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Opinion: Saudi Arabia's decision to trigger an oil price war has backfired badly – The Globe and Mail

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Saudi Arabia’s Crown Prince Mohammed bin Salman is learning the hard way that barrels of oil with nowhere to go are worth approximately zero. Saudi barrels aren’t worth nothing – yet – but they’re getting close.

On Tuesday, the day after U.S. oil prices actually went negative, Brent crude, the international benchmark, fell 25 per cent to US$19 a barrel. A year ago, it was trading at US$70.

In early March, MBS, as the crown prince is known, apparently thought he had figured it all out. He wanted OPEC, which is led by Saudi Arabia, and Russia, an OPEC ally, to cut production to support prices, which were sagging as the novel coronavirus was bursting out of China. Russia said nyet.

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MBS didn’t take Russia’s refusal to play well. He broke Saudi Arabia’s alliance with Russia and vowed to open Saudi Aramco’s spigots, flooding the world with oil. For him, it would be a nice little twofer: Punish Russia and punish the shale-oil industry, whose burgeoning output had transformed the United States into the world’s biggest oil producer and one of its biggest oil exporters.

What could go wrong?

A week later, on March 11, Saudi Arabia signalled that it would dump another 2.3 million barrels a day onto the global market, taking the country’s total output to 12.3 million barrels. Energy analysts were astonished. Olivier Jakob, a former oil trader who is now the managing director of Swiss oil consultancy Petromatrix, called the move highly aggressive, “forcing as much crude as possible in a market that does not want it.”

Indeed. By mid-March, oil was falling fast, and MBS apparently realized that his timing was rather off. So he did a U-turn and convinced OPEC and its allies to cut production by almost 10 million barrels a day. But the cuts would take months to implement, and by then, it would be too late anyway. The COVID-19 crisis had shut down economies around the world. Unsold oil was filling storage tanks and parked supertankers to the brim.

This week, the dire situation reached the point where the cost of storing American oil was higher than the price of oil itself. That’s when prices turned deeply negative. (On Tuesday, West Texas Intermediate rebounded to US$6 a barrel – a price that would still destroy the shale industry within months.)

MBS seems to have lost more than he has gained. Yes, the U.S. shale industry – the business that had the audacity to challenge Saudi Arabia’s dominance of the market – is in deep trouble. U.S. oil-company bankruptcies have started and will continue.

But the Saudi economy is also taking punishing blows. The prospect of oil going back to US$70, even US$50, this year appears slim, as big economies make only tentative steps to dismantle their quarantines. Demand could stay unusually low until a COVID-19 vaccine is developed, which may not happen until sometime next year. Italy gives you a sense of the demand destruction. Figures released Tuesday reveal that March oil sales were 34-per-cent lower than a year ago. Gasoline sales were down 52 per cent, and diesel was down 41 per cent. April’s consumption figures will be even lower, because the Italian quarantine did not start until March 9.

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Saudi Arabia is not facing financial and economic catastrophe, as Italy is. The kingdom has ample foreign currency reserves and a low public debt – its debt-to-GDP ratio is 24 per cent (Italy’s is 135 per cent and rising). Saudi Aramco, the world’s biggest company, has the lowest pumping costs of any oil producer and can endure US$20 oil for some time, though the price could keep falling.

That’s pretty much where the good news ends, because Saudi Arabia itself is a high-cost operation. The extended royal family has some 15,000 members, and a lot of them like their yachts and Ferraris. The country is an undiversified welfare state with a small entrepreneurial class. The upshot is that the government needs oil at about US$80 to balance its budget.

Already, there are signs of stress in the kingdom. Fitch Ratings has placed the top 10 Saudi banks on “rating watch negative.” It did so after oil prices plunged in mid-March (the high rating of the country itself was left stable). The budget deficit is widening fast. The Finance Minister in late March said he expects the deficit to reach 7 per cent to 9 per cent of GDP. But that was when Brent crude was still hovering around US$30. The price has fallen by a third since then, suggesting the deficit could be much higher.

MBS knows that he has to wean Saudi Arabia off its oil dependence. In 2016, he unveiled his Vision 2030 plan to modernize and diversify the economy. The plan would recruit women into the work force, create tech and logistical centres, build new cities along the Red Sea, open the country up to tourism and develop a manufacturing base. But turning the vision into reality would require fortunes; those fortunes would, by definition, have to come from oil production.

Vision 2030 is looking ambitious within the next decade as oil falls out of favour and Saudi Arabia’s financial health deteriorates. The pandemic, of course, propelled prices down at an alarming rate. But MBS’s decision to go to war against Russian and American oil producers last month was badly timed, spectacularly so. Vision 2040 anyone?

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OPEC, allied nations extend nearly 10M barrel cut by a month – World News – Castanet.net

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OPEC and allied nations agreed Saturday to extend a production cut of nearly 10 million barrels of oil a day through the end of July, hoping to encourage stability in energy markets hard hit by the coronavirus-induced global economic crisis.

Ministers of the cartel and outside nations led by Russia met via video conference to adopt the measure, aimed at cutting the excess production depressing prices as global aviation remains largely grounded due to the pandemic. The curbed output represents some 10% of the world’s overall supply.

But danger still lurks for the market, even as a number of nations ease virus-related lockdowns, and enforcing compliance remains thorny.

Algerian Oil Minister Mohamed Arkab, the current OPEC president, warned meeting attendees that the global oil inventory would soar to 1.5 billion barrels by the mid-point of this year.

“Despite the progress to date, we cannot afford to rest on our laurels,” Arkab said. “The challenges we face remain daunting.”

That was a message echoed by Saudi Oil Minister Abdulaziz bin Salman, who acknowledged “we all have made sacrifices to make it where we are today.” He said he remained shocked by the day in April when U.S. oil futures plunged below zero.

“There are encouraging signs we are over the worst,” he said.

Russian Energy Minister Alexander Novak similarly called April “the worst month in history” for the global oil market.

The decision came in a unanimous vote, Energy Minister Suhail al-Mazrouei of the United Arab Emirates wrote on Twitter. He called it “a courageous decision.”

But it is only a one-month extension of a production cut that was deep enough “to keep prices from going so low that it creates global financial risk but not enough to make prices very high, which would be a burden to consumers in a recessionary time,” said Amy Myers Jaffe, senior fellow at the Council for Foreign Relations.

“There is so much uncertainty that I think they took a conservative approach,” she said. “You don’t know how much production is going to come back on. You don’t know what’s going to happen with demand. You don’t know if there’s going to be a second (pandemic) wave.”

Jaffe said improved oil demand in China and Asia and a gradual stabilization of demand in the United States and to some extent Europe, where there’s some cautious economic reopening, were encouraging for producers.

OPEC has 13 member states and is largely dominated by oil-rich Saudi Arabia. The additional countries involved part in the so-called OPEC Plus accord have been led by Russia, with Mexico under President Andrés Manuel López Obrador playing a considerable role at the last minute in the initial agreement.

Crude oil prices have been gaining in recent days, in part on hopes OPEC would continue the cut. International benchmark Brent crude traded Saturday at over $42 a barrel. Brent had crashed below $20 a barrel in April.

Earlier this year, when demand was down, Saudi Arabia was flooding the market with crude oil, helping to send prices down to record lows. That prompted the U.S. government in April to take the unusual step of getting involved in OPEC’s negotiations, pressuring members of the cartel to agree to cuts to help end the oil price free-fall.

At the time, President Donald Trump said the U.S. would help take on some of the cuts that Mexico was unwilling to make. And perhaps more importantly, a group of U.S. senators upset over the impact on U.S. shale production said at the time that they had drafted legislation which would remove American forces, including Patriot Missile batteries, from Saudi Arabia.

Under a deal reached in April, OPEC and allied countries were to cut nearly 10 million barrels per day until July, then 8 million barrels per day through the end of the year, and 6 million a day for 16 months beginning in 2021.

In a rambling Rose Garden speech on Friday, Trump took credit for the April deal. “People said that wasn’t possible but we got Saudi Arabia, Russia and others to cut back substantially,” he said. “We appreciate that very much.”

U.S. Energy Secretary Dan Brouillette tweeted his applause Saturday for the extension, which he said comes “at a pivotal time as oil demand continues to recover and economies reopen around the world.”

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HSBC warns it could face reprisals in China if UK bans Huawei equipment: Telegraph – Investing.com

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© Reuters. HSBC’s building in Canary Wharf is seen behind a City of London sign outside Billingsgate Market in London

(Reuters) – HSBC Holdings Plc (L:) Chairman Mark Tucker has warned Britain against a ban on networking equipment made by Huawei Technologies Co Ltd, claiming the bank could face reprisals in China, the Telegraph reported on Saturday.

Tucker made the claim in private representations to British Prime Minster Boris Johnson’s advisers, the newspaper reported https://www.telegraph.co.uk/business/2020/06/06/hsbc-warns-downing-street-chinese-reprisals-huawei, citing industry and political sources.

Britain designated Huawei a “high-risk vendor” in January, capping its 5G involvement at 35% and excluding it from the data-heavy core of the network. It is looking at the possibility of phasing Huawei out of its 5G network completely by 2023, according to officials.

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HSBC warns it could face reprisals in China if UK bans Huawei equipment: Telegraph – Reuters

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FILE PHOTO: HSBC’s building in Canary Wharf is seen behind a City of London sign outside Billingsgate Market in London, Britain, August 8, 2018. REUTERS/Hannah McKay

(Reuters) – HSBC Holdings Plc (HSBA.L) Chairman Mark Tucker has warned Britain against a ban on networking equipment made by Huawei Technologies Co Ltd, claiming the bank could face reprisals in China, the Telegraph reported on Saturday.

Tucker made the claim in private representations to British Prime Minster Boris Johnson’s advisers, the newspaper reported here citing industry and political sources.

Britain designated Huawei a “high-risk vendor” in January, capping its 5G involvement at 35% and excluding it from the data-heavy core of the network. It is looking at the possibility of phasing Huawei out of its 5G network completely by 2023, according to officials.

Reporting by Ismail Shakil in Bengaluru; Editing by Dan Grebler

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