China tariff threat could be a boon for Gulf oil exports

Time: June 18, 2018

LONDON: Gulf oil producers may benefit from China’s threat to impose import tariffs on US crude and other energy products, as key exporters meet to discuss production increases later this week.

China, one of the largest buyers of US crude oil surprised many late last week when it announced plans to tax such imports, as part of retaliatory measures following the decision by US President Donald Trump to impose $50 billion worth of tariffs on a variety of US goods.

The announcement comes as China looks for a different oil supply mix ahead of likely reductions in its imports from Venezuela and Iran.

Carsten Fritsch, a commodities analyst with Commerzbank, said that while China’s reduction of imports of Iranian crude should not be overestimated, the decline of production from Venezuela left the country with no choice but to seek alternative sources of oil.

“The US could could have been an alternative supplier but of course that won’t be the case if a 25 percent import tariff comes into effect,” Fritsch told Arab News.

“Some of the Arabian Gulf countries might have an advantage in plugging the gap, given the similarity of the crude types, and the same shipping lanes that would be used.”

China is currently the largest Asian customer for US crude; imports rose to 3.89 million metric tons in the first quarter of the year, compared with just 443,000 metric tons for the year ago period, according to figures from S&P Global Platts, with the US’s market share rising to 3.5 percent at the end of March.

American crude has proved competitive for China; the US benchmark WTI averaged a $1.83 per barrel discount to oil from the North Sea Forties on a delivered basis into China in May, and a 74 cents per barrel discount to Abu Dhabi’s Murban crude, according to S&P Global Platts calculations.

But China is likely to find it easier to replace US crude imports than US producers will to get new customers, according to Thomson Reuters commentator Clyde Russell.

“It’s not hard to imagine a scenario in which China encourages Saudi Arabia and Russia, the world’s top oil exporters and partners in the agreement to restrict output, to pump more crude,” said Russell yesterday.

“China would then buy the additional Saudi and Russian output, using it to replace cargoes from the US, and even from Iran, assuming the renewed US sanctions against Iran force Beijing to curtail imports.”

The prospect of restrictions on US oil come ahead of a meeting of OPEC and other oil producers in Vienna later this week, with an increase in oil production seen as increasingly likely following the eradication of oversupply and the recovery of prices.

Oil prices were up around 1.5 percent yesterday afternoon, on reports from Bloomberg that producers were considering increasing output by between 300-600,000 barrels per day, compared with a 1.5 million barrel per day initially sought by Russia.

In addition to tariffs on oil, China has also threatened imports on other energy sources, notably coal, in a bid to hurt Trump politically as well as economically.

“Coal miners count among Trump’s most vocal backers, but if China does stop buying US coking coal, it may force producers to accept lower prices from other buyers in order to move cargoes,” said Russell.

“The Chinese have probably calculated that they can take the pain from a trade conflict longer than Trump can, or at least longer than the US. economy, companies and workers will be prepared to tolerate.”

This article was first published in Arab News

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Opec’s new game as rivalries surface over oil production

Time: June 18, 2018

The Fifa World Cup, intended to showcase friendly competition between nations, is of course a hotbed of intense rivalries.

Russian President Vladimir Putin and Saudi Arabia’s Crown Prince Mohammed bin Salman oversaw proceedings in Thursday’s opening game. Meanwhile, by a stroke of luck, Iran enjoyed late success on Friday. The US, which along with Canada and Mexico won the bid to host the event in 2026, is not on the field but comments from the sidelines. All this makes it much like Opec.

The Saudi Arabian oil team’s problem today is too much winning. The market has tightened significantly as the eventual result of their policy of production restraint. They have been assisted by continuing strong worldwide demand and by the collapse in Venezuela, then by the prospect of lost exports from Iran as the US moves to reimpose sanctions.

Prices hovering around $80 per barrel conjure the spectre of demand destruction, and diplomatic pressure from US President Donald Trump’s anti-Opec tweets and from other major customers such as India. After strongly supporting the US decision to leave the nuclear deal with Iran, Riyadh is now looking to prevent the oil price getting out of control.

After he and Mr Putin assembled an all-stars team of Saudi Arabia, the UAE, Russia, Iran, Iraq, Venezuela, Oman and other leading producers, Prince Mohammed spoke of a “10 to 20 year agreement” for oil market management. It remains to be seen whether production restraint is the right way to play for the long-term, but with threats from surging US production and the rise of electric vehicles, some kind of far-sighted strategy is needed.

Few of the “Opec+” group can raise production significantly – only Saudi Arabia, the UAE, Kuwait, Russia and, given a deal with the Kurdish region on pipeline access, Iraq. Iran feels cheated; having agreed to some production restraint after it emerged from the Obama-era penalties, it now faces losing market share to its rivals again. Exports were down sharply in early June, as South Korean, Turkish and European buyers cut shipments, perhaps in anticipation of sanctions.

Both Tehran and Caracas, also under (milder) American sanctions, object to Opec policy being made in response to US demands, and reducing prices at their expense. Venezuela, historically hopeless at football, is not doing much better at oil production. Its output may dip below 1 million barrels per day shortly, a humiliating fall for Latin America’s once-titan. Libyan oil production is threatened again by fighting at its ports.

In the short term, there is not much Iran, Venezuela, Libya or other declining producers such as Qatar, Angola or Algeria can do if the stronger members go it alone on raising production. Sanctions on Iran might prove ineffective, political change in Venezuela might restore its output, or global recession may hit demand.

Russia is in the most interesting position. Moscow wants to retain its alignment with Iran, forged by cooperation in their Syrian brutality, and it does not want to seem to play to Mr Trump’s whistle. Yet ideas that it would resell sanctioned Iranian crude at higher prices do not make much sense and China, not Russia, will be the biggest investor in Iranian oil-fields.

The Kremlin also wishes to sustain its influence with Opec, particularly in the Arabian Gulf, which it has developed through the “Vienna deal”. Its oil companies have been champing at the bit to raise production again, particularly the largest, Rosneft, controlled by Igor Sechin, Mr Putin’s sidekick. And there is some concern over rising domestic fuel prices during the summer harvesting season.

Saudi Arabia and Russia could quietly boost production to a degree. The Saudi summer, bringing higher domestic demand, is upon us. After over-complying with production cuts for a while, they could employ a period of moderate under-compliance. .

That might help keep the market from boiling over until the next scheduled meeting in November, or perhaps an extraordinary meeting in September or October. By then, the initial impact of the Iran sanctions would be clearer.

Saudi production was up 86,000 bpd in May, although it normally rises in summer anyway to meet domestic power generation. Russia’s output at the start of June was 11.1 million bpd, slightly above its 10.98 million bpd target.

Saudi energy minister Khalid Al Falih has said an Opec deal to boost production is “inevitable”, while his Russian counterpart Alexander Novak has proposed easing the targeted cuts to 1.5 million barrels per day in June, allowing 300,000 bpd to come back on the market. Further increases could then be phased in during the rest of the year.

The Saudi-Russia axis would rather Opec reached a formal position acknowledging the need for more oil to back up a commitment to stable prices. To win acceptance from other members, they could concede to a smaller boost in output, preferable to a breakaway move.

This will work for now, but by November, they need to agree to the game’s new rules.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

This article was first published in The National

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Saudi Energy Minister says oil output boost by Opec and allies ‘inevitable’

Time: June 14, 2018

It’s “inevitable” that Opec and its allies will agree to boost oil output gradually at their meeting in Vienna next week, said Saudi Arabia’s Energy Minister.

“As usual we will do the right thing,” Khalid Al Falih told reporters in Moscow on Thursday.

“I think we’ll come to an agreement that satisfies most importantly the market.”

Russia and Saudi Arabia, leaders of the deal between Opec and other major oil producers to curb output and boost prices, will discuss their next move in Moscow on Thursday on the same day as the two nations face off at the football World Cup.

Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, along with Mr Al Falih and his Russian counterpart, will discuss how to boost oil production while maintaining their petro-alliance and overcoming opposition to an increase from other Opec members.

Both nations have proposed plans for the so-called Opec+ group that would add as much as 1 million barrels per day, about 1 per cent of global output, although Riyadh prefers a smaller increase, according to people familiar with the matter.

“I think it will be a reasonable and moderate agreement,” Mr Al Falih said. “It’s not going to be anything outlandish.”

Brent futures for August settlement traded at $76.49 a barrel on the London-based ICE Futures Europe exchange on Thursday, down 25 cents. The contract advanced 86 cents on Wednesday. The global benchmark crude traded at a $9.88 premium to WTI for the same month.

West Texas Intermediate crude for July delivery traded at $66.77 a barrel on the New York Mercantile Exchange, up 13 cents, at 10.58am London time. The contract climbed 28 cents to $66.64 on Wednesday. Total volume traded Thursday was about 24 per cent below the 100-day average.

Futures rose 0.8 per cent to 468.1 yuan a barrel in afternoon trading on the Shanghai International Energy Exchange. The contract slipped 1.6 per cent on Wednesday.

Saudi Arabia is mulling various different scenarios to raise supplies. One proposal envisages a single hike of just 500,000bpd. Another would see an immediate increase of 500,000bpd followed by a similar addition in the fourth quarter. The kingdom has also shared ideas that float an increase of about 600,000 to 700,000bpd.

In the US, the crude stockpile decline was steeper than estimated by analysts in a Bloomberg survey, and also ran counter to an industry report a day earlier showing an increase. Petrol and distillates also slid last week, the Energy Information Administration said. Meanwhile, US crude production rose to 10.9m bpd, topping 10 million per day every week since early February.

Crude loadings at Libya’s biggest oil port of Es Sider and nearby terminal of Ras Lanuf halted after workers were evacuated following clashes, people familiar with the matter said.

This article was first published in The National

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United States, Saudi Arabia and Russia Find Agreement on Oil Policy

Time: June 13, 2018

Gasoline prices have fallen about a nickel a gallon since Memorial Day. In April, President Trump had tweeted that oil prices were “artificially Very High!”CreditTy Wright/Bloomberg

By Clifford Krauss

  • June 13, 2018
  • HOUSTON — It is unusual for the United States, Saudi Arabia and Russia to see eye-to-eye, much less try to achieve common energy policy goals, even indirectly.

But that is what seems to be happening, and it is taking the edge off the yearlong rise in oil and gasoline prices. Even if those countries have their own reasons for welcoming the surge in production, it is also reducing the influence of the Organization of the Petroleum Exporting Countries, which will meet in Vienna next week to discuss production cuts put in place in early 2017.

The cheerleader, if not the ringmaster, in this effort is President Trump, who took to Twitter on Wednesday to criticize OPEC for high crude prices. “Oil prices are too high, OPEC is at it again,” he wrote in his second such statement since April. “Not good.”

Oil prices are too high, OPEC is at it again. Not good!

— Donald J. Trump (@realDonaldTrump) June 13, 2018

Whatever happens at the OPEC meeting, two of the biggest players in the global oil market — Saudi Arabia and Russia — appear to have already calculated that it is in their immediate interest to crank up production, effectively sidelining the Saudis’ fellow cartel members.

Between them, the two countries have already each added more than 100,000 barrels a day to global oil supplies. Mr. Trump wants even more crude sloshing around the market to tamp down energy prices ahead of the congressional elections in November, and it looks like he may well get it.

It is perfectly normal for Republican and Democratic administrations to try to nudge oil prices down, but rarely — if ever — has the effort been so blunt and public. For decades, whenever presidents faced rising gasoline prices, American officials privately called Saudi Arabia seeking help in getting OPEC to boost production — something that the Trump administration has done, as well.

But Mr. Trump appears unsatisfied with limiting his overtures to private diplomacy. He is publicly targeting OPEC even though oil prices have stabilized since his criticism in April, and regular gasoline prices have slid by roughly a nickel a gallon since Memorial Day. A barrel of oil in the United States now costs about $67 a barrel, down nearly $4 over the past month, although that is still about 45 percent higher than at this time last year.

Saudi oil officials have agreed to boost production publicly, in coordination with Russian officials who would like to export more oil to bolster the country’s economy. That may well upset Iran, Venezuela and other OPEC members that want higher oil prices, making the coming meeting a contentious one.

President Vladimir V. Putin of Russia and Saudi Arabia’s Crown Prince Mohammed bin Salman will discuss oil and other issues on Thursday as their teams face off in the World Cup. The stars appear to be aligned for them to work together to keep oil prices from climbing too high, too fast, despite the collapse of Venezuelan crude production and the expectation that new American sanctions will target Iranian oil exports.

“There’s a commonality of interest that fortunately and coincidentally came together,” said Larry Goldstein, a director of the Energy Policy Research Foundation. “Putin is under pressure domestically to export more oil, the Saudis got a little nervous when the Brent price hit $80 a barrel, and the U.S. is nervous about their Iranian policy and the possibility of soaring gasoline prices.”

The result has been a partial reversal in energy prices, which should cheer elected leaders and economists who worry that high energy prices could hurt global economic growth.

But whatever the advantages for consumers and American foreign policy, oil price relief could be modest and short-lived.

Mr. Trump, for instance, is pursuing several policy goals that cut against each other. He wants lower gasoline prices to keep the economy humming. At the same time, he wants to squeeze Iran and Venezuela with sanctions, which would inevitably lower the amount of oil on the world market. Venezuela’s oil exports are falling by tens of thousands of barrels every month, and Iranian exports could fall by between 200,000 and a million barrels a day by next year, analysts say.

A Saudi Aramco refinery. While Saudi Arabia wants higher oil prices in the long term, it is willing to tamp down oil prices for now to put pressure on Iran.CreditAhmed Jadallah/Reuters

A boom in oil production in the United States has helped increase global supplies in recent years even as OPEC countries cut back to raise prices. But experts believe a shortage of pipelines will limit the amount of oil that companies can extract from the Permian basin of West Texas and New Mexico, the main source of new American production, until late 2019.

Scott D. Sheffield, chairman of Pioneer Natural Resources, a major Texas oil producer, said if there were a significant decline in Venezuelan and Iranian exports, “and Saudi doesn’t increase output, we’re going to see $100 oil by the end of the year.”

Just a few years ago, $100 a barrel was considered normal. But prices collapsed in 2014, falling in the United States to below $30 in early 2016, as a glut of oil filled up tankers. Now the world’s big oil producers are seeking a sweet spot for oil prices.

American and global oil prices rose modestly on Wednesday despite Mr. Trump’s criticism.

Even as he has criticized OPEC, Mr. Trump has found a willing ally in Saudi Arabia. Riyadh has long argued against the Iran nuclear deal, and pressed the United States to put more pressure on the Shiite Islamic regime. The Saudis are fighting Houthi rebels backed by Iran in neighboring Yemen and have been trying to counter Iranian influence in Syria and elsewhere.

Iran would like higher oil prices, because it needs money to invest in its weakened oil industry and ailing economy. But its exports could falter with the return of sanctions that were removed under the nuclear deal. And other OPEC members will seek to take advantage of Iran’s misfortune by selling more oil to big markets like China and India.

“If you are the Saudis, you want to do Trump a favor and get him off your back,” said Robert McNally, president of Rapidan Energy Group, a consulting firm.

Sadad Ibrahim Al Husseini, a former executive vice president of Saudi Aramco, said Russian and Saudi Arabian leaders “will look at gradual but steady increases of overall supply, easily between one and 1.2 million barrels a day by year-end.”

The two countries will probably lobby other oil-producing nations to also raise output, particularly Kuwait and United Arab Emirates, both OPEC members.

Besides juicing economic growth, Russia has other reasons to export more oil.

Two years ago, Russia agreed to slash 300,000 barrels per day to help OPEC stabilize prices. But more recently, Rosneft and other Russian oil companies have been lobbying Mr. Putin to increase production to take advantage of higher prices and for tax reasons, energy experts say.

The Russian oil companies, increasingly active in Venezuela and the Middle East, have recently raised their production capacity. They also prefer lower prices because they pay higher marginal corporate tax rates when prices go above $75 a barrel.

“Russian firms have long been pushing to produce more,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. “They have invested heavily in new production capacity and see far more upside from additional production rather than higher prices.”

The Russians are aligned with Iran in Syria and support the Iran nuclear deal, but they stand to gain financially if the agreement falls apart. American sanctions clamping down on Iranian exports would allow Russia to buy Iranian oil cheaply and resell it at a higher prices. Russia might also replace European investors in Iranian oil fields.

Of course, over the long term, Russia and Saudi Arabia would prefer higher oil prices. But short-term considerations have held sway since Mr. Trump jabbed at OPEC in April.

Saudi and Russian officials expressed their preference for higher production levels after the president tweeted: “Oil prices are artificially Very High! No good and will not be accepted!”

Amy Myers Jaffe, an energy expert at the Council on Foreign Relations, said that the post caught the attention of oil-producing nations. “The tweet was critical and derailed the entire discussion heading into the OPEC meeting 100 percent,” she said.

This article was first published in The New York Times 

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Saudi Oil Output Rises Above 10 Million Barrels a Day

Time: June 11, 2018

 

Saudi Arabia boosted daily oil output in May to the highest level since October, ahead of meetings with Russia and other global producers next week where they may propose raising production even further and phasing out 18 months of voluntary cuts.

Saudi Arabia, which along with Russia is trying to garner support for lifting output limits, told the Organization of Petroleum Exporting Countries that its daily production rose 162,000 barrels a day to 10.030 million in May compared with the previous month, a person with knowledge of the data said, asking not to be identified because the information isn’t public.

Saudi Arabia and Russia may propose a gradual production increase at the June 22-23 meetings in Vienna, intending to offset any supply disruptions in Iran and Venezuela. Riyadh pledged to pump no more than 10.058 million barrels a day under OPEC’s output-cuts agreement with Russia and other allies outside the group. The desert kingdom usually boosts output in summer months as domestic demand for fuel rises.

Russia too is showing signs of a weaker commitment to supply cuts as its production increases before talks with OPEC about the future of the accord for limiting output. The nation boosted crude supply to the highest in 14 months in the first week of June as some companies breached their caps, a person with knowledge of the matter said.

The U.S. is said to have asked Saudi Arabia and others to relax output restraints put in place in early 2017 as prices near $80 a barrel pose a threat to economic growth.

Iraq on Monday joined Iran and Venezuela in opposing any plans to start boosting crude output. OPEC should resist pressure to increase oil supplies as the production cuts haven’t yet achieved their purpose, with oil prices still below the desired level, Oil Minister Jabbar al-Luaibi said in a statement.

This article was first published in Bloomberg

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The lights are flashing of an impending oil shock

Time: June 09, 2018

BUS_180609 C&A

If it looks like a duck, swims like a duck, and quacks like a duck, it’s probably a duck. And right now, this duck is looking a lot like an oil shock.

In Brazil, a strike by truckers protesting the price of fuel brought the economy to a halt over the past week, interrupting exports of soybeans, coffee and chicken and prompting some to call for a return to military dictatorship.

In India, prices for diesel and gasoline have hit multi-year records, leading to demands for the government to cut taxes and for a price cap to be imposed on state-controlled Oil & Natural Gas Corp. — a self-defeating expedient.

Governments in Thailand, Vietnam and Indonesia and implementing or planning increases in retail fuel subsidies to protect consumers from the effects of rising oil prices and weakening national currencies.

Airline profits have probably peaked because of headwinds from fuel costs, according to Alexandre de Juniac, CEO of the International Air Transport Association. Philippine budget carrier Cebu Air Inc has promised to impose fresh fuel surcharges;

Moody’s Investors Service just blamed high oil prices in part for a 0.2 percentage-point cut in its outlook for India’s 2018 GDP growth, and warned of the potential of falling consumption spending and rising inflation across the globe if current high prices are sustained.

Judging by internet searches for the term, an oil shock is the last thing anyone should be worried about. It seems insane to be stressing over oil when Brent is struggling to break through $80 a barrel and West Texas Intermediate is bobbing around $70, about one-third lower than their levels four years ago.

But crude has a short memory.

Take the first Gulf War. In the five months between Saddam Hussein’s 1990 invasion of Kuwait and the start of Operation Desert Storm, a spike drove West Texas Intermediate to an average $30.84 a barrel. Despite representing little more than a return to the status quo before Saudi Arabia flooded the market late in 1985, those prices were high enough to help spark the early 1990s recession.

A 2011 analysis of previous oil shocks by James Hamilton of the University of California, suggests they’re a strong predictor of downturns. Rapid oil price increases have preceded 10 of the 11 US business cycle peaks since World War II. Only in 1970, 1973 and 2003 — during or in the immediate aftermath of recessions — did a run-up in prices fail to herald the peak.

Over the past 11 months, Brent crude is up 62 per cent and West Texas Intermediate has risen 46 per cent — but does that constitute an oil shock? By one measure, it could.

One way of analysing such events, pioneered by Hamilton, is to compare current oil prices to their highest level over the previous three years.

Where prices are below their previous peak, any increase can be considered a return to the norm; where they’re above that level, there’s the possibility of a genuine shock.

On a Hamilton-style measure, we’re seeing the strongest flashing red light since 2008.

Are such fears premature? Real global growth will reach 4 per cent this year for the first time since 2011, the Organisation for Economic Co-operation and Development forecast this week. Consumer prices, which have been slumbering for a decade in developed countries, could arguably do with an extra kick from higher energy prices to fuel core inflation and speed the return of central bank rates to pre-crisis levels. The Conference Board’s US Leading Index, one widely watched measure of turns in the business cycle, is at some of its highest levels on record.

At the same time, we shouldn’t expect to see many other signs of weakness yet because oil shocks are prophets, not partners, of slowing growth. And while higher prices don’t yet appear to be seriously crimping consumer spending in rich countries, trucker strikes and government subsidies elsewhere are a strong signal that the cost of crude and slumping currencies are eating into incomes elsewhere.

That should provide an extra impetus to governments in Saudi Arabia and Russia in deciding how much to increase exports. With US crude locked up onshore by infrastructure bottlenecks, a surge in supply and easing in prices may be the only thing standing between us and the next downturn.

This article was first published in Gulf News

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With its economy back in black, will Saudi pump more oil, risk lower prices?

Time: June 06, 2018

After shrinking by 0.7% in 2017 for the first time since 2009, the Saudi economy pulled out of recession in Q1 2018, growing by 1.5%, thanks to oil price rises, Capital Economics, a think-tank said Tuesday, as reported by Arab News., the kingdom’s economy in the first quarter,

Oil prices surged to around $80 a barrel last month from under $30 a barrel in early 2016 after OPEC and non-OPEC producers struck a deal to cut output, by 1.8 million bpd.
The country is securing additional revenues from non-oil economies like VAT, at a 55 tariff, from the start of 2018.
“Riyadh-based Jadwa Investment said Monday that Saudi fiscal reserves rose by $13.2 billion in April, marking its largest monthly increase since October 2013.

The reserves stood at $506.6 billion in April, down from $732 billion at the end of 2014,” said Arab News.
Since 2014, Saudi budget deficits have totaled $260 billion and the government is projecting a 2018 shortfall of $52 billion. Now the US is asking Saudi (And Russia) to raise oil production by 1 million bdp, but as this will drive prices lower, will the OEPC upcoming June 22 meeting agree to that?

1 more million, please

Bloomberg reports that the US government has asked Saudi Arabia and some other OPEC producers to increase oil production by about 1 million barrels a day, reflecting US President Trump dissatisfaction with rising fuel prices at the pump, and decision to reimpose sanctions on Iran crude exports that had previously displaced about 1 million barrels a day.

“Raising production was discussed at a meeting of some Arab oil ministers over the weekend in Kuwait City and a statement later pledged to ‘ensure stable oil supplies are made available in a timely manner to meet growing demand and offset declines in some parts of the world’.”

Benchmark Brent oil futures dropped as much as 2 percent to $73.81 a barrel in London trading after the U.S. request was reported, according to Bloomberg, but later recovered to $75.34.

Will Saudi go for it?

Despite all the jockeying behind closed doors, a series of public comments from the Saudi and Russian energy ministers suggest that the two largest producers in the OPEC+ group will likely agree to increase production in two weeks’ time, according to Oilprice.com, a prominent industry site.

“Russia is aiming for a larger increase in supply, perhaps around 1 mb/d. Saudi Arabia wants something much more modest,” said the oil site.

“Crown prince Mohammed bin Salman has waged an aggressive foreign policy and is itching for a fight with Iran. The Saudis need the U.S. on board with that campaign, so placating Washington with cheaper gasoline prices is a small price to pay.”

Also, shorter lead time for US shale to go from exploration to production, together with lower oil threshold prices of $60-$70 range today needed for shale rigs to start work from $100 in previous years, are added incentives for Saudi to agree.

Forbes said to expect markets to remain in limbo until the June meeting.

“International prices, which hit a high of $80 a barrel in May, are now more likely to head back to $50 a barrel rather than continue surging toward the feared $100 level,” said Forbes.

“Oil prices in the United States are at an eight-week low, hovering around $64.5 a barrel on Tuesday for West Texas Intermediate, as U.S. production continued its climb toward 11 million barrels a day.”

Forbes did say that Saudi cannot afford to let prices fall too far below $70 in the near-term.

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This historical crude oil development to drive demand, prices, to the roof

Time: March 28, 2018

Down prices go.

Monday May 28 saw another price tumble for oil prices, after crashing down last Friday.

The correction is mainly due to Saudi and Russia declaring their intent to increase oil supplies by some 1 million bpd as compensation to Venezuela’s output dropping to 1.5 million bpd in April, a fall of 260,000 b/d from January,  and upcoming sanctions on Iran, OPEC’s third biggest producer.

The sustained fall in Venezuelan output helped OPEC and non-OPEC members to significantly exceed the intended total production cuts over the past eight months.

“Brent crude futures were at $75 per barrel, down $1.35, or 1.8% percent, , while US West Texas Intermediate (WTI) crude futures were at $66.22 a barrel, down $1.66, or 2.5%, both from their last close,” said Reuters today.

“Brent and WTI have fallen by 6.4% and 9.1% respectively from peaks touched earlier in May (at $80 for Brent and $75 for WTI).”

However, 2 major developments, one historical, will likely push prices higher.

Surplus reaching an end

OPEC started withholding supplies in 2017, to the tune of 1.2 million barrels per day, to tighten the market and prop up prices, which in 2016 fell to their lowest in more than a decade at less than $30 per barrel.

This was in contrast to U.S. crude production surging by more than 27% in the last two years, to 10.73 million barrels per day (bpd), bringing its output ever closer to Russia’s 11 million bpd, according to Reuters.

Now, Bloomberg revealed that OPEC and allied oil producers including Russia concluded that the crude market re-balanced in April, when their output cuts achieved a key goal of eliminating the global surplus.

“The excess in oil inventories, which has weighed on prices for three years, plunged in April to less than the five-year average for stockpiles in developed nations,” reported Bloomberg quoting people with knowledge of the data assessed at the meeting of the Joint Technical Committee of OPEC and other producers last week in Jeddah, Saudi Arabia.

The International Energy Agency (IEA) said on May 16 that OPEC and its allies have finally succeeded in clearing a glut, with inventories falling below their five-year average for the first time since 2014.

OPEC and its partners meet in Vienna late June 2018 to discuss future strategy.

“The Joint Technical Committee determined that stockpiles held by developed nations dropped to about 20 million barrels below their five-year average, for a total decrease of about 360 million barrels since the start of 2017,” three of the people told bloomberg.

The Sulfur game changer

“An upcoming regulation that analysts have called “the biggest change in oil market history” and the “the most disruptive change in the refining industry” is lurking just around the corner, and experts say that it will drive oil prices higher as it will fundamentally shift the demand pattern for fuels,” said Oilprice.com

“The regulation concerns significantly limiting the sulfur content in the fuel that ships use, in a bid to curb emissions from the shipping industry.”

The industry sire added that the International Maritime Organization (IMO) has set January 1, 2020 when only low-sulfur fuel oil will be allowed to be used for ships.

Here’s the problem: “Middle Eastern crude oil producers could be one the biggest losers from the new regulation, because they pump high-sulfur crude, Amrita Sen, chief oil analyst at Energy Aspects,” told CNBC.

The global sulfur limit on fuel oil will be set at 0.5% m/m (mass/mass) in 2020 down from the 3.5% m/m current global limits.

“The regulation will send demand for middle distillates such as diesel and marine gasoil soaring, and refiners will have to shift some of the products they will be processing from crude oil,” said Oilprice.com quoting analysts.

“The stricter regulation on the fuels used by the shipping industry will result in booming demand for middle distillates that would boost crude oil demand by additional 1.5 million bpd, potentially sending oil prices to as high as $90 a barrel in 2020,” Morgan Stanley said last week.

Demand for diesel and ultra-low sulfur fuel is expected to jump by 2 million bpd to 3 million bpd, Energy Aspects analysts noted.

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