OPEC+ responds to impact of trade wars
The decision to maintain oil production cuts, and by so doing the market price, is a clear reflection of the impact of the US-China trade wars. Jonathan Bell assesses the new alliances.
Whenever there is an OPEC (Organsation of Petroleum Exporting Countries) meeting taking place in Vienna it is inevitably a massive magnet for the world’s press. And unsurprisingly it can get ugly as journalists and analysts wrestle to get in front of various oil ministers and other spokespeople from the various delegations. Thankfully I wasn’t there this week, but one of the worst things about being part of this jamboree is continually trying to avoid getting wacked round the head by camera crew who are all but oblivious to where they are dashing to get their next footage and soundbites.
Years ago, I used to visit OPEC meetings in Vienna to be part of this mad scrum, not so much in my journalist role but more so for analytical work related to crude oil pricing. I can’t tell you much more about that as somebody might want to kill me!
But in recent years the oil sector has changed massively and so have OPEC meetings, although the mainstream press scrum still feel they need to behave as they have always done. And when I say changed I mean there is now little actually decided at the Vienna meetings – the real horse-trading is done beforehand. Why? Because there is far too much at stake for the oil producers who are being impacted by the US-China trade wars. In addition, the US-OPEC equation all changed with the push for the development of US shale oil and the politics surrounding that.
Consequently, OPEC is no longer what it was. The OPEC meeting earlier this week was largely a formality where the organisation announced that it was going to cut crude oil output by 1.2 million barrels per day (mbpd), or 1.2% of global demand, until March 2020. But, and a big but, the decision to do this was actually taken at the G20 meeting in Japan when Saudi Arabia – the OPEC swing producer – met with Russia and agreed to maintain oil production cuts to try to ensure a stable crude oil price.
OPEC is now largely referred to as OPEC+, and this dates back to late 2016 when the so-called OPEC+ alliance of 25 producers agreed to cut production in order to put a floor under low oil prices that had resulted from a glut of supply, particularly due to increased US shale oil production. The US – which is now the largest oil producer in the world is, of course, not a member of the OPEC+.
Saudi Arabia is currently producing 9.7 mbpd and has 2.3 mbpd of spare capacity. According to recent US data, the US. has been producing 12.1 mbpd, which is about 1.3 mbpd more than last year.
But the agreement reached at the G20 between Saudi Araba and Russia has angered some OPEC members – particularly Iran – which sees an erosion of policy decisions being taken by the group collectively. It is not that Iran is against the cuts – it needs these more than ever given the US’s desire to try and push for lower oil prices and the fact that Iran has been impacted massively by the US economic war against it.
Politics has always played a major part in the global oil demand/supply equation. And, as we all know, crude oil supply is also something which has been used in the past as a political bargaining tool. This in turn partly led to the development of shale oil deposits in the US, and technological developments have seen that industry thrive alongside the further downstream activity of shale gas.
The US wants to see low crude prices and has consistently put pressure on its ally Saudi Arabia to increase oil production in order to drive the price of crude down. Keeping low gasoline prices at the pump is a vote winner for any US president, and with a presidential election coming up next year, this issue is something which is very much in President Trump’s focus.
The shale oil versus conventional crude oil battle has largely given the US what it wants in this regard. At the same time, as we all know, this has pitted the US against OPEC and other oil producing countries that want to see a high crude oil price. Just how this marries up with the ‘special’ relationship between the US and its main OPEC ally Saudi Arabia is, at times, hard to work out.
Saudi Arabia has to maintain what it sees as a ‘reasonable’ oil price because of its considerable budgetary commitments. Analysts assess that what Saudi would actually like to be getting is $85 per barrel to truly meet its requirements. It is a lot easier for Russia of course.
The US administration must be jawing on a lot of tobacco over the alliance which continues between Russia and Saudi – and the oil price looks relatively stable around the $60 per barrel mark allowing Iran decent returns on the smaller amount of oil that it is still able to sell. On Tuesday, Brent crude futures were trading at $65 per barrel and West Texas Intermediate at $59.
However, within OPEC – where oil production and exports have already been impacted by the sanctions against Iran and the inability of Venezuela to produce, there are concerns that the agreement to continue production cuts of 1.2 mbpd is simply not enough. Member countries have noted that global oil demand growth for this year has fallen to 1.14 mbpd whilst non-OPEC supply is expected to grow by 2.14 mbpd.
Speaking on Monday about the global demand for oil and the market prospects, in a response to current US shale oil production, Saudi Energy Minister Khalid al-Falih said, that from time to time, OPEC and non-OPEC countries needed to trim production to prevent extreme volatility,
Al-Falih also stated “I have no doubt in my mind that US shale will peak and decline like every other [oil] basin in history. The question is when.” Until it does, he added, it would be “prudent for us that have a lot at stake and also for those of us who want to protect the global economy” to make adjustments.
A decisive factor in the crude oil price outlook for the rest of the year will be the success or failure of the trade talks between the US and China. Analysts and OPEC+ producers are in no doubt that whatever is done to trim oil production is only part of the answer to improving stability and improving market demand.
The US-China trade wars have hit global oil demand and that is now hurting many companies and economies. There is a general lack of confidence in the global market because of this. Many companies have stopped placing orders and/or investing. Much will depend on whether the US and China can carry through the current trade truce which was tentatively agreed to last weekend to a positive trade agreement. It is in everyone’s interest.
Now time to get up to speed on the markets.
Here's our exclusive TXF Essentials subscriber content
Yunlin: Winding up heavy ECA support
The 640MW Yunlin offshore wind project in Taiwan has provided a viable financing template for large-scale offshore wind farms in nascent markets across Asia-Pacific. But heavy ECA backing and local bank funding are still key to getting Taiwan’s future offshore wind projects over the financial line. `
TXF Commodities Amsterdam 2019: Sucafina on funding coffee trading operations
From the side-lines of TXF Amsterdam 2019, Philippe Penet, CFO at Sucafina, discusses sustainability, the digitisation of the supply chain and locking in coffee prices.
It’s only export finance rock and roll 2019 (but I liked it)
TXF’s top takeaways from the biggest gathering of the export and project finance community in the world, TXF Global 2019, are here.
Reinventing the wheel? A sceptical take on trade as an asset class
Contrarian views on the recent HSBC and AllianzGI secondary market trade asset solution aimed at coaxing institutional investors into the trade finance space are explored here. Is the solution all that new? For sure, you can’t please all the investors and analysts all the time, but have they got a point?
TXF Commodities Amsterdam 2019: Deutsche Bank looks to new horizons
Sandra Hack, global head of structured trade commodity finance at Deutsche Bank, discusses opportunities in the Nordics, overcoming the challenges of regulatory requirements and the possibility of Deutsche Bank broadening its clients within the commodity sector.
Plus, to top things off..
the news you thought you had but didn't.
Clearway refinances South Trent Wind
Clearway Energy – via borrowing vehicle South Trent Wind LLC – has closed a refinancing for its 101.2MW South Trent Wind project in Texas.
Clearway closes on repowering debt for Wildorardo and Elbow Creek
Clearway Energy and Clearway Energy Group – via joint special purpose company Repowering Partnership Holdco (RPH) – have closed on $377 million one-year bridge loan to fund the repowering of two existing wind assets: the 161MW Wildorado and 122MW Elbow Creek wind farms in Texas.
Intervial issues bonds to fund additional Ruta del Maipo works
ISA Intervial has issued UF5 million ($202 million) of inflation-linked bonds to fund additional works on the Ruta del Maipo toll road concession in Chile. Of the proceeds, UF4.7 million will finance construction of a third lane between Rancagua and San Francisco, while the remainder will refinance existing debt.
Burundi's first solar IPP nears close on DFI-backed loan
American-owned Dutch developer Gigawatt Global is expected to reach financial close on a DFI-backed loan to finance a 7.5MW solar project in Burundi over the coming months – the first private solar IPP project in the East African country.
Nigeria LNG train seven financing gains momentum
Nigeria LNG (NLNG), a joint venture between the Nigerian National Petroleum Corporation (49%), Shell (25.6%), Total (15%) and Eni (10.4%), have begun sounding out a $3 billion corporate-style loan to back train seven of the Nigeria LNG scheme.
FC for DTEK Renewables' phase two Ukraine wind farm
Ukrainian energy company DTEK Renewables has reached full financial close on the second phase of its €300 million ($340.9 million) 200MW Primorskaya onshore wind farm in the Zaporizhzhya region, Ukraine.
SSE nears close on $2.46bn offshore wind refi
An SSE Renewables-led consortium is set to reach financial close this week on a £1.96 billion ($2.46 billion) debt package to finance the 588MW Beatrice offshore wind farm in Scotland.
Sonnedix closes Italian solar refi
Solar power producer Sonnedix has closed a €215 million ($239 million) refinancing of a 70MW portfolio of solar plants in Italy.
Rabobank appoints new regional head of TCF Americas
Rabobank has appointed Christine Pelletier as its new regional head of trade and commodity finance (TCF) for the Americas.
CEPU gets IFC backing for Genoveva 1
Central Puerto (CEPU) has received IFC approval for a 13-year $76.1 million facility – split between a $30 million IFC direct loan and a $46.1 million facility from IFC’s institutional investor-focused Managed Co-Lending Portfolio Program – for its $105 million 86.6MW La Genoveva I wind project in Argentina. Banco Galicia is also thought to be providing a short-term working capital facility for the project.
JTB signs dual-tranche $1.8bn gas field financing
Pertamina EP Cepu (PEPC), a subsidiary of Indonesia’s state-owned oil and gas company PT Pertamina, has signed a dual-tranche $1.8 billion financing for its Jambaran-Tiung-Biru (JTB) gas field unitisation project.