Oil price: bottoming out

 

oil

The year 2016 marks a turning point in relation to the price of oil and new GCC strategies for the time “after crude”. Although the Doha talks to

limit global oil production have failed, the value of the “black gold” has apparently bottomed out and revenues of crude exports will remain an ample source of income for GCC governments, Saudi Arabia in particular, in the foreseeable future.

Despite the failure of the Doha talks between 18 major oil producers (including Saudi Arabia and Russia) on April 17, analysts became bullish on the “black gold”, which recorded in April its biggest gain in seven years. Crude surged from $27 per barrel to approximately $45 in mid-May. Iran did not participate in the Doha talks.

Tehran is against a general cap of production capacities, because it is -aiming to regain global crude market shares, which it lost due to sanctions. Russia, as a non-OPEC oil exporter, is interested in a cap in order to revive its ailing economy, which suffers from EU sanctions because of the ongoing crisis
in Ukraine.

The setback of the Doha talks pushed back oil prices only for a limited period of time and the momentum remains strong. Mark Mobius, the Hong Kong-based investment guru, told Abu Dhabi daily The National that the price of oil will rebound to $60 dollars a barrel by the end of 2016 as the supply of crude has started to shrink.  Production outages in Nigeria (militant attacks on pipelines) and Kuwait (strikes) accelerated the turnaround. Late harsh winters in parts of North America and Eurasia (Moscow has seen the heaviest snowfall in 50 years in March and April) also fueled demand for heating oil.

In the US alone, the number of rigs fell from 1,609 to 342 between November 2014 and today, oil entrepreneur T Boone Pickens told Newsmax TV. The International Energy Agency (IEA) estimates that oil production in the world’s biggest economy has fallen by 530,000 barrels per day this year – roughly half the amount that Oman produces today.

Fatih Birol, executive director of the IEA, said last month that oil prices have “bottomed out”, which gave proof the global economy was “healthy”. Birol said he expects energy markets to “rebalance” by end 2016 or latest by 2017.

Overall picture

Meanwhile, more countries, such as -Cyprus, Lebanon and Nepal, are poised to become oil-exporting nations. The Central Asian nation of Nepal is ready to carry out a feasibility study on petrol exploration with China’s support, Chinese state news agency Xinhua reported last month.

“Saudi Arabia and Russia already agreed in February to freeze production levels on the height from January and the oil production in the United States is already on the decline,” explains Carsten Fritsch, commodities analyst at Commerzbank, Frankfurt.

“Any agreement without Iran does not make a big difference,” says Fritsch, “because most OPEC nations, along with Russia, already produce close to their maximum capacities and have, therefore, little space to ship more oil to world markets,” Fritsch says, adding that Saudi Arabia would remain the key OPEC member in the future pricing of oil.

The biggest GCC monarchy has rarely been more in the global focus as it is these days. On the one hand, the Saudi government has made it clear to the five world powers that, despite the end of -sanctions following the nuclear deal, the Kingdom still considers Iran a threat to the region.

However, the US administration under outgoing US President Barack Obama took the Iran nuclear deal as a major foreign policy trophy. Obama, whose Secretary of State John Kerry was spearheading a détente between the West and Iran, consequently received a cold reception during his recent visit to Riyadh, when Saudi King Salman bin Abdulaziz broke with a tradition and remained in his palace instead of welcoming the most powerful man in the world at King Khaled International Airport.

The slump in the price of oil, on the other hand, has put pressure on the world’s second-biggest crude producer to cap production in order to trigger a price rebound.

By replacing Saudi Arabia’s Oil Minister Ali Al-Naimi – who ended his political career at age 81 after heading his department for more than two decades – with Saudi Aramco chairman Khalid Al-Falih, the kingdom has shown that it is “serious about change,” said Gary Dugan, chief investment officer at the UAE’s biggest lender, Emirates NBD. The wider restructuring of the oil ministry into the Ministry of Energy, Industry and Mineral Resources also hints at the dawn of a new era, he added.

By all accounts, Saudi Arabia is not only preparing for a future without oil, but also for a time that will be shaped by the next generation of royals under the influential Deputy Crown Prince Mohammad Bin Salman Al-Saud.

This new generation of Saudi leaders faces three challenges, which are “managing through an age of austerity; internationalizing the national oil companies; and opening up the industry,” Robin Mills, CEO of Qamar Energy, told Abu Dhabi’s The National.

The GCC region’s governments have good reasons for not abandoning their paths in diversifying revenues. According to Masood Ahmed, director of the IMF’s Middle East and Central Asia Department, it is still too early for policy makers in the oil-exporting Arab countries to relax. “Although oil prices bottomed out in April, the current level is still lower than last year,” Ahmed told TRENDS. 

In April, US crude climbed 22 percent to reach $45 per barrel, which is 70 percent above its January lows, when the barrel was traded just above $27. Therefore, the IMF’s prediction that the $600 billion fiscal budget surplus the GCC amassed from 2011 to 2014 would transform into a combined deficit of $700 billion by 2020 has not changed, said Ahmed, who has been heading his department since 2008.

On track for GCC 2.0

Ahmed praised the GCC governments’ serious actions in reforming their energy subsidies (as the UAE, Saudi Arabia and Qatar did) and signaling to markets that privatizing state-owned enterprises is high on the agenda for the coming years. However, the ongoing rift between Riyadh and Tehran partially prevents the region from reaping benefits from last year’s nuclear deal between the five world powers and Tehran. “The end of sanctions still has to work its way through,” said Ahmed.

During his last meeting with Saudi King Salman, Barack Obama stressed that, despite America’s efforts toward energy independence, the traditionally strong Saudi-US relations would sustain, despite their differences on Iran and how to fight Daesh in Syria and Iraq effectively. The Saudi-American bond goes back to the end of World War II, when the world’s biggest economy was in need of continuous oil flows from the Middle East; in exchange, the US gave -security -guarantees to Saudi Arabia. But how much this promise will be worth if the next president will be Hillary Clinton or Donald Trump remains to be seen.

Former Deutsche Bank Co-CEO Anju Jain once said in a keynote that America’s independence from oil could also have “far-reaching consequences for US troops’ presence in the Middle East.” US military bases are located in all of the Middle Eastern states, with the exception of Syria, Lebanon and Iran (by Iranian law, no foreign troops are allowed to be based in the Islamic Republic).

Within the next five years, GCC governments might benefit from the fact that they slashed subsidies and are about to introduce VAT, and are expecting oil prices to rebound in the near future. “The excess supply in crude will disappear in the second half of 2016,” says Commerzbank’s Fritsch.

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