OPINION | Energy Markets React to Rocky Geopolitics

Shaky economics and challenging politics do not promise a stable outlook, but there will be more clarity as the dust from today’s macroeconomic uncertainty clears by year-end and the crash of oil prices slowly starts to reverse.

By B. M. Bansal, 

Strategic Director & Board Member, Gulf Petrochem Group

Energy markets and geopolitics are permanent bedfellows, but the relationship is set to get particularly tricky in 2016. Gulf governments’ budgets are under rising pressure as oil prices sink to below $30 a barrel (bl) for the first time in twelve years and relationships darken within OPEC and with non-OPEC producers. Nigeria’s oil minister and 2015 OPEC President Emmanuel Ibe Kachikwu recently hinted at an emergency meeting by April; a statement welcomed by OPEC’s less wealthy members that have called on OPEC linchpin Saudi Arabia to change the group’s policy to maintain market share since November 2014. Nigeria, Algeria and Venezuela are just a few that are particularly feeling the pinch.

But the stalemate is likely to continue. The UAE Energy Minister Suhail Mohamed Al Mazrouei has questioned how an OPEC meeting would address the whole problem while non-OPEC members’ oil production must also be curbed. Oman, the largest non-OPEC oil producer in the Gulf, said the Sultanate would slash 10% off its total production of just under 1mn b/d if other oil producers in both camps followed suit. Yet, different philosophies persist and the oversupply will probably get just worse as Iran hopes to bring up to an additional 1mn b/d to the market in 2016 following the lifting of sanctions in January.

Gulf OPEC members enjoy thicker profit margins and foreign exchange reserves, but a bout of global headlines illustrate how their economies are far from immune. Kuwait has posted its first budget deficit in fifteen years, the UAE and Oman are grappling with deficits and all Gulf states have already, or are thinking of slashing subsidies in an urgent bid to cushion their coffers. Saudi Arabia, OPEC’s linchpin, has increased petrol prices by up to a 50% and the Kingdom’s budget deficit of 326bn riyals ($87bn) for this year is roughly equivalent to 16% of GDP.

Most surprising, however, is state-owned Saudi Aramco’s possible plans to issue an initial public offering (IPO). The world’s largest oil company is notoriously secretive about its oil and gas reserves, with current data estimating 260bn bls of proved oil reserves and the equivalent of 50bn bls barrels of natural gas reserves. The IPO could be a call for cash, which would back the International Monetary Fund’s (IMFs) forecast that Riyadh will deplete its financial assets by 2020 if oil prices remain low. More likely, however, is that Riyadh wants to either diversify its refining assets, or diversify its shareholder portfolio by ramping up its number of foreign investors.

Saudi Aramco’s plans have not been backed up by a date, so the market should hold off getting too excited for now. Still, a successful IPO of a private company with such global influence could redefine the landscape for state-owned majors in the Gulf – perhaps the UAE’s Adnoc, or Kuwait Petroleum Company (KPC) will follow in Saudi Aramco’s footsteps?

Riyadh’s escalating political disputes with Iran have failed to curb Tehran’s bold ambitions to ramp up gas and oil supplies to clients in Europe, Asia and the Gulf. Iran, home to the world’s second largest gas reserves, is expected to at least firm up gas memorandums of understanding (MOUs) with neighbours Oman and Turkey in the first half of 2016.

The need for significant investments in infrastructure means Iran is unlikely to bring the planned 1mn b/d to market this year, but the country’s re-emergence onto the global energy stage will undoubtedly be a wake-up call to its energy competitors in the Gulf. 

Nearly twenty months after the Saudi-led OPEC policy to ring fence market share started, the US shale oil producers are finally beginning to kneel under the weight of burgeoning debt packages. Small and medium producers have cut costs and held off drilling new wells since June 2014, demonstrating an unexpected resilience to the bearish price outlook.

But $30/bl is proving just too much. Many shale oil producers are now declaring bankruptcy, or planning to kick start production when oil prices climb above $50/bl – whenever that may be. Some US producers are retreating to conventional oil drilling as it is sustainable even at $20/bl. But there are 5,000 wells in the US that have already been drilled and tested and not yet fracked, which could produce 4mn b/d in total if all came online at 100-200 b/d – derailing Saudi’s competitive edge against non-OPEC producers and likely creating another glut that dampens prices.  Also worth considering is the US’ revived appetite for supply contracts following the lifting of a four-decade ban in December on crude exports, bar the 500,000 b/d that the US mostly sends to Canada.

Pertinent questions continue over how China plans to manage a 25-year record low in growth, with the country’s stock exchange halted twice in early January. China’s growth is on track for roughly 7% in 2016, but the drop from 10% has confused sentiment. Meanwhile, the US has raised interest rates for the first time in a decade and a handful of emerging economies – Malaysia and Turkey, for example – are braced for another increase this year.

Shaky economics and challenging politics do not promise a stable outlook, but there will be more clarity as the dust from today’s macroeconomic uncertainty clears by year-end and the crash of oil prices slowly starts to reverse.  

About the Author:              

Brij Mohan Bansal is Strategic Director at Gulf Petrochem group, and comes with 36 years of extensive work experience in the Oil & Gas sector in areas spanning business development, R&D, refining and technical services. He joined Gulf Petrochem as the Strategic Advisor and a Member of Board.

Prior to joining Gulf Petrochem, Mr. Bansal was working in Kenya Petroleum Refineries Limited as the CEO. He has also worked with Mauritian Consultancy Company M/S DCDM as Advisor for Business Development Activities in Africa. During his tenure in Indian Oil Corporation Limited he has served as Chairman and Director Planning and Business Development, Research and Development.

Source: The Gulf Intelligence