By Syed Rashid Husain
PRESIDENT Donald Trump is in Riyadh on his maiden foreign trip. And energy is very much in the air. As the President boarded Air Force One taking him to Saudi Arabia, the two sides see major business deals.
But when a US president lands in Riyadh, besides huge deals covering all major sectors, oil and the emerging scenario naturally crop up for discussion – one way or the other. After all, the visit brings together the world’s largest crude consumer and the world’s largest crude exporter. But this very equation is now changing, undergoing a major metamorphosis, bringing to the fore the issue of long-term stability of the oil markets.
As President Trump set foot on the Saudi soil, the US role in the energy world is already multiplying, as a number of issues continue to shape the global energy horizon. In a bid to stabilize the currently fluid oil markets, Saudi Arabia and non-OPEC Russia, the two major crude producers of today are seen expressing their resolve to see crude output curbs extended for another nine months, instead of the original six, until March 2018.
Setting up the agenda of the May 25 OPEC meeting to discuss the output curb extension, Energy Minister Khalid Al-Falih and his Russian counterpart, after a meeting last Sunday, emphasized that supply cuts should be prolonged for nine months, and not the optional six-month specified in the original deal last November. This could help bring more stability to the oil markets, the two felt.
The go-ahead signal for this deal came from the top. Russian President Vladimir Putin was quoted as saying in Beijing that extending oil output cuts for a further nine months would ensure stable oil prices, underlining it was the right thing to do. «I have met with the heads of the companies … and we support the proposal,» said Putin, who said it was right that Russia was choosing how to approach the issue itself.
This gave a clear signal to the markets that the two major global crude producers were ready to go to any extent in combating the glut in the market. OPEC kingpin Saudi Arabia stressed publicly that it wanted to see prices above $60 per barrel by the end of the year, promising to do «whatever it takes» to help clear the current global glut. And in an explicit expression of its intentions, Saudi Aramco was reportedly curbing supplies to Asia by about 7 million barrels in June, a source with direct knowledge of the matter was quoted in the press as saying.
The agreement between Riyadh and Moscow definitely helped firm up the markets somewhat, yet a number of other variables continued to impact the markets – rather – adversely. “Although OPEC is apparently putting on a renewed push to support values, this looks like the only significant bullish consideration currently available to the energy complex,» Jim Ritterbusch, president of Chicago-based energy advisory firm Ritterbusch & Associates said in a note.
To some, by hinting at extending the output cuts for nine months, instead of the originally envisaged six, the two leading global crude producers were basically endeavoring to ‘talk up the crude prices’. This may not help long, others felt.
«OPEC is no longer in control,» Douglas Rachlin, managing director at Neuberger Berman›s Rachlin Group, said on Wednesday at the SALT Conference in Las Vegas. And he had a point. Courtesy the rising US output, despite OPEC sticking to its output cut pledge, the markets are still far from balanced. The US output has risen by more than 10 percent since mid-2016 to 9.3 million bpd in 2017 and the EIA is forecasting an all-time annual high of almost 10 million bpd in 2018. Boosted by the continued surge in shale output, this level is close to the current output of Russia and Saudi Arabia. In fact in 2015 too, the US had overtaken both Saudi Arabia and Russia as the world’s largest and fastest-growing producer of oil.
According to some analysts, in the backdrop of the continuing shale development, the US today is the global swing producer. «The reality is that the US is now…the swing producer,» Michael Hintze, the founder of hedge fund CQS, said at the SALT Conference in Las Vegas. There are indeed reasons for this entire development. US shale production costs are going down, making it more and more competitive to the traditional sources of crude. Analysts at UBS estimate that US producers can now make money as long as prices remain above $40 per barrel. That›s down from $65 in early 2014.
Consequent to all this, the Paris-based International Energy Agency is now stressing that the US operators have sharply stepped up spending and drilling activity since last year against a backdrop of the coordinated supply cut agreement and higher prices. A flood of supply from US shale producers, especially in the Permian Basin of Texas and New Mexico, has thus adversely impacted the OPEC›s ability to influence the oil prices alone.
The growing outflow from Libya and Nigeria, exempted from the output cut agreement, is also impacting the overall global crude equation. Libya›s output rose above 800,000 bpd for the first time since 2014, when a second civil war broke out, the country›s National Oil Corp. reported last week. Meanwhile, Nigeria is restoring major infrastructure damaged in militant attacks that nearly halved its output last year.
Goldman Sachs is asserting that the rising Libyan and Nigerian production are also capping oil price gains, even as top producers Saudi Arabia and Russia push to extend OPEC›s output cuts into 2018. «While we remain cautious on factoring in such a recovery in production given the ongoing local tensions, these combined volumes could largely offset the benefit of the extended cuts,» the bank said in a research note. The International Energy Agency also views this as «clearly offsetting cutbacks by other OPEC and non-OPEC countries.»
In the meantime, domestic pressure on President Trump is also growing. And that is beginning to impact the oil markets. Signs of a deepening political crisis in Washington has apparently accelerated the decline in prices with investors becoming increasingly cautious following the latest reports of links between Russia and the team in the White House.
In the midst of all this, «an extension of the supply deal beyond June looks likely but its effectiveness will remain questioned,» Norbert Ruecker, head of macro and commodity research at Julius Baer was quoted as saying.
OPEC and its non-OPEC partners need a helping hand to overturn the rising tide. As per some reports, OPEC has already sent a plea to the US earlier this month to stop pumping so much oil.
Will the fossil fuel friendly president, pay any heed to the call?