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Saudis Make Biggest Oil Price Hike in 20 Years After OPEC+ Cuts


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Saudis Make Biggest Oil Price Hike in 20 Years After OPEC+ Cuts

Saudi Arabia made some of the biggest price increases for crude exports in at least two decades, doubling down on its strategy to bolster the oil market after OPEC+ producers extended historic output cuts.

The steepest jump will hit July exports to Asia, state producer Saudi Aramco’s largest regional market, according to a pricing list seen by Bloomberg. Overall, the increases for Saudi crude erase almost all of the discounts the kingdom made during its brief price warwith Russia.

The sharp price increases show that Saudi Arabia is using all the tools at its disposal to turn around the oil market after prices plunged into negative territory in April. As the price setter in the Middle East, the increases in its official prices may be followed by other producers.

Tighter crude supply is helping repair an oil market battered by the coronavirus. Unprecedented output cuts led by the Saudis and Russia boosted prices in May, and the OPEC+ group decided Saturday to extend those limits through July. Brent crude, down 36% this year, has clawed back some of its losses and ended trading on Friday at more than $40 a barrel.

But the profits that oil refiners make from processing crude into fuel are struggling to keep up with the rising market, and the sharp Saudi price hikes are likely to exacerbate that problem. Representatives for refineries from Europe and Asia expressed concern and said the pricing would crush margins.

Price War

Saudi Arabia unleashed a price war in March when it slashed official selling prices by the most in three decades. The kingdom took that drastic step after failing to reach an agreement with Russia to extend production cuts in the face of the pandemic’s destruction of oil demand.

After Tweets, phone calls and top-level consultations, OPEC+ returned to negotiations and hammered out the biggest output curbs in history, pledging to take nearly 10 million barrels a day off the market. U.S. production plunged by roughly 2 million barrels daily as low prices drove producers to shut wells.

OPEC+ chose on Saturday to renew production limits at almost the same level, instead of tapering them as planned at the end of June. Aramco, which typically announces pricing on the fifth day of each month, had delayed its July numbers until after OPEC+ members made their decision.

Saudi Arabia sells its crude at a differential to oil benchmarks, announcing every month the discount or premium it’s charging to global refiners. The so-called official selling prices help set the tone in the physical oil market, where actual barrels change hands.

With China’s demand for crude now rising, the Saudis are raising prices. The month-on-month increase in the official selling price for flagship Arab Light crude to Asia, which accounts for more than half of Saudi oil sales, is the largest in at least 20 years. Aramco raised Arab Light to Asia by $6.10 a barrel to a premium of 20 cents over the benchmark.

It raised July pricing for all grades to Asia by between $5.60 and $7.30 a barrel. That compares with an expected increase of about $4 a barrel, according to a Bloomberg survey of eight traders and refiners.

Buyers in the U.S., the Mediterranean region and Northwest Europe will also pay more for oil.

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Saudi Arabia Lays Down the Law to the Oil Market

Calling out OPEC’s laggards may help rescue the group’s reputation.

Julian LeeJune 7, 2020, 12:00 AM CDT
Saudi oil minister Abdulaziz Bin Salman obtains promises from OPEC’s laggards.

Saudi oil minister Abdulaziz Bin Salman obtains promises from OPEC’s laggards.

Photographer: JOE KLAMAR/AFP

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Saudi Arabia called out the cheats at yesterday’s OPEC meeting — the countries that hadn’t fully reduced oil output in May as agreed — and extracted promises that they would compensate with even deeper reductions in the third quarter. Now the kingdom faces the group’s perennial problem of enforcing those promises.

The meetings of the Organization of Petroleum Exporting Countries and the bigger OPEC+ group, which includes Russia and nine other countries, were the shortest and least controversial since the latter collective was formed in 2016. It’s not that there was no drama; it just all took place in the days before the virtual gatherings.

The drama centered around the failure of key countries to make all the output cuts they had promised when the group met by videoconference the previous month. Of the 20 countries participating in that deal, 19 agreed to reduce their production by 23% from agreed-upon baselines. Only Mexico held out, and eventually the others gave in to its demand for a smaller reduction.

When the May production estimates started coming in, however, it became abundantly clear that several countries hadn’t fulfilled their promises. That’s not unusual — but what followed was.

Saudi Arabia was done turning a blind eye to the cheats. It spent a week threatening and cajoling them. In the end, as well as agreeing to extend current output targets through July, the other countries promised to compensate for the barrels they failed to remove in May, and would fail to cut in June, by making deeper cuts in the third quarter.

Laggards

Several of the OPEC+ countries failed to implement in full the output cuts they agreed to make in May

Source: Bloomberg and Nigeria National Petroleum Corporation

Four countries, in particular, were held to account — Iraq, Nigeria, Angola and Kazakhstan. Iraq and Nigeria have long histories of failing to make the cuts they promised under previous OPEC+ agreements. Angola’s production last year was well below its target, and Kazakhstan met its obligations on average over the period, thanks to maintenance and unexpected outages at its biggest oil fields. But neither cut quite as much as they had pledged last month.

Iraq especially angered the Saudis by admitting that, not only had it failed to meet its obligations in May, but it wouldn’t be able to get output down to its target level until the end of July. On the other hand, Nigeria had insisted that its production numbers were reported incorrectly by the secondary sources that OPEC relies on to monitor production, but its oil minister eventually admitted in an Instagram post that the country had cut production by 216,000 barrels a day — 52% of the reduction it had promised.

All four countries eventually agreed to the principle of making additional compensatory output cuts in the coming months. The real tests will be whether they do, and how Saudi Arabia reacts if they don’t.

Demand Slump

April saw an unprecedented slump in global oil demand, which fell by 24% year on year

Source: Energy Information Administration

Back in March, when Russia refused to accept deeper output cuts championed by Saudi Arabia, the kingdom threatened to bring the whole OPEC+ edifice crashing down, rather than go on without Russia’s full participation. Russia called Riyadh’s bluff, and the Saudis proceeded to boost their oil production to more than 12 million barrels a day in early April — just as the destruction of global oil demand by the Covid-19 pandemic reached its peak.

The kingdom seems to have threatened to do the same again, if it didn’t get its way ahead of Saturday’s meetings. But Iraq and Nigeria learned from Moscow’s mistake — at least well enough to say the right things to appease Saudi Arabia.

Nigeria may be able to meet the new goal, as it will be aided in the task: Maintenance being conducted on at least one of its major offshore oil fields means production will run at reduced rates and shut down completely for several days. Iraq, though, will find it more difficult. In fact, I don’t see any way that it can meet its obligations by the end of September.

Iraq's Pain

Even if the cuts begin to taper in August, Iraq would have to cut output by more than 1.3 million barrels a day from its April level

Source: Bloomberg calculations

Note: Cuts are measured from April production level. Cuts required to meet Iraq's target are assumed to reduce from 929,000 barrels a day to 717,000 barrels from August, assuming a one-month extension of current targets

Assuming its production falls steadily between now and the end of July to reach its target level, Iraq would still have to reduce output in August and September by more than 1.3 million barrels a day from what it pumped in April — taking production down to a level not seen in six years. That is going to be a very tough sell for the newly installed government in Baghdad.

OPEC and OPEC+ only have more promises from those countries to make deeper cuts. The organizations have no mechanisms to enforce them.

But after the disastrous meetings in March and April, Saudi Arabia looked strong in the run-up to Saturday’s gathering, holding Iraq and Nigeria to account. Maybe those countries will find a way to do what they’ve promised. But even if they don’t, it might not matter so much. Because by demanding extra cuts and getting promises that they will come, the Saudi oil minister has sent a warning to other would-be backsliders: They, too, will be called out if they fall short.

Plus, the oil market could look very different by July. Brent crude is already above $40 a barrel, demand is slowly recovering and supply has been reduced significantly. They may be able to meet their promises simply by maintaining cuts while others slowly increase output.

For now, Saudi Arabia has shown that it can exercise a degree of authority over the other OPEC members and instill some discipline, or promises of it. Even that is a big step toward restoring credibility to OPEC and OPEC+ after a couple of bruising meetings earlier this year.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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Russia and SA are in agreement, so for now the oil war is over.  Oil prices will be going up!!!  Is this another sign of the coming RV.  To quote a VP Presidential Canditate from 2008, “ You Betcha”..  Anytime oil goes up it should be good for Iraq and their Budget/Economy.  

 

WTI and Brent are both up in futures.  I will probably be DT’ing some of my favorite oil stocks tomorrow.   CVX, EOG, PXD, FANG, XOM,  but I’m thinking it will be throw a dart anything will work.  (If they pop us pre market wait for a pull back before you try and enter).

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