Saudi Arabia Is Open To Discuss Non-Dollar Oil Trade Settlements
Saudi Arabia, the world’s largest crude oil exporter, is open to discussing oil trade settlements in currencies other than the U.S. dollar, Saudi Minister of Finance, Mohammed Al-Jadaan, told Bloomberg TV in an interview in Davos on Tuesday. The Saudi signal that it could be open to talks about oil trade arranged in non-dollar currencies could be another threat to the current dominance of the U.S. dollar in global oil trade. “There are no issues with discussing how we settle our trade arrangements, whether it is in the US dollar, whether it is the euro, whether it is the Saudi riyal,” Al-Jadaan told Bloomberg TV. “I don’t think we are waving away or ruling out any discussion that will help improve the trade around the world,” the Saudi minister added. The Saudi riyal has been pegged to the U.S. dollar for decades, while the Saudi oil exports continue to support the petrodollar system from the 1970s in which the world’s top oil exporter prices its crude in U.S. dollars. However, Saudi Arabia is willing to deepen its strategic cooperation in oil trade with China, the world’s largest crude oil importer. Last month, China and Saudi Arabia agreed to expand crude oil trade as they upgraded their relations to a strategic partnership during the visit of Chinese President Xi Jinping in the Saudi capital Riyadh. China, for its part, plans to make its own currency, the yuan, more prominent in international oil trade. During a visit to Saudi Arabia last month, Xi Jinping pledged to ramp up efforts to promote the use of the yuan in energy deals, suggesting at a summit in the Saudi capital that the Gulf Cooperation Council (GCC) countries should make full use of the Shanghai Petroleum and Natural Gas Exchange to carry out its trade settlements in yuan.
Ukraine: Time To Review Russian Oil Price Cap
It’s time to review the price cap on Russian crude oil, Ukraine’s foreign minister said on Thursday because the current market price of Urals is below the cap. A coalition made up of the G7 countries as well as Australia and the EU set last year a price cap on all seaborne Russian crude oil. The goal was to reduce Russia’s oil revenue that it could funnel into its war with Ukraine. Russia, however, said it would not play along with the measure and said it would refuse to sell oil to anyone attempting to enforce the price cap. Further, the Kremlin recently said that it had yet to see any cases of price caps on its oil. And therein lies Ukraine’s problem with the price cap, if that is indeed true. Russia’s Urals crude oil grade for delivery to Europe was trading at $54.43 on Wednesday—coming comfortably under the established price cap. “Ukraine is confident it’s time to review the oil price cap given the current market price on Urals is lower than $50 USD per barrel. This decision should ensure a drastic reduction in Russia’s income to finance the war, mass atrocities, and destabilization in Europe and elsewhere.” Ukraine’s foreign minister tweeted Thursday afternoon. The coalition is set to soon implement another price cap—this time, on Russia’s petroleum products. The new cap will go into effect on February 5, although the plan has been criticized for its complex nature, including the dual cap—one for crude products that trade at a premium to crude oil, and another that trade at a discount. The Biden Administration is likely to oppose lowering the current crude oil price cap on Russian crude oil, Bloomberg sources said on Thursday.
Windfall Taxes Will Stifle Oil Industry Investments
Windfall taxes have suddenly become quite popular. With oil and gas companies reaping record profits from the rally in energy commodity prices, governments have been unable to resist the temptation to skim a bit more of these profits. It’s hard to blame them – the energy crisis has pushed most governments in Europe to come up with billions in aid for households and businesses. In the UK, millions have slipped into energy poverty, and the government has had to act urgently, too. India has also imposed a windfall tax on crude oil and fuels. Yet while it seems like an easy way to find some extra money to spend on helping businesses and households survive the cost-of-living crisis, windfall taxes are tricky because they discourage investments. Windfall taxes are counterproductive for the oil industry at a time when oil demand is forecast to outpace supply, Aramco’s chief executive Amin Nasser told CNBC’s Hadley Gamble this week. And they would also discourage investments in decarbonization efforts. “I would say it’s not helpful for them [in order] to have additional investment. They need to invest in the sector; they need to grow the business, in alternatives and in conventional energy, and they need to be helped,” Nasser said. “Decarbonizing existing resources also costs a lot of money,” he said. “So we need to see the support from the policymakers and from the capital markets at the same time. Capital markets [are] putting a lot of pressure also on these companies, where it makes it too difficult for them to make some of these investments and get the right funding and capital,” Aramco’s top executive also said. Indeed, so far, the windfall tax has been presented to the public as something of a punishment for Big Oil for making so much money from oil and gas when millions have been struggling to pay their bills—a well-deserved punishment. There has been no mention of what the impact of these taxes would be on future investment decisions, at least not from politicians. The oil and gas companies themselves have been quite vocal about that impact. UK oil and gas producer Harbour Energy this week announced job cuts stemming from the 10-percent windfall tax that the industry has been slapped with. Shell said the windfall taxes in the EU and the UK will cost it some $2.4 billion. Total estimated the hit from the windfall levy at around $2.1 billion after saying it would reduce investments in the North Sea by a quarter this year. The UK’s windfall tax will cost the French supermajor around $1 billion. Some are going further than complaining. Hungarian energy major MOL is suing the government of Slovakia for the windfall tax it imposed on energy firms. Exxon is suing the entire European Union, arguing it exceeded its legal authority with this move. And the energy industry association in Britain has warned that financing for new oil and gas projects will dry up because of the additional levy. It makes sense that when additional taxes discourage investments, they won’t only discourage specific investments but would rather lead to a comprehensive reconsideration of investment plans, including low-carbon projects. What’s more, the European Union has targeted wind and solar power producers with windfall taxes, too, arguing that they have raked in massive profits from producing low-cost electricity because prices are formed on the basis of gas prices, and these have been sky-high. This, too, has prompted a backlash. All this is happening at a time when the International Energy Agency—a champion for a quick energy transition—forecast oil demand will this year grow by 1.9 million bpd while supply growth slows to 1 million bpd. It’s hardly the best time to discourage any energy investments.
Profitability of oil marketing companies to restore in FY24
The profitability of oil marketing companies (OMCs) will be stretched in the current financial year, ending March 2023, even as international prices of crude oil have softened from the historic highs in March and April 2022, diluting their marketing losses Moody’s Investor Service in a report said that as international prices of gasoline (petrol) and gasoil (diesel) cool on economic slowdown concerns, marketing losses will ease for the three state-owned refining and marketing companies—Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL). Still, overall earnings for FY23, ending on March 31, 2023, will be weak because of marketing losses in the first half, when net realized prices did not increase as much as international prices because of fuel price caps. The rupee’s depreciation against the US dollar further hit profits as oil prices and a large portion of refiners’ borrowings are in dollars,” it added. Rising interest rates and concerns of an economic slowdown have weakened demand for oil products and cooled international prices of transportation fuels. As a result, marketing margins for IOC, BPCL and HPCL have turned positive for gasoline while marketing losses on gasoil have narrowed, it noted. Significant marketing losses earlier in the year will drag on earnings for the OMCs in FY23. Net realised prices for gasoline and gasoil, which account for almost 55-60 per cent of product sales for the three companies, did not increase at the same pace as international prices, resulting in EBITDA losses for the six months through September 2022, Moody’s said. “Despite the recent improvement, marketing margins remain below historical levels. We expect marketing margins to normalise only when the refining and marketing companies’ net realised prices for gasoline and gasoil are allowed to freely align with international prices. This will likely happen only in 2024 after the conclusion of general elections in India,” it added. Clarity on fuel pricing in India is credit negative for the refining and marketing sector. If companies continue to incur losses from fuel price controls and are not compensated by the government in a timely and predictable fashion, their fundamental credit quality will weaken. However, their final ratings will likely remain unchanged because of a high likelihood of extraordinary government support incorporated in their ratings.