The boss of Nigeria's national oil company NNPC, Mallam Mele Kyari has confirmed in a statement released on Monday that, Nigeria is now producing 2.3 million barrels of crude oil daily, including condensates. The end of the OPEC+ deal has seen the start of a free for all as the agreement has terminated without a replacement which as triggered a production race to the bottom.
It comes at the worst possible time for producers and is creating global financial distress just as COVID-19 closes down OECD economies. Nigeria has had to drastically discount the official selling price of some of its major crudes grades to a record low in April in order to compete with other crudes. Bonny Light a main crude grade was assessed at a discount of $4.85/b to Dated Brent on Wednesday, its lowest level since Platts started the assessments methodology. This if anything illustrates the battle for market share current going on in global markets. At the start of the year, Bonny Light was trading at a premium of $1.70/b to Dated Brent which was priced at $69.00 per barrel.
Market trading sources have reported that despite the sharp reduction in differentials, Nigeria were unable to sell around a quarter of its cargoes in April which equated to around 15 million- 18 million barrels of unsold crude. In broad terms the 25% unsold crude correlates with the level of global markets demand destruction.
Kyari said prices were not expected to go below the $20/b they approached last week. “I am certain, all things being equal, oil price will bounce back,” he said, adding Nigeria’s crude remained the target of refiners in Europe and Asia. Whilst prices have rebounded since last week in anticipation of the OPEC++ meeting, there are still many in the market that there is substantial scope for prices to deteriorate further in the short term. Not least Vitol, the worlds largest independent crude oil trader and Trafigura, both of who are the largest traders of Nigerian crude oil. They have warned that there is a danger oil prices could collapse to as low as $10 per barrel after thee OPEC+++ meeting. Last week Kyari had warned that at $20 per barrel Nigeria would be out of the oil business.We also know that all things are rarely equal overtime which in itsellf creates uncertainty.
He went on to say “The key issue in crude oil business is market fundamentals of demand/supply. I believe COVID-19 will subside and countries will come back to life.”. The imponderable for the oil market is the length of time it will take for demand for transport fuels to be restored. Global demand resusitation will support higher crude oil prices but it makes no sense in the interim to waste valuable economic resources for marginal revenue gains
"If I have to do tariffs on oil coming from outside or if I have to do something to protect our ... tens of thousands of energy workers and our great companies that produce all these jobs, I'll do whatever I have to do," ... .
Unless US Shale is about to perform a volte-face, there is no possibility of an agreement to rebalance the global oil markets. Trump seems to have sparked a market rebound on friday with his now familiar Trump tweets which lent the market a "sugar high" with a dubious narrative only the rash or the desperate translate into price action. Typically his tweet sought to reprise his previous non existent role of the redeemer. Apparently he had spoken to the two protagonists in the Russia- Saudi oil price war and based upon that conversation and his power of persuasion, they had both agreed to cut production by 10-15 million barrels a day.
In any event his tweet seemed to provide a trigger to the market with a record surge in both Brent and WTI prices. WTI is currently trading at $28.34 up from $20.31 on wednesdays trading and Brent surging to $34.11 up from $24.81 of the previous session. In the aftermath of the reported call, the Saudis have called for an urgent meeting of OPEC+. This has created speculation in the market but it has also caused a bout of short covering which has had a bullish effect on the market. Given the market fundamentals it is inconceivable that the price action is going anywhere but ultimately short
There are also deep divides around the table. In what can only be described as pre-meeting skirmishing, the Russians have refused to accept any blame for the so called price war between them and the Saudis. The date of the meeting has also been moved back to the 9th of April. In the current scope of things, the so called price war is really pretty irrelevant. Beyond political posturing it makes little difference to the global oil market. Most commentators accept that demand destruction of around 20% or 20 million barrels a day is insoluble. Even if Russia had agreed to a further production cut of 1.5 million barrels a day in March , it would be insufficient to address the market inequilibrium that exists as a consequence of COVID-19.
This makes a nonsense of the US response to the drop in oil prices and the role either of these countries played. since, had Russia and the Saudis arrived at some agreement to curb production, it could not have changed in any meaningful way the issue at hand. Trumps protectionist instincts have the US once again reaching for his favourite tool, tariffs. Though the American Petroleum Institute (API) are against tariffs as they believe they would penalise US refiners dependent on imported grades. Yet they are also against proration
There is no easy solution, Trump originally viewed the oil price collapse as a boon to the American consumer who he told might be buying gasoline at 90 cents per gallon, tantamount to a tax break. But he is conflicted as he is aware that states like Texas which are battlefield states in the forthcoming US elections, have hundreds of thousands of oil industry jobs in jeopardy. It is also unconscionable to suborn the Saudis into cutting production if only to allow shale to continue to pump at full tilt. As for the Russians whose oil and gas industry is subject to stringent US sanctions, it is difficult to see how any agreement could be reached which does not provide sanctions relief or see shale bear some of the burden of production cuts.
The Texas Rail Road Commission (TRRC) Commissioner Ryan Sitton described as the lame-duck Commissioner of the Texas state Regulatory has initiated a conversation with both OPEC and OPEC+ on proration. The TRRC has the ability to impose production cuts by proration, but only in Texas. It however remains a difficult proposition for an avowedly free market theocracy, but one that agnostic oil producers are now considering. Scott Sheffield the CEO of Pioneer Natural Resources believes proration is imperative for the survival of the shale industry and is only concerned that it is executed faily by the TRRC. Indeed Pioneer Natural Resources and Parsley Energy, filed with the TRRC a Motion Requesting a Market Demand Hearing and Market Demand Order for May 2020 Production.
However Texas Oil & Gas Association (TXOGA) whose membership represent over 90% of the oil value chain in Texas are vehemently opposed to proration. TXOGA President Todd Staples re-iterated the associations committment to fee market solutions whilst opining that and production curbs made by Texas producers would be instantly replaced by other volumes. If nothing else the the narrative provides a clear insight of the difficulties in arriving at a unified position.
The burden of production cuts cannot be that of Texas alone, yet there are producing states that do not have proration on their statutes. Furthermore there exists the possibility of legal challenges too. It is hard to see how to implement and enforce a proration across the US, but equally difficult to see any agreement between producers which exempts US Shale. Despite President Trumps soft blandishment to the Saudis it seems increasingly more likely that he heard what he wanted and as ever reported it as fact. Nobody should be surprised
NIGERIA BRACES AS CRUDE OIL SHUT-INS LOOM
Brent crude the international oil price benchmark and the basis which Nigeria uses for price discovery of its crude grades fell to $22 per barrel on Monday, its lowest level in 18 years . Such a price if it persists for a short while will mean that Nigeria will have no option other than to shut in production. Given that in order to find buyers, crude will have to be offered at a discount to this benchmark, the business becomes unprofitable. The Nigerian National Petroleum Corporation (NNPC) was reported on Monday to have cut its April official selling prices for Bonny Light and Qua Iboe, two of the its major grades, by $5 per barrel to dated Brent minus $3.29 and minus $3.10 per barrel, respectively. The price reflects the desperation to cajoule Traders in a stringent buyers market and also represents a first in NNPC OSP pricing history.
Most producers are offloading their oil for below $20 per barrel as the double whammy of coronavirus pandemic demand destruction and global oversupply amid an action by Saudi Arabia and Russian. Last week, Russia got as little as $18 per barrel for its benchmark export grade Urals while Saudi Arabia was selling its Arab Light in Europe for $16, according to Reuters calculations based on official Saudi prices and Urals deals. OPEC said on Thursday its daily basket oil price fell to $16.87 a barrel on April 1, down from $22.61 the previous day.
Whilst crude grade across the board have been hit, light sweet grades have bourne the burden. These grades with low density and low sulphur are mostly used to make transport fuels whose demand has crashed and are also hard to store for long. Nigeria produces only light sweet grades which makes it almost impossible to secure marketshare. It creates a bleak outlook for the country, moreso since the median cost of production in Nigeria is about $20 per barrel.
The Nigerian Minister of State for Petroleum Resources has suggested that the policy would be to ramp up production to as much as 2.3 million barrels a day to compensate for the fall in the oil price. That policy seems misguided as realistically Nigeria posses very little excess capacity if any and to whom will this oil be sold. Analyst estimate that demand has contracted by about 25 million barrels a day, inventories are also at an all time high as refiners cut back refining runs. The implications of shutting in production are egregious.
Take Nigerian Petroleum Development Co. (NPDC) for example, the E&P subsidiary of NNPC and the cash cow whose revenue sustains the existence of NNPC as a solvent entity. The median cost of extracting NPDC's 280,000 bpd is circa $30 per barrel.There exist loans and financial agreements which are based upon production output not to speak of the perilous fx position and the devastating effect it will have on the Nigerian economy. Shutting in production is complicated, comes with geological risks and has costs. It also represents a victory for Saudi policy as they secure the market. Add to that oil price volatility and the uncertainty it provokes and there are seemingly no easy or good options for the Nigeria at the moment
It simply cannot be the case that an Excess Crude Account which has swallowed a whooping $107.4 billion since it was established should be beyond the scrutiny of the Nigeria people. If the so called Excess Crude Account (ECA) could talk I suspect it would have a harrowing tale to tell. It would reveal hitherto unknown details of transactions hidden from public scrutiny. It would be telling the story from its sick bed after years of abuse, mistreatment and deceit. It would also be telling us that it should not have existed after 2011, when the Nigerian Sovereign Investment Authority (NSIA) bill was passed. Nigerians should have known from the very begining that anything that has 'excess as' a part of its title would not end well. You don't need to be Freud to have foreseen its outcome. Now at a time of crisis, that rainy day we hoped would never come, like Old Mother Hubbard in the children's nursery ryhme, the cupboard is bare.
The ECA was stablished in 2004 with the primary objective to protect Nigeria’s planned budgets against shortfalls caused by crude oil price volatility. The premise was sensible and it was anticipated that this prudent measure would insulate a Nigerian economy, entirely dependent on crude oil receipts and provide a counter cyclical buffer against the effects of external economic shocks.
At its high water mark in 2008 the ECA had an account balance of $20 billion. A decade later in 2018 it had fallen to $1.8 billion, as of today in 2020 it is now reported as having only $71m. The account has global notoriety as well as legal uncertainty and is universally acknowledged as the worst of its type in the world. In a recent report by the NRGI it commented "The government discloses almost none of the rules or practices governing deposits, withdrawals or investments of the ECA," . If any example is needed last December, the Federation Accounts Allocation Committee (FAAC)reported that the ECA balance stood at $631 million barely three weeks after the Minister of Finance, Zainab Ahmed, had confirmed the account balance as $2.319 billion. A shocking revealation made more alarming by the absence of any transparency or accountability.
Whilst account drawings are inevitable and in itself a decline in an account balances is unremarkable, it is the opaque processes and lack of transparency which constitute the problem. The way in which the ECA has supported the clandestine way in which it is operated . A source of funds outside the aegis of the National Assembly and with no oversight for the Executive. The ECA is unconstitutional and illegal and according to the Nigeria Senate 'a slush fund' which should be abolished. The evidence seems to support the notion that State Governors and the Executive have had carte blanche access to the account. The Senate are prepared to abolish the ECA, but stop short of probing it. The Senate is a well established retirement home for ex- state Governors.
In order to resolve the vexed issue of the ECA and to provide legal certainty , a statue the Nigeria Sovereign Investment Authority (NSIA) bill was passed into law. The NSIA Act, 2011 created the NSIA and authorised the establishment of three ringfenced funds (Nigeria Infrastructure Fund, Future Generation Fund and Stabilization Fund) which are jointly owned by the three tiers of Government to prepare for the eventual depletion of Nigeria’s oil resources. The ECA should have ceased to exist from such a time and all the deposits held in the ECA transferred to the NSIA, the only possible reason for its continued existence was its usefulness as an impenetrable black box. Its ability to evade scrutiny.
An analysis of the Excess Crude Account (ECA) spending by categories provided by Premium Times, showed that in the last fifteen years, distribution to the three tiers of government, at the highest, was $61.86 billion. Spending on oil subsidy in the same period was $12.06 billion, debt financing took $15.42 billion and investment on power projects $8.71 billion. The empowerment project popularly known as Sure-P got $5.74 billion while the stabilisation fund, through payments to Sovereign Wealth Fund, was only $1.25 billion. Additionally, the NNPC pipeline and joint ventures operations on gas took $1.51 billion. The other expenditures from the ECA were Security, Transportation and Sundry Contingencies with $496.37 million, $250 million and $100.38 million respectively. It is notable that the information obtain via the FOI Act is legacy data with no means of interrogating same.
Nigerians need to reflect on the fact that an illegal and unconstitutional account maintained by the Federal Government is being used with impunity to evade the scrutiny of the Nigeria people . Whilst reflecting on that they also well to reflect on the fact that despite a preponderance of evidence of malfeasance relating to this account, the National Assembly is not prepred to scrutinise this in any way lest proof of corruption emerges in their ranks. Even if the money has been squandered, which seems most likely, the Nigeria people need to identify those responsible for such profligacy with their resource endowment and such actors need to be held accountable.
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.
TIME FOR OPEC TO TO DEAL WITH US SHALE
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?
There is reason for Nigerians to worry and it is not only the arrival of COVID-19. Oil price benchmarks are in freefall, crashing through resistance levels as if they were none existent. This week has seen Oil fall to its lowest price levels since July 2017 and barring a miraculous cure for the COVID-19, it is difficult to see what an OPEC+ are able to do, to arrest this downward spiral. We may soon see Brent below $45 as Libya gets back on stream.
Brent crude, the global oil benchmark which is used by Nigeria as the marker for all the crude oil grades they sell has plummeted. It fell as much as 4.2% today, briefly breaking below $50 a barrel, which is a level not seen since 2017. It eventually lost 3.27% or $1.66 to finish the day on the ICE at $50.07 which puts it on track for its worst week in four years. WTI crude ended up at $45.31, a decline of 3.78% on previous days trading.
About 12 years ago in the wake of the recession which caused demand for crude oil to shrink in late 2008, with oil prices collapsing from $147 to $32, I put to the Nigerian National Petroleum Corporation (NNPC) a comprehensive hedging proposal which would act as insurance and allow Nigeria downside protection against falling oil prices. The thing you would have thought any prudent actor would do without prompting.
I repeated the exercise in 2012 and over the years have sought to understand why a country that predicates its budget and entire welfare on the price of oil would not exercise critical prudence and responsibility by unfailingly hedging their crude oil production.
Considering oil markets have been vulnerable for a while as global inventories reach record highs and the renewable footprint grows rapidly. It is not as the warning signals in a world awash with oil were not there. Investment in fossil fuels is declining off the back of climate change and global warming concerns. The oil market outlook for 2020 forecast excessive supply growth exerting downward pressure on prices. Yet nobody in Nigeria thought it might be a decent idea to hedge their production. Made all the more bemusing at a time when Mohammed Barkindo a Nigerian is the Secretary General of OPEC
At the OPEC+ meeting in Vienna next week, we may well get a plausible rendition of King Canute, quite what effect that will have on the bear market in questionable. However if the oil benchmark does not recover until after Q2, Nigeria will have another recession and it will be deep. What is particularly galling is that nobody seems to learn from their mistakes. Nigeria are only just emerging from their last recession and are close to insolvency.
My question to NNPC and by extension the Nigerian Government is this, is the Minister of Petroleum doing a good job?
Russia seem to have won the argument and OPEC+ will meet as scheduled in Vienna on March 5th- 6th. It could be that a resurgence in the Brent oil price benchmark which has seen it reach $59.16/b as of 1719 GMT today, up 11% from the February 10th low has alleviated the pressure . However although the front month ICE future has rebounded it is still down over 10% year to date and far below the level most OPEC members states need to balance their domestic budgets.
Russia has been reluctant to agree to Saudi requests for members of the alliance to meet in mid-February, as the effects of the coronavirus outbreak caused oil prices to slump. Earlier in the month an OPEC+ technical committee recommended that the coalition deepen its existing 1.7 million b/d production cut accord by an additional cut of 600,000 barrels per day through the end of the second quarter to offset any demand impact from the COVID-19 infection.
The Saudi energy minister Prince Abdulaziz bin Salman who reportedly spoke to the Russian energy minister Alexander Novak by phone on Tuesday acknowledged on Wednesday that he was unable to convince his Russian counterpart. Prince Abdulaziz bin Salman, never short of a quotation had previously been quoted as saying the price plunge in February called for decisive production cuts. "When there's a fire in your house, you call for the fire truck, not the garden hose," the sources quoted him as saying. Perhaps an oversimplified metaphor perhaps but it left the market in no doubt as to the urgency the Saudis position.
Yet the Russian position is complex and seemingly set to become even more complicated. The Russian news agency TASS originally quoted the Russian energy minister " Russia is now carefully studying the recommendation of the technical committee in order to assess the situation on the market and take a balanced approach based on the interest of the market as a whole". It was polite procrastination, whilst it is prudent to attempt to assess the full effect of the COVID-19 the process is open ended.
Interestingly an impending $38-billion deal under which the finance ministry will buy state lender Sberbank is due to start in April and is expected to lead to a stronger rouble, which is a factor that is generally disliked by oil exporters as it hits their profits. At a meeting on Wednesday, oil companies asked Energy Minister Alexander Novak to tell central bank governor Elvira Nabiullina that they do not favour a strong rouble. It is however thought that the final decision will be Putin’s. A strong rouble would favour a production cut.
Furthermore it would appear that though the Saudis have cut back production their exports do not seem to have dropped accordingly, so whilst other members like Nigeria are cutting exports the Saudis seem to be using reserves to maintain export volumes. The Russians have always been wary of surrendering market share to US shale
The real issue is the fidelity of the alliance and its ability to demonstrate a unity of purpose. The technical committee is essentially a unit which comes up with policy, if those ideas are not endorsed by both Russia and the Saudis these policy positions become just interesting suggestions. Russia has continually maintained that they are content with a lower crude oil price. Russia do not want to see an increase in US shale production facilitated by increased oil prices created by a rash OPEC+ production cut
NOBODY SAW THIS ONE
After a couple weeks of continued slippage, the price of the Brent and WTI benchmarks were trading down 0.98% and 0.73% on the day, respectively, at 9:51 am as the World Health Organization declared a global health emergency.
While the WHO did not recommend any travel restrictions to China, the US State Department recommended no travel to China, and airlines have stopped flying to China, including Air France, British Airways, Lufthansa, Virgin Atlantic, Lion Air, and Seoul Air. Other airlines had reduced their flight schedules to China, including American, Delta, United, Finnair, Cathay Pacific, and Jetstar Asia.
In addition to airline stoppages, the Philippines halted visas on arrival to Chinese nationals, Hong Kong has stopped trains from China, Singapore has closed its borders to Chinese guests, Russia has closed its border with China—for people at least, Italy has halted all air traffic to and from China, Kazakhstan has halted bus service and passenger trains to China, North Korea has closed its borders to all foreign tourists—and these are just some of the travel restrictions in place, indicating that the world is proceeding with an abundance of caution despite the WHO stance that travel and trade should continue as usual.
It is these travel restrictions that are, in part, denting fuel demand, and OPEC is standing up and taking notice, and is considering moving up its March meeting in order to discuss how to respond to the viral emergency.
Brent was trading at $58.24 a barrel on the London-based ICE Futures Europe exchange on Friday, and is down around 12% in January, according to Bloomberg.
WHY WOULD ANYONE BE LONG
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are trading mixed on Friday, however, momentum is clearly to the downside as traders continue to worry about the coronavirus’ impact on global demand. Both futures contracts are in a position to post their fourth consecutive weekly loss.
Early in the session, the markets were boosted by comments from the World Health Organization (WHO) that seemed to calm tensions. On Thursday, the WHO declared the coronavirus a global emergency, but calmed the markets by opposing travel restrictions. It also said Chinese actions so far will “reverse the tide” of the spread and that it declared the emergency to help those countries with weak health systems.
At 14:33 GMT, March WTI crude oil is trading $51.73, down $0.41 or -0.81% and April Brent crude oil is at $56.57, down $0.77 or -1.26%.
Oil prices were also underpinned by reports that Saudi Arabia has opened a discussion about moving an upcoming policy meeting to early February from March to address the impact of coronavirus on crude demand.
Perhaps putting a lid on prices was a report showing China manufacturing came in line with expectations. It wasn’t the actual report that capped the market, but the thought that it did not reflect current conditions in the country.
Growth in China’s factory activity faltered in January, an official survey showed, as export orders fell and an outbreak of a new virus added to risks facing the world’s second-largest economy, Reuters reported.
The Purchasing Managers’ Index (PMI) fell to 50.0 in January from 50.2 in December, China’s National Bureau of Statistics (NBS) said on Friday. The reading was in line with analysts’ forecasts and hit the neutral 50-point mark that separates growth from contraction on a monthly basis.
While the PMI showed activity in some parts of the sector holding up, economists are doubtful the survey provides a meaningful read on the economy given recent developments with the coronavirus and distortions from the Lunar New Year break.
“I would disregard today’s release,” said Raymond Yeung, Chief Economist for Greater China at ANZ, in an email to Reuters.
“The figure certainly overrates the economic outlook as it does not reflect the interruption due to the outbreak,” he said.
With the coronavirus spreading, it’s going to be hard for traders to carry speculative long positions over the weekend, so I anticipate selling pressure throughout the day as traders increase bearish bets on conditions worsening.
SHELL SHELVE OIL BUY BACK
The UK’s biggest company, Shell, will slow a $25 billion shareholder buyback to a trickle after tumbling oil prices forced it to put more money aside for a rainy day.
The oil major is currently undertaking the world’s largest shareholder buyback, returning cash made from a 2014 takeover of gas firm BG Group.
So far it has handed back about $15 billion to shareholders, including most UK pension funds and millions of retail investors, at a rate of around $3 billion per quarter. Shell today said the remaining $10 billion will be given back more slowly due to tougher conditions in the oil market. It will start with just $1 billion between now and April, meaning the buyback is unlikely to be finished as promised by the end of the year and may run into 2021.
That could be a headache for many fund managers who pencil in scheduled payments, forcing them to rejig their portfolios to manage cash flows.
“We remain committed to prudent capital discipline supported by world-class project delivery and are looking to further strengthen our balance sheet while we continue with share buybacks,” said Shell chief executive Ben van Beurden.
“Our intention to complete the $25 billion share buyback programme is unchanged, but the pace remains subject to macro conditions and further debt reduction.”
The cautious tone prompted shares to fall 4% to their lowest since 2017. Shares in rival BP also shed 1.3% on fears of a tougher energy market.
Shell’s profits for the period September to December halved from $5.7 billion to $2.9 billion due to lower prices for oil and gas and fears about the coronavirus’s impact on global growth.
The flu has ripped through China, the world’s biggest user of oil and gas, prompting fears of less consumption and an oversupply of oil.