Oil prices spike as Saudi Arabia, Russia extend 1.3 million barrel a day oil cut through December
Saudi Arabia and Russia agreed on Tuesday to extend their voluntary oil production cuts through the end of this year, trimming 1.3 million barrels of crude out of the global market and boosting energy prices. The dual announcements from Riyadh and Moscow pushed benchmark Brent crude above $90 a barrel in trading Tuesday afternoon, a price unseen in the market since November. The countries’ moves could increase inflation and the cost for motorists at gasoline pumps. It also puts new pressure on Saudi Arabia’s relationship with the United States, as President Joe Biden last year warned the kingdom there would be unspecified “consequences” for partnering with Russia on cuts as Moscow wages war on Ukraine. Saudi Arabia’s announcement, carried by the state-run Saudi Press Agency, said the country still would monitor the market and could take further action if necessary. “This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC+ countries with the aim of supporting the stability and balance of oil markets,” the Saudi Press Agency report said, citing an unnamed Energy Ministry official. State-run Russian news agency Tass quoted Alexander Novak, Russia’s deputy prime minister and former energy minister, as saying Moscow would continue its 300,000 barrel a day cut. The decision “is aimed at strengthening the precautionary measures taken by OPEC+ countries in order to maintain stability and balance of oil markets,” Novak said. Benchmark Brent crude traded Tuesday above $90 a barrel after the announcement. Brent had largely hovered between $75 and $85 a barrel since last October. A barrel of West Texas Intermediate, a benchmark for America, traded around $87 a barrel. White House national security adviser Jake Sullivan declined to comment on the market impact of the decision, though he said U.S. officials had regular contact with the kingdom. He added that Biden would look to utilize “everything within his toolkit” to assist American consumers. “The thing that we ultimately stand for is a stable, effective supply of energy to global markets, so that we can in fact deliver relief to consumers at the pump, and we do this in a way that is consistent with the energy transition over time,” Sullivan said. Bob McNally, the founder and president of the Washington-based Rapidan Energy Group and a former White House energy adviser, said Saudi Arabia and Russia had “demonstrated their unity and resolve to proactively manage” the risk of oil prices potentially dropping in tougher economic conditions with their announcement Tuesday. “Barring a sharp economic downturn, these supply cuts will drive deep deficits into global oil balances and should propel crude oil prices well above $90 per barrel,” McNally said. The average gallon of regular unleaded gasoline in the U.S. stands at $3.81, according to AAA, just under the all-time high for Labor Day of $3.83 in 2012. However, gasoline demand typically drops for U.S. motorists after the holiday so it remains unclear what immediate effect this could have on the American market, AAA spokesman Andrew Gross said. “I’m more concerned about what the rest of hurricane season may hold,” Gross told The Associated Press. “A big storm along the Gulf coast could move prices dramatically here.” Hurricane Idalia just plowed through Florida and U.S. forecasters said Tuesday that Tropical Storm Lee in the Atlantic Ocean will become an “extremely dangerous” hurricane by Friday. Meanwhile, higher gasoline prices can increase transportation costs and ultimately push the prices of goods even higher at a time when the U.S. and much of the world is already raising interest rates to combat inflation. “The impact these cuts will have on inflation and economic policy in the West is hard to predict, but higher oil prices will only increase the likelihood of more fiscal tightening, especially in the U.S., to curtail inflation,” said Jorge Leon, a senior vice president at Rystad Energy. The Saudi reduction, which began in July, comes as the other OPEC+ producers have agreed to extend earlier production cuts through next year. A series of production cuts over the past year has failed to substantially boost prices amid weakened demand from China and tighter monetary policy aimed at combating inflation. But with international travel back up to nearly pre-pandemic levels, the demand for oil likely will continue to rise. The Saudis are particularly keen to boost oil prices in order to fund Vision 2030, an ambitious plan to overhaul the kingdom’s economy, reduce its dependence on oil and to create jobs for a young population. The plan includes several massive infrastructure projects, including the construction of a futuristic $500 billion city called Neom. But Saudi Arabia also has to manage its relationship with Washington. Biden campaigned on a promise of making the kingdom’s powerful Crown Prince Mohammed bin Salman a “pariah” over the 2018 killing of Washington Post columnist Jamal Khashoggi. In recent months, tensions eased slightly as Biden’s administration sought a deal with Riyadh for it to diplomatically recognize Israel. But those talks include Saudi Arabia pushing for a nuclear cooperation deal that includes America allowing it to enrich uranium in the kingdom – something that worries nonproliferation experts, as spinning centrifuges open the door to a possible weapons program. Prince Mohammed already has said the kingdom would pursue an atomic bomb if Iran had one, potentially creating a nuclear arms race in the region as Tehran’s program continues to advance closer to weapons-grade levels. Saudi Arabia and Iran reached a detente in recent months, though the region remains tense amid the wider tensions between Iran and the U.S. Higher oil prices would also help Russian President Vladimir Putin fund his war on Ukraine. Western countries have used a price cap to try to cut into Moscow’s revenues. But those sanctions have seen Moscow be forced to sell its oil at a discount to countries like China and India.
The G7 Has No Immediate Plans To Review Its Russian Oil Price Cap
Despite the fact that Russia’s oil is now trading above the G7 price cap due to the oil rally in recent weeks, the group of the world’s top economies and its allies have shelved the regular reviews of the price ceiling, Reuters reported on Wednesday, quoting sources familiar with the matter. At the end of last year, G7, the EU, and allies including Australia imposed a price cap of $60 for Russia’s crude oil if Russian crude shipments to third countries outside the EU are to use Western insurance and financing. For most of this year, most Russian crude grades – including Urals – have traded below the price cap as international benchmark prices were trading in a narrow range of around $75-$80 per barrel. However, with recent rises in Brent prices and narrowed discounts of Russian crude oil, Moscow’s crude has moved above the price cap. Despite the rise in prices, the G7 group hasn’t reviewed the cap since March this year and has no immediate plans to do so, four sources with knowledge of the G7 policies told Reuters. “There were some talks in June or July to do a review, or at least talk about it, but it never formally happened,” a diplomatic source told Reuters. “The share of tankers covered by the price cap in crude oil shipments out of Russia stayed around 50–55% in July, dropping by around 5% compared to the prior month. For oil products & chemicals, the coverage of the price cap coalition has remained more stable at around 65% in July,” the Centre for Research on Energy and Clean Air (CREA) said in its latest monthly snapshot for July. The price of Russia’s flagship crude grade, Urals, averaged $74 per barrel in August, slightly down from August 2022, but way above the G7 price cap of $60 and higher than the July average of $64.37 a barrel, data released by the Russian Finance Ministry showed last week. Between January and August 2023, the average price of Urals was $56.58 per barrel, compared to an average of $82.13 a barrel for the same period of 2022.
China’s Influence In Oil Markets Grows With BRICS Expansion
Piece by piece, China continues to build alternatives to each of the key building blocks of the West’s world order, including – crucially – a new global oil market order, as analysed in full in my new book of the very same name. The latest building block is the invitation to three of the world’s biggest oil and gas powers – Saudi Arabia, Iran, and the UAE – to join the BRICS political and economic grouping, comprised of Brazil Russia, India, China, and South Africa. This can be considered as a developing world alternative to the U.S.-dominated Group of Eight (G8) major industrialised nations from which Russia was suspended indefinitely in March 2014 following its annexation of Ukraine’s Crimea. As it stands, Iran and the UAE said that they will accept the invitation, while Saudi Arabia stated that it is considering the proposal. With the addition of all three new members, the BRICS group would control around 41 percent of all global oil production, according to International Energy Agency estimates. In practical terms, though, it is irrelevant whether Saudi Arabia formally joins or not, as all three countries – and virtually all of the Middle East’s major oil and gas players – have already pledged their allegiance to China in one of its geopolitical building blocks or another. While BRICS can be considered China’s alternative to G8 (now G7 again following Russia’s permanent withdrawal in January 2017), the Shanghai Cooperation Organisation (SCO) is a much bigger deal altogether. As exclusively reported by OilPrice.com at the time, and analysed in full in my new book, Saudi Arabia had already signed a memorandum of understanding on 16 September 2022 granting it the status of SCO ‘dialogue partner’. At that point, the Kingdom did nothing to encourage the release of the news at that point, unlike later in April this year – just after it had agreed to a stunning resumption of a relationship deal with Iran, brokered by China. By then, Saudi Arabia had decided that the time was right to ensure full coverage for the news that its cabinet had approved a plan to join the SCO as a dialogue partner. As also exclusively reported by OilPrice.com at the time, Iran approved its own ‘full membership’ to the SCO back in September 2021 and was granted it on 4 July this year. Iran’s membership of the SCO simply rubber-stamped China’s control over the country – and over neighbouring Iraq, heavily influenced by Iran – through the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and fully examined in my new book. Unlike the rather vague operational parameters of the BRICS organisation, the SCO is very specific, very powerful, and very serious in its objectives. Already it is the world’s biggest regional political, economic and defence organisation both in terms of geographic scope and population. It covers 60 percent of the Eurasian continent (by far the biggest single landmass on Earth), 40 percent of the world’s population, and more than 20 percent of global GDP. It was formed in 2001 on the foundation of the ‘Shanghai Five’ that was set up in 1996 by China, Russia, and three states of the former USSR (Kazakhstan, Kyrgyzstan and Tajikistan). Aside from its vast scale and scope, the SCO believes in the idea and practice of the ‘multi-polar world’, which China anticipates will be dominated by it by 2030. Veteran Russian Foreign Minister, Sergey Lavrov, has since stated that: “The Shanghai Cooperation Organisation is working to establish a rational and just world order and […] it provides us with a unique opportunity to take part in the process of forming a fundamentally new model of geopolitical integration”. Aside from these geopolitical redesigns, the SCO works to provide intra-organisation financing and banking networks, plus increased military cooperation, intelligence sharing and counterterrorism activities, among other things. The end of December 2021/beginning of January 2022 saw meetings in Beijing between senior officials from the Chinese government and foreign ministers from Saudi Arabia, Kuwait, Oman, and Bahrain, plus the secretary-general of the Gulf Cooperation Council (GCC). The principal topics of conversation, as analysed fully in my new book, were to finally seal a China-GCC Free Trade Agreement and to forge “a deeper strategic cooperation in a region where U.S. dominance is showing signs of retreat”. Also during the meetings, Chinese President Xi Jinping and Saudi Crown Prince Mohammed bin Salman signed a China-Saudi partnership pact with King Salman. The new pact pledged cooperation in finance and investment, innovation, science and technology, aerospace, oil, gas, renewable energy, and language and culture. Having got all the names gathered to sign these all-consuming cooperation agreements, Xi then identified two ‘priority areas’ that he believes should be addressed as quickly as possible. The first is the transition to using the Chinese renminbi currency in oil and gas deals done between the Arab League countries and China, and the second is to bring nuclear technology to targeted Middle Eastern countries, beginning with Saudi Arabia.
India does not follow any ideology while procuring crude oil, says HS Puri
Emphasising that India does not follow any ideology while procuring crude oil, Minister of Petroleum & Natural Gas HS Puri said the government’s “moral commitment” is to the common man by ensuring affordability, availability and sustainability. “Look, the bottom line is we will buy from whomever we have to at the cheapest possible price. There is no ideology. There is no emotion. The only moral commitment we have is to our consumers,” Puri told businessline when asked about declining crude oil imports from Russia, India’s largest supplier of seaborne crude. Citing instances, the Oil Minister pointed out that when he was a Joint Secretary on the Americas desk, many years ago, India did not import any energy from the US, but now it is buying about $20 billion worth of energy products. On import from Russia Asked about India’s decision to begin importing crude oil from Russia in 2022, Puri said: “When the crisis took place, I happened to be the Petroleum & Natural Gas Minister. It was clear to us then, and even more clear to us now, that we had to adopt a practical approach to the entire issue of energy sourcing.” Practicality becomes even more necessary when the Indian economy is firing on all six cylinders. Because consumption of energy is not a reasonable, but a definitive indicator of whether the economy is doing well or not. If energy consumption slides, one can be reasonably sure that the economy has problems, he added. “Turbulence in global markets is not a new phenomenon. I have studied that period from 1973, when the world first got what is called either an oil shock or a news shock related to oil. To understand what happens every 7-8 years, I was very pleased to see spikes and uncertainties have taken place earlier and they’ve had a major impact on the price as available to the consumer,” he explained. Elaborating on the energy crisis that engulfed the world on account of the Russia-Ukraine conflict, the Minister said there are some countries, which produce a lot of oil. They don’t consume very much because they have a small population base. There are large other countries who consume a lot of oil. Some of those consumers are both producers and consumers and some are just consumers. “We find ourselves in a very interesting situation. Whilst all our targets say that we will become self-sufficient by a particular date, and I’ve no doubt that we will, in the interim we find ourselves dependent on imports of crude oil up to an extent of 80-85 per cent. Equally, on gas we find ourselves dependent on 55 per cent or so.,” Puri pointed out. He further said “What have we done? A, we have diversified the sources of our supply. This has not happened now, it has happened over a period of time, and I want to give credit to everyone. From 27 sources we know import from 39 sources we support from hither to unimaginable sources.” Highlighting that affordability is “always relative”, the Minister said: “I’ll give you a ballpark figure, gas prices globally went up at 303 per cent, but we were able to sustain (with) a marginal increase of 60 per cent or something. Petrol and diesel all over the world shot up in the last two years, (but) our prices have come down on petrol by 5 per cent. Our diesel prices came down by 0.28 per cent. Increases elsewhere have been 40 per cent, 50 per cent including in the G20 countries.” India has to face the trilemma of availability, affordability and sustainability, he said adding “I think the Modi government has done an outstanding job on being able to ensure all three. Availability means at no stage in my two years plus have I come across a situation where there’s a serious shortage of supplies anywhere. One particular day some pipeline somewhere something happens, but it’s corrected in a few hours. But not the kind of situation some of the other countries are facing where for the love of money you cannot access energy. Some cases in our immediate neighbourhood in South Asia. So, availability is not an issue.”
Asia Oil & Gas Latest: Refining ‘Crying Out’ for Investment
The outlook for oil prices and Chinese demand, the longevity of OPEC+ supply curbs, and rising flows of Iranian crude are among the key topics at Asia’s biggest gathering of the industry’s traders and executives, which entered its second day in Singapore. Attendees at APPEC by S&P Global Commodity Insights will also have an opportunity to reflect on Russia’s war in Ukraine, and the transition away from fossil fuels in the transport sector. Meanwhile, the Gastech 2023 conference also kicked off in the city-state on Tuesday. Global crude and fuel markets are tight, with refineries running as hard as they can to capitalize on high margins, Alex Grant, senior vice president for crude, products and liquids at Equinor ASA, said at APPEC. Equinor has no plans to reroute its Johan Sverdrup stream from Europe, but “if it comes to a point where Europe needs it less, and Asia is saying they need more by virtue of the prices they’re offering, we will then make plans to move quite quickly,” he said. 50 Million Tons of LNG Diverted to Europe Vitol Group Chief Executive Officer Russell Hardy said 50 million tons of liquefied natural gas will be diverted to Europe in 2023, meaning demand in Asia is still far from recovering to 2021 levels. LNG spot prices will be at $13-$15 per million British thermal units this winter, which is still relatively expensive compared to coal, he said at Gastech. “Europe is going to pay for that gas,” he added. Shell Says Calcasieu Pass Delay ‘Not Credible’ It’s “not credible” for Venture Global LNG Inc. to operate its Calcasieu Pass liquefied natural gas export plant in the US for over a year above nameplate capacity and not start commercial operations, Steve Hill, an executive vice-president at Shell Plc, said at Gastech. “If contracts are seen as options, then buyers simply won’t sign them,” he said. Venture Global hasn’t supplied cargoes to foundation buyers, Hill added. BPCL Can Pay for Russian Crude in Dirhams India’s Bharat Petroleum Corp. has flexibility in making payments for Russian crude in currencies other than US dollars, including dirhams, should prices fluctuate, Manoj Heda, the company’s executive director of international trade, said on the sidelines of APPEC by S&P Global Commodity Insights. Russian crude prices have risen alongside oil benchmarks like Brent, although Heda didn’t elaborate on exact levels. Most of the payments for imports of Russian oil are still done in US dollars, he said.
Asian LNG market faces price volatility risks, warns Wood Mackenzie VP
Mangesh Dilip Patankar, Vice President, APAC Gas and LNG Consulting at Wood Mackenzie, has cautioned that the Asian liquefied natural gas (LNG) market is delicately balanced, and any disruptions in supply or increases in demand could lead to significant price fluctuations. Patankar made these remarks during the Gastech 2023 conference in Singapore, highlighting the uncertainty in the LNG market, which has impacted pricing and contract terms and created a gap between buyer and seller expectations. Many LNG buyers in Asia are facing the challenge of ensuring a secure supply of LNG while keeping procurement costs competitive and contract terms flexible. Simultaneously, LNG sale and purchase agreements (SPAs) are evolving as LNG trading grows. According to Wood Mackenzie Lens, Australia and Qatar are expected to be the largest LNG suppliers to Asia from 2023 to 2030, accounting for nearly 60 per cent of the total LNG delivered to Asia during this period. Asia’s LNG interest Patankar believes that the LNG market, which has cooled off from its peak in the previous year, is now attracting interest from emerging buyers in Asia. However, he advises that these buyers must understand the complex fundamentals of LNG and monitor its price volatility closely.