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Saudi Arabia  made what has been described as  a surprise announcement,  it will voluntarily deepen its crude oil output cuts. The announcement stated that this voluntary output cut  would take effect from June . The cut is an additional  1 million barrels per day which will reduce Saudi  production to the lowest level in 18 years. The ostensible reason given by the Saudis is to  hasten  a recovery from the crash in oil price benchmarks which has pitched them  into austerity. According to Energy Minister Abdulaziz bin Salman Al Saud, Saudi Arabia wanted to be ahead of the curve.

" We want to expedite the process of returning back to normal ... demand is picking up. We want to make sure that we are helping to expedite the equilibrium between the supply and demand,” he told Reuters in a telephone interview.


“We are taking a proactive role and we are encouraging others to do the same,” he said, adding that Riyadh’s deeper cuts are “not conditional or restricted to us alone”.


The Saudi government's actions are far from altruistic and really should not be a total surprise. They, the Kuwaitis and the Emiratis understand  price recovery  is a function of  market sentiment as well as fundamentals. Their efforts to drive up oil price benchmarks requires demonstrating to the market their new found willingness to act flexibly to further drain global inventories. Essentially acting to make  a virtue out of a necessity.


The move comes in the wake of the U.S. pulling two Patriot missile batteries and some fighter aircraft out of Saudi Arabia,  amid tensions between the kingdom and the Trump administration over oil production. Whilst there has by no means been a causal link identified between both events, it is not a stretch to see how one could exist. The mood in the US Capitol towards Saudi Arabia is far from effusive at the moment. In fact Congress have threatened to pass the NOPEC Act to strip the Saudis and OPEC member states of their sovereign immunity and sue them under existing U.S. anti-trust legislation.


Congress fully expect Saudi Arabia to act in a manner that supports US oil producers regardless of Saudi's own economic interests. The age-old relationship between Washington and the House of Saud is inviolate as far as the US are concerned. It is premised on Riyadh supporting US energy needs whilst enjoying its protection. Any deviation from that relationship is seen as outright betrayal by Washington. That the US is a lot less dependent on Saudi oil does not release the Kingdom from its implied obligations, if anything it allows Washington to be more vociferous in enforcing them. When President Trump stated to King Salman, the House of Saud would not last 2 weeks without US military support, his warning was unequivocal. It seems the recipients got the message.



In order to attract investors to its initial public offering  the Saudi Arabian Oil Co.  aka  Aramco  pledged an annual dividend of $75 billion for the first five years . This was before the black swan arrived , It now seems unlikely that it will be unable to maintain that   dividend payment to the Saudi government, whilst attempting to protect the dividend payment  to minority shareholders .  Though the dividend payment for Q1, 2020 of $18.75 billion is in line with their  commitment.  Despite that  Net income for the 3 month period ending March31, 2020 was SAR62.48 billion ($16.66 billion) compared to SAR83.29 billion ($22.21 billion) for the same period in 2019, a drop of over 25%.


The plunge in crude prices has created severe economic hardship for the Kingdom and raises questions about the wisdom of the decision to place their economy in further peril by initiating a damaging crude oil price war. Clearly as events have unfolded their actions seem more reckless and less thoughtful. Despite the transient increase in volumes supplied  into  the Asian market and China last month, obtained  through a discount  race to the bottom. If the outcome could be deemed a victory, it has turned out to be a pyrrhic one. There appear to be few tangible long term opportunities or benefits accruing to the Saudi economy from the price war. Not to mention  the political fall out with Washington.


Indeed the Saudis have announced a slew of austerity measures to cope with the impact of the coronavirus pandemic and the  ill fated  oil price war. In unprecedented actions the Saudi authorities have tripled  its value-added tax and slashed  a raft of cost-of-living allowances for government workers. These measures are expected to generate 100 billion riyals (€24.6 billion) in total, according to Finance Minister Mohammed Al-Jadaan. But more importantly they are a measure of the Saudi economy.

 Shortly before the measures were announced, King Salman ordered a payment of 1.85 billion riyals to be distributed to state welfare recipients to mark the Islamic holy month of Ramadan. The payments will include 1,000 riyals for each family and 500 riyals for each dependent. The kingdom has announced other stimulus packages , including interest-free loans, a discount on electricity bills, deferments of fees and a government guarantee to cover 60 per cent of salaries for some Saudi workers in the private sector.


According to Moody's credit review the new fiscal austerity package should help offset a portion of this year’s revenue loss caused by the sharp decline in oil prices and lower oil production,  Moody's said the decisions point to the government’s capacity to adjust to shocks. The new spending cuts, together with those already announced in March and those approved in the 2020 budget, are equivalent to nearly 8% of GDP. However the increase in tax will affect retail purchasing and  detrimentally dampen overall  consumption. VAT a flat rate tax will disproportionately affect the less well-off and undermine the competitiveness of what little local manufacturing exists.


That  the Saudis have taken the quite radical fiscal measures they have,  exposes the desperation of the Government and its willingness to tempt social unrest as there is a real risk of pushbacks. Their desperation lays bear the false equivalence fallacy that lies at the heart of the low cost producer advantage and MBS policy faux pas. The Saudis can seize market share by undercutting competitors based on their low cost of production and spare capacity. But the crucial metric is the barrel price the country needs to sustains the generous social benefits enjoyed by  their citizens in a competitive low tax environment. In the on-going price war, the Saudi aggressive predatory pricing acted as a catalyst in distorting and collapsing the barrel complex. It now appears albeit with a little jab  from Washington, Riyadh is wide awake










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Thursday, 30 April 2020 23:17


The IMF have approved   US$3.4 billion in emergency financial assistance to the Nigerian Government  under the Rapid Financing Instrument to support the authorities’ efforts in addressing the severe economic impact of the COVID-19 shock and the sharp decline in oil prices. The funding is a loan which attracts low interest and needs to be paid back  within 5 years.


Nigeria, Africa’s largest oil exporter, told the IMF in a letter requesting emergency financial assistance that the drop in oil prices, which provide more than half of government revenue, and the economic shocks related to the new coronavirus left it with an external financing gap of $14 billion.  In the detailed brief related to that decision, released on Wednesday, the IMF warned that Nigeria remained exposed to rising risks, particularly in oil markets. Nigeria  is also seeking additional funds from the World Bank, the African Development Bank, the Islamic Development Bank and Afreximbank, the IMF noted.

 An article published by Reuters on Wednesday cited the IMF forecasting   a decline of at least $26.5 billion in revenues Nigeria were expected to earn from oil and gas exports as demand destruction created by the COVID-19 pandemic has destroyed oil markets  and cratered oil prices.

The IMF went further to state in reference to the glut of Nigeria’s distressed cargoes numbering by some estimates as high as 30 with no home.

“Rising unsold cargoes could also impact oil production, which could decline further through OPEC agreed cuts or if prices persist below production costs,” .

 However Nigeria has been forced to call on the global financial  firefighter and is a reluctant borrower.  Nigeria has not forgotten a previous IMF prognosis in the 1980's, the Structural Adjustment Program (SAP) which many hold responsible for wiping out an entire  generation of  the Nigerian middle class. It has resisted the IMF economic remedy and the conditions which come attached to IMF loans.

But in its request letter , Nigeria  outlined plans to allow a “more unified and flexible exchange rate regime,” to increase its revenue to 15 percent of GDP and to move to cost-reflective electricity tariffs by 2021. It also said a new fuel price regime, outlined in March, would permanently eliminate costly fuel subsidies. The subsidies cost an estimated 10 trillion naira ($27.78 billion) from 2006 to 2018.


It would appear on the face of it, Nigeria has capitulated to the IMF economic orthodoxy, but at a time both the IMF and the World Bank are deluged with requests for financial assistance, not towing the line is no longer an option. Unlike the World Bank, which was designed as a lending institution focused on longer-term development and social projects, the IMF was conceived as a watchdog of the monetary and exchange rate policies vital to global markets. The fund gives loans to member countries that are struggling to meet their international obligations. Loans, or bailouts, are provided in return for implementing specific IMF conditions  many deem far too neoliberal, designed to put government finances on a sustainable footing and restore growth.

Whilst the current loan does not have the ‘conditionalities’ typically mandated by the IMF, the Nigerian Government will want to provide the sort of assurance of financial governance and prudence in its use, such as to put any further loan applications in a favourable light. Talking to the IMF in its own neoliberal language creates a much higher likelihood of success.

 Joseph Stiglitz , a Nobel Prize winning Economist  has denounced the IMF has have many . He argued that many of the economic reforms the IMF imposed as conditions for its lending—fiscal austerity, high interest rates, trade liberalisation, privatisation, and open capital markets—have often been counter-productive  for the poor local  economies and  devastating for local populations.

Given the country’s dire finance gap, it is highly likely as a condition of lending such policies will be required. The  cumulative impact of these  policies on the Nigerian masses  will prove hugely problematic and unpopular and may  provoke civil unrest. It will yet again be the masses, "the grassroots" that pay the price for the IMF loan and any other borrowing on top of paying the price for COVID-19.

In the past payment meant doing without amenities, things that were not missed because they simply never had them. If Nigerians are to take the Governments letter to the IMF seriously, the new raft of economic policies will increase fuel prices, increase direct taxation,  increase the cost of electricity whilst devaluing the Naira. It is  an onerous burden for the  impoverished masses to carry.

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Nigerians have been told they are resilient, as if they have a choice. A flattery conceived to beguile the masses   living in abject poverty. Often repeated  by a well fed political class that have garnered enough wealth to insulate themselves from the harsh vagaries of the Nigerian existence.  The resilience fallacy is a dangerous fable which is an affront to the over one hundred million Nigerians that exist on less than  US $1per day, thus constituting  the largest group of people living in extreme poverty on the planet.


This self-same  elite through a mixture of corruption, ineptitude and abuse has mismanaged Nigeria's collective natural resource endowment and led the Nigerian people yet again  to the brink of catastrophe . This time laid bare by COVID-19 a black swan nobody saw coming.


Now Nigerians really  have to be resilient as the collapse in global oil prices has abruptly choked off the oil receipts  which the Nigerian Government depend on for over 90% of their foreign exchange earnings. It could not be more ironic, at a time most Nigerians are suffering from having nothing, the thing they have too much of (oil) has caused a price crash that has amplifies their penury.

 Nigeria earned ₦10.21 Trillion last year (2019) in oil and gas  revenues. This year a budget originally predicated on a sales value of $57 per barrel and daily production of 2 million barrels has been eviscerated. The budget is now premised on a price of $30 per barrel and daily production of 2.18 million bpd a decision I find breath-taking since it is bereft of any  logic. Unless the Finance Minister has relied on Carlo Collodi  to run the numbers, quite how anyone has thought it realistic to use them as the basis for the new budget is a mystery. 


Under the most recent OPEC agreement, even if condensates are included, the production figure would still be well short, not to mention the price. Herein lies plain for all to see, government policy makers that seem to exist only in  Shangri-La. The ministry appear to lack the ability to navigate its way through this admittedly very serious crises and have demonstrated an appalling lack of market nous. And all this at a time Nigeria has  at least three dozen unsold cargoes still available for export in April and May and Bonny Light trading on the physical market at a $5 discount to a dated Brent posting historically low prices.

 Finance minister Zainab Ahmed has warned the collapse in oil prices will slash Nigeria’s revenue almost  in half, causing a 20%  cut to the capital budget and an additional 25%  cut in annual expenditure.  She went on to declare prophetically

  “The reduction of the crude oil price from the $57 per barrel  we budgeted for to $30 per barrel  means that we are going to get so much less revenue, almost 45% less than we planned, and because of that we have to amend a lot of projections in the budget to reflect our current realities,”.

 The Hungry ResilientsAssuming the Ministers sums are correct and setting aside the likelihood of production shut-ins, the implication is that a much lower oil price will translate into deeper budget cuts.  NNPC official spokesman  Dr. Kennie Obateru when contacted to confirm whether NNPC had started production shut-ins  reportedly responded  "only prayers can save the economy now". His supplication for divine intervention is tantamount to a stark admission of hopelessness. Yet the GMD Mallam Mele Kyari, his boss  has blithely reassured the Nigerian public that the recent WTI Negative $-40 event is really no cause for  concern to Nigeria, he is wrong. The Intercontinental Exchange (ICE) that are responsible for Brent oil price futures has just reconfigured its system to accommodate negative prices.


Perhaps and more worrying,  the  Brent benchmark does not have to go to zero for Nigerian grades that are priced at a discount to dated Brent to go negative. Though the boss of the national oil company NNPC, in a moment of rare clarity  has confirmed to reporters

“We have to cut down, whether with or without OPEC output cut deal. We have to reduce our oil production level because we do not have where to take the oil to, till the situation improves. The impact of the crisis is global and not on Nigeria alone,”.

 Up until now NNPC’s  strategy has been to pump at full tilt, producing cargoes Nigeria  can neither sell, store or refine. There seems to be no cognitive bias to loss aversion and no  reluctance to avoid losses in  NNPC. That is, the preference to avoid loss making in the uncertain pursuit of gains. For most businesses the concept of employing assets to create something that has intrinsic value and then pay customers to take it, is horrifying. It would be like paying customers to come and eat in your restaurant.


 Kola Karim the Chief Executive Officer of the Shoreline Group, the third-biggest independent producer in Nigeria, was very clear in his anxiety “The impact is a complete and utter disaster, we’re under water, without adding the cost of finance. If you add the cost of financing, we’re drowning.”.

According to the CBN fully one third of all loans by the Nigerian banking sector were to indigenous oil companies and many of those loans were not hedged; the oil sector accounted for 24% of all delinquent loans in 2019. This presents a systemic risk for the banking sector whose  over exposure to the oil sector  has prompted rating agencies to downgrade their risk rating. Fitch recently downgraded three Nigerian banks’ Long-Term Issuer Default Ratings (IDRs) to ‘B’ and placed all 10 Nigerian banks’ solvency ratings and IDRs on Rating Watch Negative.The Nigerian Government's  ability to service it's own debt which stands at about $84 billion and consumes almost 69% of pre-oil collapse revenues is highly questionable. Though it has been reported The International Monetary Fund (IMF) is expected to recommend the approval of $3.4 billion in emergency funding for Nigeria as part of the measures to cushion the impact of COVID-19 on the economy.

 The chronic shortage of US dollars means that defaults will be inevitable. The devaluation of the naira will cause inflation and the government will have to curtail spending whilst imported inputs for manufacturing will become increasingly unavailable. Naira has currently reached $1:450 in the parallel market and seems destined to depreciate even further.


 Foreign Portfolio investors(FPI)  have been trapped in Nigeria as the Central Bank has suspended fx interventions in the Investors and Exporters (I&E) Window during the COVID-19 lockdown. The I&E was set up by the CBN to provide a more market driven  fx  rate for the naira. The  window until recently conducted about $400 million in transactions daily, now it does less than $20 million. This has meant FPIs have been unable to repatriate their US dollar  funds despite exiting their positions. In the event FPI's are unable to repatriate their funds due to either US dollar liquidity or regulator currency controls, it could trigger a rating downgrade to CCC. Currently Nigeria's foreign reserves stand at $33.8 billion, down $5 billion since the beginning of the year and lest we forget Nigeria has a arbitral award of $9.6 billion hanging over it.


The most optimistic estimate for demand growth to return has to be Q4 2020, but seems destined to be Q1 2021,  at which  time oil inventories will be at historical highs. There is a clamour in the OECD to get economies back up and running and this will be the key to rebalancing the market and re-inflating oil price benchmarks. Though it now seems unlikely that full economic output will not return until a vaccine for the coronoavirus has been perfected. COVID-19 is teaching the world different lessons everyday, many of these lessons will shape the post COVID-19 narrative. They will  alter the way things are done and what priorities  society enshrine.  If the coronavirus forces Nigeria to restructure its oil and gas business,  resolve its governance, perfect policy decision making and create positive outcomes for all its citizens, then at least it won't have been all bad.















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Bonny Light the most recognisable and one of the most sought after Nigerian crude grades last week  traded at $12 per barrel.  The low sweet flagship Nigerian crude had up until last month historically traded at a premium to dated Brent. Bonny Light has become emblematic of the fate of light sweet crude grades that yield high cuts of transport fuels in a world in lockdowns.

It would also appear the published price discovery apparatus has been subsumed by a market in turmoil. This can only be described as a  disconnect between S&P Platts Global methodology on close and real market activity. Brent crude headline oil futures closed at $28 on the ICE on Tuesday , yet in the physical market according to traders it was fetching  only about $18.10 a barrel on Wednesday, and Bonny Light was trading at a discount of $5.70 less.

 It was inevitable that given the scale of oversupply the market was going to enter the sort of super-cantango it is now  experiencing  with producers having to sell at aggressive discounts as more crude enters the market. The term structure of all crude benchmarks moved to a super contango in March, as massive oil demand destruction, significant refinery cuts and rising global oil supply  created a large surplus in the oil market. This has pushed  prompt prices to decline much lower compared to longer-dated contracts, steepening the forward curve at the front end. In the futures market, the nearest Brent contract is for June, which is about $3 cheaper than July. But with April barrels still available, those need to price at even deeper discounts in a race to the bottom to find buyers.

 The super contango provokes  a similar response  as entering a deflationary spiral,  where buyers  hold off on purchasing crude waiting for the bottom of the market. Nigeria's position is made worse because it has virtually  no storage capacity and no operating Refineries.  It has no capacity to refine the crude it produces for domestic consumption. Nigeria could continue to produce and store cargoes on tankers offshore to capture the contango. It is risky proposition because nobody can really gauge when COVID-19 might pass and the time it will take for economies to rebound.  

 The boss of the national oil company NNPC, Mallam Mele Kyari said  recently that Nigeria would be effectively out of the oil business  at $20 per barrel, yet neither he nor  the Oil Minister Chief Timipre Sylva have articulated Nigeria's policy  on what strategy Nigeria will adopt. A few weeks ago the decision was made to continue production at full tilt, but without buyers it seems pure folly.  Many of Nigerias customers have simply suspended or reduced oil purchases. Indeed several Indian refineries, including IOC, BPCL and HPCL, reduced run rates and said they are not making any large purchase commitments because of weak demand and Reliance even offered cargoes   [April ], which would have been sold  at a  huge loss.

 The Oil Minister Chief Timipre Sylva confounded the market in the wake of the recent OPEC+ agreement by boldly predicting  it would boost the oil price by $15 a barrel, at least he got the $15 part almost right. It could be that he was confusing himself by  indulging in some sort of Hegelian dialectic on  oil market pricing. More likely and perhaps more characteristically he was demonstrating the lack of nous which is an ubiquitous feature of Nigerian oil policy decision making. If that were not enough, he subsequently announced an oil block bid round scheduled for the next fortnight. On the face of it,  such a bid round seems a desperate attempt to create revenues to bolster declining crude oil  receipts. The reality is that if it were the governments sole intention to choose the worst possible time to hold a bid round they could not have done better.

 There are difficult times ahead for Nigeria with few good options. The hope has to be that COVID-19 swiftly abates and global economies begin to rebound as they reverse lockdowns. The naira will come under increasing pressure as oil receipts slump. Nigeria is experiencing a crisis of a generation  brought on by a global pandemic but made worse by years of ineptitude, greed and corruption.

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Nigeria have agreed to a production cut of 400,000 barrels a day as their contribution to the OPEC+ agreement. This is based on a 23% cut on a production baseline taken from October 2018. Nigeria also produce between 350-400,000 bpd of condensates which are exempt from OPEC cuts. Condensate is a mixture of light liquid hydrocarbons, similar to a very light (high API) crude oil. On paper OPEC and the  OPEC+ group led by Russia announced a 10 million barrel cut which is by far the largest production cut in history.  However be under no illusions the cut will be insufficient to rebalance the global oil markets and rebound oil price benchmarks. The deal as it stands only serves to slow down the rate at which global storage capacity will be breached.

 The agreement does not solve the chronic oversupply problem, but guarantees production shut-ins as the supply of  oil massively  dwarves demand. Given the market fundamentals finding buyers for Nigeria’s oil is going to be very difficult. In stark terms where does Nigeria sell its oil? The last couple of months have seen NNPC selling its crude at historical discounts in an effort to clear the glut of cargoes.

Under the new agreement based on October 2018 production of 1.829 million barrels per day(bpd),  Nigeria will initially  produce 1.412 million bpd. From July until the end of the year it will produce  1.495 million bpd, and for all of 2021 and into 2022 , 1.579 million bpd . It is highly likely this will be subject to change over time.


The Minister of State for Petroleum Resources Chief Timipre Sylva has stated that the agreement will somehow see Nigeria financially better off. I fail to see how that can be. He has gone on record to state the agreement will produce an increase of  $15 per barrel  in global oil benchmarks, increasing revenue available to Government by $2.8 billion in the short term. It is difficult to see how he has arrived at this conclusion. All the market indications are of a drop in the price of crude oil. Indeed the initial response to the agreement was not an increase  in prices as the market assessed the news.  Crude prices that had climbed 10 percent leading up to the meeting in anticipation  of  a  cut that would put a stop to over supply, ended up  falling 10 percent once markets assessed that the cut was wholly insufficient to stabilise it.

HMSPR Chief Timipre Sylva It is a gross misinterpretation of the deal by the Oil Minister  which exposes either a fundamental lack of understanding of the oil markets or a dangerous  naivety or perhaps even more likely, unfound optimism.  It is a worrying sign that if the government lack the forensic ability to interpret a rudimentary outcome, then to what extent can their judgement be trusted in identifying, analysing and  pursuing Nigeria's best interests.

Mallam Mele Kyari the  boss of NNPC, the national oil company in a recent press interview justify  a highly questionable business  strategy . sought to rationalise NNPC adopting a policy of producing at a loss as a means to establish its credentials to the market as a reliable supplier. Confusingly he went on to explains that sometimes producers pay off takers to lift crude for free and this was something NNPC had done two weeks previously. As a national oil company NNPC have an abysmal record on strategy which has cost the country billions of dollars in forsaken revenue, and it looks set to continue.

More disturbing however is the newly published Saudi official selling prices for May. They have  cut  the price of their  flagship Arab Light crude  to Asia by a further  US$4.20 per barrel to April, to a total discount of US$7.30. That closes India and the Far East to Nigerian crude. They have kept the prices into Europe flat and decreased the discount for crude into the US to $0.75 per barrel. The price war continues unabated. If a clear indication  were needed, their pricing policy is conceived to buy market share in Asia whilst placating both Presidents Trump and Putin in the US and Europe.

 The key actors in the negotiations went to the meeting with very clear objectives. Russia who had initially miscalculated the impact of COVID-19 on demand had felt confident that they could ride out the storm based on their huge foreign reserves and sovereign wealth fund. This deal buys them time and enables them better gauge the coronavirus effect. It also allows them to re-establish a very important rapprochement with their new buddies the Saudis.  Energy politics is a very important weapon in Russian foreign policy  and they have recently made good in-roads to the Middle East.

The Saudis have established  the principle that all major producers must shoulder the burden of balancing the oil market. Notably Russia and Saudi Arabia have a different starting point than the other countries to measure their pledged reductions, so the real number of barrels to be taken off the market will be closer to 8.4 million barrels a day.

The deal  was pre-emptive  and caused by  the inevitability of production shut ins.  It was an opportunity for Russia and the Saudis to  make virtue out of a necessity as much as it was to address the global crude oil crisis . Both were under pressure for exacerbating a bad situation and making it worse. Right now there are simply no good choices for producers and had OPEC and OPEC+ groups not achieved  an agreement the market would have been forced into steep  production curbs but only much quicker. Storage is filling up, there is no where to put  oil with over 2 weeks of current production to go.


The US have  made their position very clear. Dan Brouillette the US Energy Secretary singing a well rehearsed verse from the song that defines  the US contribution to the global oil action as a decline in production as created by the free market and not a voluntary cut. It seems on this occasion Russia has capitulated its demands for the US to make a formal production cut. The truth is it simply does not really  matter in the general scheme of things. Such is the oversupply to the market that large parts of shale will be shut-in. I would say that the great deal maker President Trump has been out thought by OPEC+ and it is only now beginning to dawn upon him.

For the Honourable Minister of Petroleum Chief Timipre Sylva optimism to have any basis in reality, the market would have needed to cut 30 million barrels, for now it is a race to the bottom with production shut-ins looming.


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Tuesday, 24 March 2020 21:41




Many of us have been  brought up in the empirical tradition that avers "if it looks like one, walks like one and quacks like one, it is a duck". If I didn't know better,  I would say that the so called Russia-Saudi oil price war was an opportunistic,  meticulously prepared,  well co-ordinated and brutally executed assault on US shale at a time the fracking industry  is at its most vulnerable. There are many commentators out there myself included, that believes  the entire shale industry has been supported by a financial infrastructure of pertinacious  debt and capital markets and a proclivity for the  US to weaponise its status  as the guardian of the global reserve currency. In my humble opinion this is not a Russia - Saudi Oil price war, it is a war but one which the  Russians and the Saudis are waging  on the United States.


Conservative estimates put shale's cumulative losses in excess of $400 billion. Shale has neither ever generated any free cashflow or provided dividends for its weary  investors in over a decade of unrelenting  growth. It now seems inevitable that  at some point shortly Washington will reach for the national security trope as justification to bail out the industry. Energy independence allows the us pursue a more definitive isolationist foreign policy and to that extent an argument could be made for what would effectively be a state subsidy to the shale. The sort which the US typically impose tariffs on other countries, though I suspect any such assistance will be more partisan.

All this at a time when the US markets are in freefall and the Fed seemingly disoriented. The US banking system led by the Fed appears to be adopting the Robert Mugabe momentary policy handbook. Treasury Secretary Steve Manuchin has however sought to calm troubled waters by announcing an impending  stimulus package apparently in excess of $2 trillion with $3 billion for shale. This  package is to be co-ordinated with the Fed whose money printing machine has been working overtime recently to support a wonky repo market. Neoliberalism and free market dogma  conveniently forgotten by all for now.

Russia’s actions are not entirely unpredictable. The US have humiliated a once strong  and very proud Russia that considered itself at least a peer to the US in decades of cold war. Now they are subject to sanctions at every turn as the US asserts its will with impunity. The nature of the sanctions are personal, targeting influential oligarchs close to a seat of power that would be only too glad to give the US a bloody nose.  All the sanctions are crafted with the intent to extend the US's power and hegemony. Recently in an habitual demonstration of its  extraterritorial jurisdiction the US have imposed sanctions on Russian company TNK (Rosneft) in Venezuela  as well as  the Nordstream 2 project. The Russians have  bided their time, waiting for an opportunity to retaliate. Their objective  a concerted attempt to blunt the aggressive US sanctions tool that has been so very effective due to a US resource endowment that shields the US consumer from the effects of such sanctions.

For the Saudis this is really the 2nd bite of the cherry. They failed woefully in 2014 and despite their best efforts shale has been growing ever since, boosted in part by successive OPEC production cuts, and a shale patch forced by OPEC to be more efficient.  The Saudis now realise  if they didn’t previously, the only way to achieve a sustainable oil price which supports both Aramco and their budget  benchmark is to inflict mortal damage on US shale. There is also the delicate question of the evolution of the US-Saudi relationship as the US moves towards energy dependence and isolation. The global demand contraction created by the COVID-19 pandemic and the subsequent collapse of US energy stocks has created a perfect storm. Both the Russians and the Saudis under the guise of a price war turn on all their taps and flood the market.


The fallout for shale  has been calamitous, so much so that in a quite unprecedented move  the Commissioner of Texas oil regulator,  Texas Railroad Commission (TRRC) Ryan Sitton spoke  with Mohammed Barkindo the OPEC Secretary-General,  ostensibly to see if the U.S. could help end the price war between Saudi Arabia and Russia. Production cuts are apparently among the options the U.S. oil industry is considering as it now appears proration is back on the agenda after 40 years. Though it must be said the TRRC Chairman, Wayne Christian has voiced his strong political and philosophical reservations to proration as a 'liberal free market conservative'

Yet therein lies the impasse for shale production, for proration to work it needs to extend to all US producers but more fundamentally it needs to surmount the neoliberal dogma that predicates free market theology. There is clearly a place for shale production in energy markets but due to its decision to prioritise production over profitability it has inherently  sown the seeds of its own demise. Whatever relief a stimulus package might provide will be transient. The size and scope of a proposed  SPR purchase program has little effect on market fundamentals. The Trump Administration has yet to elucidate a definitive position beyond some sort of vague assurance of " getting involved at the appropriate time".

Ominously Russian officials suggested on Friday that Trump shouldn't get in the middle of this fight. Kremlin spokesperson Dmitry Peskov stated  "We know that the huge US oil sector is now in distress because of these prices,"  Tellingly he asserted that  "There are no price wars between Russia and Saudi Arabia....We have good partnership relations with Saudi Arabia, and we do not think that anyone should intervene in these relations."


In a perverse and ironic twist, the self-same Congress which has recently sought to enact the NOPEC Act 2019 is now threatening to impose sanctions on both the Saudis and the Russians should they fail to cut production. Yet  not only are US shale  somehow exempt from any production cuts, these cuts are specifically meant to support the shale industry over the consumer. The bipartisan No Oil Producing and Exporting Cartels  Act is legislation which seeks to  criminalize actions by a foreign state, collectively or in combination with other foreign states or persons, that limit the production or distribution, maintain the price, or restrain trade of oil.  The act itself is ridiculous and would create havoc in that it seeks to strip countries of their sovereign immunity and subjugate the control of their natural resources to the extraterritorial jurisdiction of the US Department of Justice.


The Russians see shale has having had a free ride off the back of OPEC+ production cuts and seems determined to end what it sees as it benefitting from a adopting an iniquitous position. The oil price war will only end when  US shales exponential growth at the expense of OPEC production cuts is resolved.








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Saturday, 14 March 2020 22:55


When it came it was as abrupt as it was devastating, a collapse in crude oil price futures significant enough to be defined as a material adverse change. In other words a calamity, at a time Nigeria is least able to absorb it.  Indeed the Group Managing Director (GMD) of Nigerian National Petroleum Corporation (NNPC) Mallam  Mele Kyari at a meeting with the Central Bank of Nigeria (CBN) warned of the dire economic consequences of the collapse of oil price benchmarks. We learnt that most of Nigeria's crude oil loading programme for both March and April is distressed and has no home to go to. According to Mallam  Kyari, that amounted to around 51 cargoes, which would equate to almost 50 million barrels of crude or condensate.

 The Saudi decision to respond to Russia's unwillingness to make further and deeper production cuts, has resulted in them opening their  spigots and flooding the market with cheap, heavily discounted crude. Their ostensible aim to block Russian crude into europe and force Putin to accept the Saudis plan, though there has been disquite about Russian crude oil exports to China who are now the main buyer of Russian crude using the ESPO pipeline.  Yet the outcome has been to shock energy exporting emerging markets  economies like Nigeria.  It feels like a  wanton, spiteful act of obliviousness on the Saudis part, a salutary lesson for members of OPEC to observe.


The Saudis as low cost producers have a price advantage over the market as Mallam Kyari acknowledged. Whereas Nigeria typically produces its crude from anything between $15-$20 per barrel (Cost Oil), the Saudis are able to get theirs out of the ground for about $5 per barrel. In order to seize market share, they have aggresively discounted their barrels by between $6-$8 per barrel depending on the destination. The Saudis are also able to rapidly deploy their spare capacity which will ramp up production by  about 3.5 million barrels per day in April. In any event they have ample inventory to draw upon to achieve their objectives.

 This leaves Nigeria in a critical position. Since  Mallam Kyari's denouement   freight rates for  VLCCs from West Africa to East Asia have leapt to $43.22 per metric ton on Wednesday, nearly $26 up on the previous Friday's price  of $17.83. The current market reality is that dated Brent oil futures at circa $30 means the Nigerian oil industry is effectively out of business. The current price for Brent is $34.60 with Bonny Light being assessed at a premium of 35 cents per barrel  over Dated Brent on  Thursday, down 85 cents per barrel  from the start of the week.

 It is highly unlikely that the CBN will be able to keep in place the USD$ currency peg as february data showed FX reserves dropped  by more than $1.6 billion to $36.38 billion. Crude oil receipts account for 90% of Nigerian foreign exchange earnings. The CBN actively intervenes in the market to maintain the official exchange rate which is currently N306.90. This will mean a devaluation of the naira and exchange rate restrictions.

 The CBN have contended that a devaluation is unnecessary at the moment, but the market rate for the 1 year Non Deliverable Forward (NDF) naira settled futures has raced to N488 to the USD$ from N388 last month. The NDF is a currency  hedging tool which allows US dollar investors to lock in to a naira exchange rate. The NDF provides a much more precise indication of  market fundamentals than the CBN. If the so called Saudi-Russia price war continues unabated, then not only will Nigeria be threatened with recession, but depression and insolvency might follow in quick order.

 The Saudi action to my mind is reckless and does not contemplate the damage it unleashes on other OPEC members such as Nigeria. That is not to say they would not have been appropriately aware of the consequences of their actions, but clearly deemed Nigeria's financial distress as acceptable collateral damage in the pursuit of their  own self interest. The Saudis, the de facto leaders of OPEC continue to treat the organisation as a tool  to achieve  Saudi foreign policy objectives. All OPEC members states agreed to cut and thats what should have happened.

 We have been made to understand that Russia’s refusal was fuelled in part by the fact that OPEC cuts only seemed to have the effect of increasing US shale marketshare and providing support to financially vulnerable shale producers. Whereas the focal point of Saudi motivation  seems to be the Aramco IPO and MBS's 2030 Vision. However I suspect it was the loss of Saudi market share and crude oil volumes relative to the Russians in China which created the most consternation.

 In any event Nigeria has been thrown under the bus at a time the oil market is dealing with the effects of COVID-19 and it is simply not good enough. I think it is time for African producers to make their voices heard. OPEC is clearly an undemocratic organisation where smaller producers lack gravitas and are bullied.  It is time for the government to debate the benefits of belonging to an organisation where you are regarded as a vassal State.












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When asked about the proposed OPEC production cuts last week, UAE energy minister Suhail al-Mazrouei told reporters in a show of what now turns out to be misplaced confidence,   "I can not see us not agreeing, because that's very important for the market." He however went on to state that in the event such a deal was not agreed,  he did not envision OPEC acting unilaterally on production cuts. The  Nigerian oil minister Chief Timipre Sylva on the other hand,  in direct contradiction had earlier stated when asked if OPEC would go it alone,   "we will if we have to". His utterance, if at all any were needed,  provided a clear insight as to the policy dissonance which exists at the heart of  OPEC. 

Ultimately OPEC and the Saudis were unable to convince Russia to agree to further production cuts. The Russians have been  unequivocal regarding their position, that any production cut would be a gift to US Shale and there is ample evidence to support this view. In February the US recorded its highest ever crude export volumes. There was also the Nordstream 2 issue and the sanctions against Rosneft, TNK and other Russian energy companies. Moscow's world view has the US  front and centre and so their desire to undermine US energy security is axiomatic. It has also emerged from credible sources that the Saudis entreaties to the Russians was practically an ultimatum.

That ultimatum has come to pass, the Saudi Energy Minister Prince Abdulaziz was reported as saying on Friday that “Today will be a regretful day” the Saudis threat to flood the market and provide buyers with significant price discounts on oil price futures has sent it into the steepest declines seen since 1991. The market has crashed by over 30% in a few days with WTI  trading on the NYMEX  at as low as $27.71. Brent futures for May delivery slumped to $31.02 in early morning trading on the ICE in London.

Saudi retribution however swift seems very reckless and demonstrates a real lack of statecraft . The Saudi administration with MBS at the helm have displayed a proclivity for rash actions.  These action may well turn out to be self harming to the Saudis. The drop in oil prices has caused Aramco's shares to lose 10% of their value. This means in the 3 months since the high watermark evaluation of $2 trillion on the 16th of December, the company's valuation has dropped by $429 billion. It now seems likely that the cornerstone of MBS’s diversification vision will be come a casualty

The Saudi Government has sought to reign in spending in 2020 The budget figures are realistic and the projected deficit of 6.4% of GDP is likely to be achieved but this assume an average Brent oil price of $58 per barrel. Even if the Saudis increase their production by 1.5 million barrels, such an increase in production   will fall far short of meeting revenue target to balance the budget.

 It is unlikely that the Saudi strategy will bring Russia back to the negotiating table any time soon. Indeed the Russian Finance ministry in a bullish riposte to the Saudi instigated price war released a statement maintaining Russian could weather oil prices of $25-$30 for the next 6-10 years. It may well turn out in the end some one will have to find the Saudis a ladder

 The Saudis have spare capacity and substantial crude oil stocks in storage, but if they persist in their strategy of flooding a contracting market, it will have dire consequences for some of OPEC's African members such as Nigeria and Angola. These countries have high production costs, some as high as $20 per barrel. $30 priced Brent crude would devastate their economies. Nigeria's budget is predicated on a $57 barrel. Reuters have calculated at current oil prices OPEC member states will lose over $500 million per day based on February prices.

 A lot of US shale production is hedged but as energy stocks plummeted today with the S&P 500 Energy Index reportedly posting its worst intraday decline on record. It seems inevitable that there will be numerous Shale companies going to the wall. A combination of weary investors, wary capital markets and distressed junk bonds mean a substantial tract of US shale production is in jeopardy. The price war could not come at a  worst possible time for frackers and Russia has made the judgement that a production cut at this time would breath  life into the industry.

Such a determination would have been made at the highest levels   by senior figures in the Russian oil industry along with the political leadership. They would have determined that even if the Saudis initiated a price war, their economy hade sufficient resilience to withstand the malign  effects of such an action whilst it negatively impacted US energy security. The fact that Putin is  prepared to terminate his Bromance with MBS to pursue this strategy serves to reinforce the importance attached to it by Russia.

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Wednesday, 04 March 2020 22:50





This is no time for OPEC+ to cut production and if I were in charge I would maintain production levels as they currently stand. The main beneficiary of any OPEC cut would be shale. According to Moody’s investor service  60% of the $86b debt issued by Shale producers  maturing in the next four years has  junk bond status. Junk bonds are typically rated  'Ba' or lower by Moody's which means they are of a lower credit quality and more likely to default. Investors have become increasingly impatient with an industry that has prioritised production over free cashflow and dividends. US producers reportedly absorbed over $400 b in the decade from 2008 -18 with scant return for investors. The financial future for shale is by no means secure.

 Yet shale production has increased to reach record levels making the US the worlds largest producer and now a key exporter, all at the expense of OPEC.  In  2014 OPEC under the leadership of Saudi Arabia, initiated an abortive price war with the objective of expelling the higher cost shale production  from the market. The plan was simple or so it seemed at the time. It was considered that shale production needed $50 a barrel as a break even.  After 2 years of mutual destruction and low oil prices it ultimately ended in failure. Shale survived due to a combination of factors. It was able to increase efficiency using new drilling techniques, it had abundant prolific  tier 1 acreage to drill wells, and it had sustained access to cheap money from Wall Street and acquiesant capital markets.

 Since 2016 shale production has increased by 50% from about 8.5 million bpd to 12.2 million bpd, increasing output by 1.2 million bpd last year.  US Shale production was expected to rise by 9% to about 13.2m bpd in 2020. The Shale boom is a zero sum equation  to the direct detriment of OPEC production. Where OPEC have cut production shale has stepped in and seized marketshare. The continued viability of shales existence is premised on OPEC continued willingness to cut production in the face of global demand destruction or oversupply.

 Shale is now at its most vulnerable, it requires continual capital investment at a time there is significant investor antipathy. The tier 1 acreage that provided bountiful output for frackers has shrunk and experimental drilling program results have been dissapointing.  The nature of shale production and its  steep declines necessitates constant drilling to offset the loss of production and maintain output levels. Such output levels provide a constant supply of cashflow, a reduction in drilling will diminish future cashflows. Energy stocks have tumbled and a slew of bankruptcies have further  dented investor appetite. The collapse of oil benchmark mean that the likelihood of default events and chapter 11 episode seem destined to increase. Refinancing using reserve base lending approaches are also restricted when crude oil prices slump.

 Unlike in 2014 OPEC will need to stay the course which will mean such a decision must be sustained until Shale production decreases. It may take a couple of years. This is easier said than done as OPEC members have contrasting and sometimes contradictory  policy objectives. It begs the question, is it now  OPEC's response to any 'Black Swan' to further cut production in order to ensure the price of crude is sufficient to enable its great rival to increase its marketshare?

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Friday, 21 February 2020 19:54



It is by definition complex, intricate, requires ingenuity and is perplexing. Out of a clear blue sky just as market analysts had snugly settled down with their forecast outlook for 2020, it  emerged without warning, a shock that  the market is still yet to fully comprehend. Despite the initial slump in global oil benchmarks the price of Brent  rebounded by over 10%  last week.

This week ending, West Texas Intermediate crude for April delivery CLJ20, -1.99%  on the New York Mercantile Exchange fell $1.13, or 2.1%, to $52.75 a barrel, while April Brent crude BRNJ20, -2.23% lost $1.37, or 2.3%, to trade at $57.94 a barrel on ICE Futures Europe. Coronavirus fears returned to the market as the pervading sentiment seems to be that the virus still has a course to run with no clear sign it has peaked.

With Refiners in China reported as processing 25% below seasonal averages  and an estimated reduction in transport fuel consumption of 30-40% the logical expectation would be that oil prices continued on their downward spiral. Apple Inc. have issued what is essentially an impartial  prognosis on the Chinese economy. A warning that would normally be regarded as a bellwethers. Setting aside the predictable short term spike in oil benchmarks the market experiences every time there is an US inventory build in excess of forecast, market sentiment seems to be driven by the rate and number of coronavirus infections.

There were initial reports at the beginning of the month that Chinese buyers had called a halt to West African grades, yet it seems that Chinese imports have remained fairly unabated at the seasonal rate of about 10 million barrels a day.  Some of China's biggest suppliers such as  Russia, Iraq and the Saudis have continued to export oil to China at typical rates. Though we will not know definitively until the begining of next month when China’s General Administration of Customs releases the data for February.

 The build up of oil cargoes  offshore at the beginning of February seemed to provide evidence of high refinery inventories  build as a result of low run rates and a general collapse in demand. Subsequently we have however learned that available storage has been freed up.  China’s overall crude storage is at 760 million barrels, versus a peak of 780 million barrels in early June last year which is about 65% capacity. Sources at Shandong ports have confirmed that while storage levels are high, they are working with refineries to move oil out and make way for more cargoes that are expected to arrive in the coming weeks. So in theory there is still a lot of spare capacity


Depending on what data the General Administration of Customs reports on crude oil imports the market will have a more precise gauge of the situation. If imports are close to seasonal averages it would confirm that China are increasing oil inventories. Such an act would be strategic yet would leave the market to ponder their motivation in a time of seeming crisis

It would only really make sense to put oil into storage if China is convinced the market was in contango and that the price of oil was bound to increase. It is a statement of confidence in their ability to spark the economy back into life, thus increasing the demand for oil. Stockpiling is a  hedge when you think future prices are going to increase.

Counterfactually,  if the General Administration of Customs reports shows a substantial decrease in imports well  below seasonal or pre COVID-19 levels for February,  it would confirm that the coronavirus is having a more detrimental effect on consumption and will continue to weigh on China’s economy for some time to come. It would also decrease the incentive for China to put oil into storage as it would send the market into prolonged  backwardation.


The integrity of the information emanating out of China has always been questionable. This adds to the  market's volatility.  In any event OPEC+ are well positioned to construct their own assessment of Chinese crude imports from amalgamating the member states export data. By the 5th of March there will also be significantly more trend data providing a clearer indication as to the state of the Chinese puzzle.



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