Output hit a record 10.057 million bpd in November, according to the U.S. Energy Department.

Meanwhile, OPEC oil ministers, U.S. shale oil producers and other global oil industry leaders gathered in Houston as CERAWeek, the largest energy industry get-together, kicked off on Monday.

The gathering comes against the backdrop of an extension in output cuts led by OPEC, along with other oil producers including Russia, in a bid to absorb a global oil glut and boost prices.

Higher U.S. oil production has hampered OPEC’s drive to reduce global supply, however.

Elsewhere, Libya’s El Sharara oil field resumed operations on Monday. The field, operated by Libya’s National Oil Corporation (NOC), was shut down on Sunday after a landowner closed a valve on a pipeline crossing his land.

‘Relentless’ growth could see the US topple Russia, Saudi Arabia as world’s largest oil producer, IEA says

CNBC

  • “This year promises to be a record-setting one for the U.S.,” the IEA said in its closely-watched report published Friday
  • The latest monthly report from the IEA comes at a time when crude futures have climbed to highs not seen since the early days of a slump in December 2014
  • One of the main beneficiaries of OPEC-led production cuts is the producers’ major competitor, U.S. shale oil. U.S. oil producers are staging a dramatic comeback amid a recovering oil price that has allowed many of them to restart operations.

IEA’s Atkinson: Low Venezuelan oil production hastens market rebalancing

IEA: Expect a volatile year for oil prices  

The U.S. is well-placed to overtake the likes of Saudi Arabia and Russiaas the world’s leading energy producer over the next 12 months, according to the latest monthly report from the International Energy Agency (IEA).

“This year promises to be a record-setting one for the U.S.,” the IEA said in its closely-watched report published Friday.

“Relentless growth should see the U.S. hit historic highs above 10 million barrels a day (in production), overtaking Saudi Arabia and rivaling Russia during the course of 2018 — provided OPEC and non-OPEC restraints remain in place,” the Paris-based organization added.

‘Unchartered waters’

The latest monthly report from the IEA comes at a time when crude futures have climbed to highs not seen since the early days of a slump in December 2014. Brent crude futures hit a peak of $70.37 a barrel on Monday, with the global benchmark since paring some of its recent gains to trade at $68.69 on Friday morning.

“What we are trying to understand is the responsiveness of the U.S. shale producers. And because of the dynamism of the industry, the innovation and the vast number of players in that space … to some extent, we are in unchartered waters,” Neil Atkinson, head of the oil industry and markets division at the IEA, told CNBC on Friday.

Atkinson said that given the recent rally in oil prices, the IEA was expecting a “wave of new production” from the U.S. in the coming months. He added OPEC would then need to “accommodate” for that and make its own judgment at its next meeting in June as to what its response should be.

IEA predicts a slowdown in crude demand growth in 2018

IEA’s Atkinson: Low Venezuelan oil production hastens market rebalancing  

The main price driver has been a supply cut from major oil producing group OPEC and Russia, who started to withhold output in January last year. The production cuts by OPEC and 10 other allied producers, which are scheduled to last throughout 2018, are aimed at clearing a supply overhang and propping up prices.

One of the main beneficiaries of these cuts is the producers’ major competitor, U.S. shale oil. U.S. oil producers are staging a dramatic comeback amid a recovering oil price that has allowed many of them to restart operations.

US ‘beat all expectations’ in 2017

U.S. crude production stands at 9.9 million barrels a day, according to the IEA, which is the country’s highest level in almost 50 years. That level of supply puts the U.S. neck-and-neck with OPEC kingpin Saudi Arabia — the world’s second-largest producer after Russia.

“The stage was set for a strong expansion last year, when non-OPEC supply, led by the U.S., returned to growth of 0.7 million barrels a day and pushed up world production despite OPEC and non-OPEC cuts,” the IEA said.

“U.S. growth of 0.6 million barrels a day in 2017 beat all expectations, even with a moderate price response to the output deal as the shale industry bounced back — profiting from cost cuts, stepped up drilling activity and efficiency measures enforced during the downturn,” the group said.

A worker prepares to lift drills by pulley in the Permian basin outside of Midland, Texas.

Brittany Sowacke | Bloomberg | Getty Images
A worker prepares to lift drills by pulley in the Permian basin outside of Midland, Texas.

In recent years, America’s unprecedented oil and gas boom has been driven by one factor above all others — and that’s shale. The so-called shale revolution could help to alleviate Washington’s reliance on foreign oil, including from turbulent Middle Eastern states, while also supporting a bid to export to more countries around the world.

The IEA’s estimates of global oil product demand in 2017 and 2018 were left roughly unchanged at 97.8 million barrels a day and 99.1 million barrels a day, respectively.

The price of oil collapsed from near $120 a barrel in June 2014 due to weak demand, a strong dollar and booming U.S. shale production. OPEC’s reluctance to cut output was also seen as a key reason behind the fall. But, the oil cartel soon moved to curb production — along with other oil producing nations — in late 2016.

Oil prices fell more than 1 percent on Wednesday

Oil prices slide after IEA casts doubt over demand outlook

CNBC

  • Oil prices fell more than 1 percent on Wednesday, continuing Tuesday’s slide
  • Crude prices are now down by around 5 percent since hitting 2015 highs last week
  • The International Energy Agency (IEA) on Tuesday cut its oil demand growth forecast by 100,000 barrels per day (bpd) for this year and next

A pump jack and pipes at an oil field near Bakersfield, California.

Lucy Nicholson | Reuters
A pump jack and pipes at an oil field near Bakersfield, California.

Oil prices fell more than 1 percent on Wednesday, continuing Tuesday’s slide after the International Energy Agency cast doubts over the past few months’ narrative of tightening fuel markets.

Brent crude futures were at $61.33 per barrel at 0515 GMT, down 88 cents, or 1.4 percent from their last close.

U.S. West Texas Intermediate (WTI) crude was at $55 per barrel, down 70 cents, or 1.3 percent.

The price falls mean that crude prices are now down by around 5 percent since hitting 2015 highs last week, ending a 40-percent rally between June and early November.

“Crude prices dropped dramatically after the IEA forecast a gloomy outlook for the near future … The drop was arguably exacerbated by a global selloff in other commodities,” said Sukrit Vijayakar, director of energy consultancy Trifecta.

The International Energy Agency (IEA) on Tuesday cut its oil demand growth forecast by 100,000 barrels per day (bpd) for this year and next, to an estimated 1.5 million bpd in 2017 and 1.3 million bpd in 2018.

“The oil market faces a difficult challenge in 1Q18 with supply expected to exceed demand by 600,000 bpd followed by another, smaller, surplus of 200,000 bpd in 2Q18,” the agency said.

The demand slowdown could mean world oil consumption may not, as many expect, breach 100 million bpd next year, while supplies are likely to exceed that level.

The IEA report countered the Organization of the Petroleum Exporting Countries, which just a day earlier said 2018 would see a strong rise in oil demand.

Vijayakar said a reported increase in U.S. crude inventories was also weighing on prices.

Crude oil tracks for worst day in a month

Crude oil tracks for worst day in a month  

The American Petroleum Institute (API) said on Tuesday that U.S. crude inventories rose by 6.5 million barrels in the week to Nov. 10 to 461.8 million.

U.S. government inventory data is due later on Wednesday.

On the supply side, rising U.S. output also pressured prices.

U.S. oil production has already increased by more than 14 percent since mid-2016 to 9.62 million bpd and is expected to grow further.

The IEA said non-OPEC production will add 1.4 million bpd of additional production in 2018.

The IEA’s outlook pressures OPEC to keep restraining output in order to defend crude prices, which its members rely on for revenue.

OPEC and some non-OPEC producers including Russia have been withholding production this year to end years of oversupply.

The deal expires in March 2018 but OPEC will meet on Nov. 30 to discuss policy, and it is expected to agree an extension of the cuts.

“Anything less than a full nine-month extension delivered at the Nov. 30 meeting could precipitate a sell-off,” U.S. bank Citi said.

China crude oil storage splurge is OPEC’s best friend

Nasdaq

Reuters

By Clyde Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

LAUNCESTON, Australia, Oct 16 (Reuters) – China’s crude oil imports surged to the second-highest on record in September, but this isn’t a sign of supercharged demand in the world’s second-biggest economy.

China’s crude imports jumped to 37 million tonnes in September, equivalent to 9 million barrels per day (bpd), according to preliminary customs data released on Oct. 13.

This was up from August’s 8 million bpd, but it’s worth noting that August was an eight-month low. More importantly, China’s oil imports are up 12.2 percent in the first nine months of 2017 from the same period last year.

This certainly looks like solid growth in the world’s biggest crude importer, and indeed, demand for refined fuels had been higher than expected at the start of the year, mainly on the back of strength in infrastructure and construction.

But it also appears that China is buying substantial amounts of crude for its strategic and commercial storages.

The September figure was likely boosted by the start-up of China National Offshore Oil Corp’s new Huizhou refinery, with plants typically requiring around 21 days of commercial reserves to ensure smooth operations.

The return from maintenance of some of the independent refineries also likely boosted crude imports in September.

But it also appears that China’s ongoing build-up of its strategic storage contributed to import demand.

China rarely releases data on its Strategic Petroleum Reserve (SPR), but Thomson Reuters Oil Research and Forecasts estimated that at least 1.15 million tonnes, or about 280,000 bpd, flowed into the SPR in September.

The International Energy Agency said on Oct. 12 that China has been building its crude stockpiles at a record pace in 2017, contributing to the country’s expected demand growth of 540,000 bpd in 2017 from 2016.

The IEA does expect China’s crude oil demand growth to slow to 325,000 bpd in 2018 as the country closes in on filling its available storage tanks.

While China’s buying of crude for its SPR isn’t a new dynamic, in the global oil market it effectively represents a shift of where oil is being stored.

STORED OIL FLOWS TO CHINA

As the global benchmark Brent crude moves into backwardation, where prices for oil for future delivery become cheaper than cargoes for immediate shipping, it becomes unprofitable for producers and traders to store crude.

This has resulted in stored oil being released onto the market, and China has shown it’s a willing buyer.

In particular it appears that crude in floating storage in the Asian region has been moved to China.

While it may seem of limited consequence for oil simply to move from one place to another, it does matter for market dynamics.

Oil in China’s SPR is effectively off the market, insofar as it’s unlikely to be used or be available for sale, unless there is a crisis of some description.

However, oil stored in anchored tankers or in land-based facilities can be traded and shipped. In other words, it is dynamic and part of the global physical oil market.

It’s these inventories that the Organization of the Petroleum Exporting Countries (OPEC) and its allies have been targeting in their efforts to re-balance the global market and boost the price of crude.

The overhang of crude acted as a drag on the price, and as oil moves out of storage it tightens the market, allowing OPEC and other producers to raise prices.

In some ways China’s demand for oil for its SPR has been OPEC’s biggest ally, but it should also be noted that China most likely has boosted oil imports precisely because the price has been relatively cheap.

Whether China would ease purchases for its SPR if crude prices rose strongly remains to be seen, but it certainly would be a possibility.

With Brent remaining below $60 a barrel despite the output curbs by OPEC and its allies, it’s also likely that China will continue to fill its SPR.

This means the country’s crude imports will likely remain robust in coming months, even if they slip back somewhat from September’s elevated levels.

However lower quotas for the export of refined products may also hamper China’s demand for imported crude in the fourth quarter, with refiners getting close to having used up their allocations for the year.

As usual there are competing dynamics at work in China’s crude oil markets, but it is likely that good consumption growth in the domestic market and strong flows into storages will offset any loss of demand from slowing refined product exports.