What to make of last week’s oil price rally?

What to make of last week’s oil price rally?

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What is behind the oil price rally that lasted nearly two weeks? Last week Brent went from $25.50 per barrel traded on Monday to a high of $32.27. The psychological event was when Brent crossed the $30 per barrel threshold on Tuesday. The price of Brent has doubled since hitting its lowest point in 18 years.

This week the July contract retrenched slightly on fears over a second wave of the coronavirus disease (COVID-19) pandemic. It was at $30.25 per barrel early morning in Europe.

When West Texas Intermediate (WTI) went below zero on that fatal day on April 20 it was a shot across the bow indicating just how deep the recession due to COVID-19 would be.

Demand had fallen off the cliff by some 29 million barrels per day (bpd) for April, according to the International Energy Agency (IEA). That constituted around one-third of oil consumption at the beginning of the year. Demand will fall by 23 million bpd in the second quarter when averaging the agency’s monthly forecasts. In mid-April, OPEC+ (an alliance between the OPEC countries and their 10 non-OPEC allies lead by Russia) agreed to cut 9.7 million bpd as of May 1. The G20 energy ministers explicitly supported the announcement. G20 producers who are not members of OPEC+ made supporting statements indicating they also envisaged lowering production — although not by explicit cuts but rather via attrition due to falling demand.

Indeed, Saudi Arabia started cutting production before May 1. When the date came OPEC+ production went down. Last week Norway announced it would also reduce production by 250,000 bpd in June and 134,000 bpd for the remainder of the year.

The US surprised. According to the IEA, production stood at 11.9 million bpd for the week ending May 1. Texas production could have fallen by almost 1 million bpd, which would represent 20 percent. North Dakota’s output contracted by 400,000 bpd, nearly one-third.

The rig count was astounding. It went below 400 for the first time since 1940. According to US oil industry company Baker Hughes, it was at 374 for the week ending May 1, a decline of 34 for the week and 614 fewer than a year ago. This reflected the dire situation in the shale oil patch. However, all US representatives of big oil, Exxon, Chevron, and ConocoPhillips, also cut production unexpectedly.

None of this was further surprising when looking at reduced refinery runs and the lack of storage throughout the US, but especially at Cushing.

We have not yet seen the worst in terms of economic downturn, if the unemployment numbers are anything to go by

Cornelia Meyer

While all of this happened on the supply side, several economies eased their lockdown measures which had a positive impact on demand. China drew 9.7 million barrels in reserves.

Recent developments seem to indicate that the oil market may have started on the long and hard road to rebalancing. This thesis was supported by Saudi actions last week. Saudi Aramco reduced its discounts to suppliers in Asia and elsewhere. They came down by as much as 60 percent in Europe, namely from $10 per barrel to $4. This indicated two things: For one, that the war for market share/price with Russia was over and more importantly, that Aramco considered that the market had started to rebalance.

All the above is positive but the road to economic recovery has not yet started, in contrast to the bullish equity markets which had rallied on the back of massive government stimulus.

The latest unemployment rate of 14.7 percent in the US is the harbinger of worse to come. In Europe too, there are many unemployed and more than 40 million furloughed, many of whom will not keep their jobs. This is the world’s largest economy and its largest economic bloc.

While East Asia is recovering, China, Japan and Korea are export-driven economies who will suffer when their counterparties decline.

We have not yet seen the worst in terms of economic downturn, if the unemployment numbers are anything to go by. The shape and speed of any recovery will also depend on how well the virus is contained and there are problems ahead if the latest developments in east Asia are anything to go by.

In other words, it was great to see oil recover over the last two weeks. However, how sustainable that road to rebalancing the markets is, depends entirely on what happens in the real economy going forward.

• Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view

Saudi Arabia to cut oil production by additional 1 million bpd

An Aramco employee walks near an oil tank at Saudi Aramco’s Ras Tanura oil refinery and oil terminal in Saudi Arabia. (REUTERS)
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Updated 12 May 2020

Saudi Arabia to cut oil production by additional 1 million bpd

  • Voluntary cut for June is in addition to reductions already agreed with OPEC+ last month
  • Kuwait also announced additional cut for next month

Saudi Arabia will unilaterally cut an extra 1 million barrels of oil production per day from June in a renewed effort to stabilize global energy markets.

The Kingdom’s energy ministry told Saudi Aramco to further reduce the output level beyond the historic reductions agreed with OPEC+ countries last month, bringing the total the Kingdom is pledged to reduce to nearly 5 million barrels a day.

From next month, Saudi Arabia will produce only 7.5 million barrels, the lowest in two decades and well below capacity of more than 12 million barrels. 

“We want to expedite the process of returning back to normal,” Energy Minster Prince Abdul Aziz bin Salman said.

An energy ministry official said the new cut was intended to “encourage” other members of the OPEC+ alliance, which includes Russia, to implement the cuts they have already agreed on. The UAE and Kuwait signaled they were ready to follow the Saudi cuts with smaller cuts of their own.

OPEC+ will debate a possible extra round of cuts next month as the global oil glut continues.




        This section contains relevant reference points, placed in (Opinion field)

Some analysts saw the new cuts as an attempt to help the struggling American shale industry, which has been hit by closures and bankruptcy after the oil price collapse.

But Brent crude, the global benchmark, fell 3.4 percent after the announcement to $29.50, with West Texas Intermediate, the American standard, also down at $24.21 per barrel.

The move in the global oil market came after Saudi Arabia took drastic measures to overhaul its finances amid the global economic shock of the coronavirus pandemic.

The value added tax will be tripled to 15 percent, cost of living allowances for government employees cut, and capital spending on some big projects reduced or delayed.

But megaprojects such as NEOM and the Red Sea Development, core parts of the Vision 2030 reforms, will carry on. 

“It may not be as fast as it used to be, but they are continuing,” Finance Minister Mohammed Al-Jadaan said.

The increase in the VAT, bigger than the IMF has called for in the past, would add to the cost of living, but Al-Jadaan said the effect would be minimal because coronavirus lockdowns would depress consumer spending.

Some analysts said the measure was a return to “austerity” economics amid the global recession caused bythe pandemic. Tarek Fadlallah, chief executive of Nomura Asset Management in the Middle East, said: “The subtle approach to diversifying the Saudi economy and raising non-oil revenues has been too slow.

“The authorities have accepted the need to induce a painful and immediate overhaul of the economy in the hope of longer-term gains.”


Global organizations commend Saudi Arabia’s role in e-learning

Updated 31 min 6 sec ago

Global organizations commend Saudi Arabia’s role in e-learning

JEDDAH: Six international organizations have completed two studies on e-learning in the Kingdom and praised its efforts in providing a rapid response, multiple options and continuous improvement during the coronavirus pandemic.
The studies involved the participation of 342,000 respondents and were conducted under the supervision of the Kingdom’s National Center for e-Learning.
The center said that the global organizations completed two comprehensive studies on the experience of public and higher education in Saudi Arabia during the pandemic, with the aim of documenting and studying the reality of the experience and coming up with initiatives to develop e-learning practices in accordance with current global practices and standards.
The studies were conducted with the participation of students, faculty members, teachers, parents and school leaders.
The number of participants in the public education study reached 318,000, while the number of participants in the higher education study reached 24,000.
The first study was prepared by the Online Learning Consortium (OLC), with the participation of the International Society for Technology in Education (ISTE), Quality Matters (QM), the UNESCO Institute of Information Technologies in Education (IITE), the National Research Center for Distance Education and Technological Advancements (DETA) in the US.
The second study was prepared by the Organization for Economic Co-operation and Development (OECD) with the cooperation of the Harvard Graduate School
of Education.
In the studies, reference comparisons were made with more than 193 countries. The two studies showed the Kingdom’s distinction in the diversity of options, including, for example, electronic content and satellite channels available for e-learning in public education.



The studies on e-learning involved the participation of 342,000 respondents and were conducted under the supervision of the Kingdom’s National Center for e-Learning.

The percentage of countries that succeeded in providing these at the national level was only 38 percent.
The study conducted by the OECD and the Harvard Graduate School of Education included a comparison of the Kingdom’s response to education during the COVID-19 pandemic with 37 member states.
The results showed the Kingdom’s progress in 13 out of 16 indicators on the average of
these countries.
The study also revealed that teachers received significant support to overcome obstacles to e-learning.
The study of public education indicated that there was a clear strategy for the Ministry of Education to reopen schools in the Kingdom and address any issues.
OLC hailed the efforts of the Saudi Ministry of Education in dealing with the crisis by providing a variety of options for e-learning, and the quick response to the pandemic and immediate shift to remote instruction.
The two studies recommended 71 proposed development initiatives for public education and 78 proposed development initiatives for higher education.
The National Center for e-Learning is working in coordination with the Ministry of Education to present the initiatives and begin their implementation.
The center announced that the organizations that conducted the studies would publish their results and complete the second phase at the end of the current semester.