Friday, May 29, 2020

China Scoops Up Cheap Nigerian Oil

Nigerian National Petroleum Corporation (NNPC) Vector Logo

The submersion of East Asian markets into coronavirus-induced recession has pulled down several major oil producers, most notably Nigeria whose breakeven price is well above $100 per barrel (Fitch puts it at $144 per barrel). Depending on its crude production for 60% of government revenue, Nigeria was confronted with a double whammy of falling oil prices and general economic decline – to the extent that Lagos has applied for some 7 billion in SARS-COV-2-related emergency funds provided by the IMF and the World Bank. Nigeria’s credit ratings were downgraded by both S&P and Fitch (Moody’s kept the negative outlook without downgrading) and things seemed as if the most populous country in Africa might be in for some serious trouble.

Part of the anxiety was due to the fact that Nigeria agreed to participate in the unprecedented Russia-Saudi Arabia-United States crude production curtailment and vowed to drop output levels by some 300kbpd to an overall level of 1.4mbpd (do not be confused by the ostensibly higher level of crude exports, Nigerian condensates are out of the question and will remain left out from the deal itself). The Nigerian Oil Ministry even went as far as to say that they expect 2.8 billion in additional revenue from being part of the OPEC+ deal. Initially, however, whilst Nigeria’s commitment to the deal entirely laudable, it seemed as if OPEC+ was removing only a fraction of barrels that entered the market.

Graph 1. Nigeria’s Crude Exports in 2017-2020 (in million barrels per day).

Source: Thomson Reuters.

Now Nigeria can finally let off a brief sigh of relief as the return of China has boosted both export prospects and grade differentials. Led by Saudi Arabia, leading Middle Eastern producers engaged in a hypercompetitive price war and despite most of West African crudes remaining one of the most optimal sources for IMO 2020-compliant products, Nigerian crudes struggled to reach their traditional market outlets in Asia. The intense price pressure has rendered West African remarkably attractive after it drove them to multi-year lows – even IMO 2020 favorites like the Equitorial-Guinean Zafiro or Chadian Doba went as low as -7 against Dated Brent, not to speak of the manifold light sweet grades West Africa wields. 

Chinese buyers would generally buy only 1-2 cargoes from Nigeria yet boosted by the economic profitability of West African countries in April there were 4 vessels sailing off for China and the May 2020 tally went even further to a whopping 7 cargoes, totaling 9 MMbbls. Interestingly, both April and May witnessed an Egina cargo loading for China, despite it being a staple diet of Northwest European refiners. This reconfiguration of the usual state of things (albeit temporary) is partially due to the fact that Indian demand, routinely the largest magnet for Nigerian grades, has subsided somewhat as the SARS-COV-2-induced lockdown took place there with a delay of several months. All this means that Nigerian cargoes arriving to China this June will mark the highest-ever level, whilst West African exports to China will be the highest since November 2018. Related: Will There Be Another Oil Price War?

As impressive as the Nigerian export surge to China seems, it would not have happened without extremely depressed grade differentials. The combination of Middle Eastern producers cutting OSPs and the coronavirus demand slump has elicited an unprecedented drop in Nigerian differentials – from March to April (the OSPs are usually published around the 15th of the preceding months) almost every single grade has witnessed a $4-5 per barrel month-on-month decline. Moreover, differentials were plummeting even harder in terms of real market prices (since OSPs play a largely indicative role) – after most flagship Nigerian grades moved to discounts against Dated Brent in March, it took them more than a month to bottom out in the $-7/-9 per barrel interval to Dated.

Graph 2. West African Crude Exports to China in 2018-2020 (in million barrels per day).

Source: Thomson Reuters.

The official selling prices of Nigerian grades present a fairly truthful picture of their current pricing levels. If the OSPs of light sweet, predominantly IMO 2020-compliant, Nigerian grades drop in May 2020 to $-3 or even $-4 per barrel against Dated Brent, the lowest ever recorded, then surely something is not right. Yet as the June OSPs start to transpire one can see that a bounce back of differentials is already taking place, Nigeria’s flagship export streams like Bonny Light or Qua Iboe are both assessed at $-1.05 per barrel to Dated, with the rest moving even stronger towards a flat Brent assessment. As Europe comes back from a multi-month lockdown season, it will rediscover its appetite for West African crudes, hence the probability of the Nigerian export surge to China becoming a long-term trend (especially with the strengthening diffs) is shrinking. 

Graph 3. Nigerian Official Selling Prices in 2017-2020 (against Dated Brent).

Source: NNPC.

Nigeria’s way forward will not be easy – its exports possibilities will be subdued for a couple of months by its participation in OPEC+, all its differentials will not go back to pre-corona territory that easily. This will be especially true of high-gasoline-yield very light grades, whilst grades with a more balanced mid-distillate yield should become the best performers of this summer. Nigerian exporters would also need to keep in mind the risk of increased competition – to name just one example, the Indian refiner IOC has awarded in a recent purchase tender in May to the American WTI although almost everyone expected it to buy Nigerian.

By Viktor Katona for

Thursday, May 28, 2020

U.S. takes aim at the power behind Venezuela’s Maduro: his first lady

HAPPY UNION: Maduro and Flores formed a political and private partnership when they both advised an ascendant Hugo Chávez. Maduro would wink at Flores in early meetings, drawn by her “fiery character.” REUTERS/Handout/Venezuelan presidency

First lady Cilia Flores has a long record as a power broker in Venezuela. Now, with the help of a jailed former bodyguard, U.S. prosecutors are preparing to charge her with crimes that could include drug trafficking and corruption.

CARACAS/WASHINGTON – Four years ago, a bit player in the Venezuelan leadership was arrested in Colombia and extradited to the United States to face drug charges. He proved to be an important catch.

The man, Yazenky Lamas, worked as a bodyguard for the person widely considered the power behind President Nicolás Maduro’s throne: first lady Cilia Flores. 

Now, with help from Lamas’ testimony, the United States is preparing to charge Flores in coming months with crimes that could include drug trafficking and corruption, four people familiar with the investigation of the first lady told Reuters. If Washington goes ahead with an indictment, these people said, the charges are likely to stem, at least in part, from a thwarted cocaine transaction that has already landed two of Flores’ nephews in a Florida penitentiary.

Nicole Navas, a spokeswoman for the U.S. Department of Justice, declined to comment on any possible charges against Flores. Flores and her office at the National Assembly didn’t respond to questions for this article. Jorge Rodríguez, Venezuela’s information minister, told Reuters in a text message that its questions about the possible U.S. indictment of Flores were “nauseating, slanderous and offensive.” He didn’t elaborate.

In a series of interviews with Reuters, the first Lamas has given since his arrest, the former bodyguard said Flores was aware of the coke-trafficking racket for which her two nephews were convicted by a U.S. court. Flores also used her privileged position, he said, to reward family members with prominent and well-paid positions in government, a claim of nepotism backed by others interviewed for this article. 

Speaking behind reinforced glass at the prison in Washington, D.C., where he is detained, Lamas told Reuters he is speaking out against Flores because he feels abandoned by the Maduro administration, still ensconced in power even though many of its central figures, including the president, have also been accused of crimes. “I feel betrayed by them,” he told Reuters. 

In late March, U.S. prosecutors indicted Maduro and over a dozen current and former Venezuelan officials on charges of narco-terrorism and drug smuggling. Maduro, now in his eighth year as Venezuela’s president, for years sought to flood the U.S. with cocaine, prosecutors alleged, seeking to weaken American society and bolster his position and wealth.

Maduro’s office didn’t respond to requests for comment. In a televised speech after the indictments, he dismissed the charges against him and his colleagues as a politically motivated fabrication by the administration of U.S. President Donald Trump. “You are a miserable person, Donald Trump,” he said. 

The March indictments and the possible charges against Flores come amid a fresh campaign by Washington to increase pressure on Maduro. His enduring grip on power, some U.S. officials say, is a source of frustration for Trump.

Starting in 2017, the U.S. Treasury Department sanctioned the Socialist leader along with his wife and other members of the Maduro “inner circle.” The swipe at Flores enraged Maduro. “If you want to attack me, attack me,” he said in a televised speech at the time. “But don’t mess with Cilia, don’t mess with the family.”

Leveraging the economic fallout from the coronavirus crisis in Venezuela, the White House now hopes it can topple a leader who has weathered years of tightening economic sanctions, civil unrest and international isolation.

Washington has accused Maduro and his circle of looting Venezuela of billions of dollars. But it’s unclear how much personal wealth he and Flores possess. Neither the president nor the first lady disclose income statements, tax returns or other documents pertaining to their personal finances. After U.S. prosecutors charged Maduro, the Justice Department said it had seized more than $1 billion in assets belonging to dozens of defendants connected to the case. The charges didn’t detail those assets or specify who holds them. 

Flores is a longtime strategist and kingmaker in the ruling Socialist party. She first gained prominence as a lawmaker and confidante of the late Hugo Chávez, Maduro’s predecessor and mentor. She doesn’t hold an official role in Maduro’s cabinet. Still, the probe against her underscores the vast influence she wields, particularly in helping Maduro outmaneuver rivals inside and outside Venezuela.  
In addition to Lamas, Reuters interviewed more than 20 people close to and familiar with Flores. They portray her as a shrewd and stealthy politician who now brandishes much of the power of her husband’s office, demanding important briefings even before the president and personally negotiating with foreign emissaries, rival lawmakers and others.

When the opposition-led National Assembly tried to oust Maduro last year, Flores ordered security officials to deliver intelligence on the matter directly to her, according to Manuel Cristopher Figuera, the head of the country’s intelligence agency then. Figuera was one of a handful of senior Venezuelan officials who at the time considered trying to negotiate an exit from power by Maduro with the United States. Figuera fled Venezuela when the effort failed. 

“Flores has always been behind the curtain, pulling the strings,” Figuera told Reuters.

Flores has sought personal concessions in recent years in negotiations with the United States. According to five people familiar with the discussions, Flores instructed intermediaries to ask U.S. envoys for liberty for her jailed nephews. In exchange, these intermediaries said Venezuela would release six imprisoned executives of Citgo Petroleum Corp, the U.S. refining unit of Venezuela’s state-run oil company. The executives, arrested by Venezuela in 2017 and charged with embezzlement, are widely considered by human rights activists and many in the business community to be political prisoners. 

That overture, reported here for the first time, failed.

But Washington knows Flores’ clout. “She is probably the most influential figure other than Maduro,” Fernando Cutz, a senior White House adviser on Latin America during Trump’s first year in office, told Reuters.

Earlier this year, according to people with knowledge of her efforts, Flores personally pressed crucial opposition lawmakers to support a Maduro ally to head the National Assembly, until then considered the last independent government institution in the country. As Reuters reported in March, people familiar with lobbying of the lawmakers say ruling party operatives paid bribes to rivals who switched sides. Reuters couldn’t determine whether Flores played any role in such payments.

Little is known about the first lady outside Venezuela, particularly the extent of her role in Maduro’s government and her dealings that help it survive. In their first interrogation of Lamas after his arrest in Colombia, U.S. Drug Enforcement Administration agents had one request, he recalled: “Tell us about Cilia Flores,” they said.

Michael D. Miller, a DEA spokesman, referred questions regarding the case to the Justice Department. 

Lamas, now 40, spent over a decade guarding Flores – first when she was a lawmaker and headed the National Assembly, later when she became first lady. After his extradition in 2017, Lamas agreed to a plea deal with U.S. prosecutors, according to a confidential Justice Department document reviewed by Reuters. The agreement hasn’t been previously reported.

In the plea deal, Lamas admitted to charges of drug trafficking and agreed to cooperate as a witness in investigations related to his case. The Colombian court order that approved his extradition, also reviewed by Reuters, said Lamas conspired to ship cocaine from Venezuela on U.S.-registered aircraft. Neither the Colombian court order nor the Justice Department document mention Flores, Maduro or others in the family. 

Because of the terms of the plea agreement – he said he is still awaiting sentencing and continues to testify in related investigations – Lamas declined to discuss specifics about the case against him. His lawyer in Washington, Carmen Hernandez, also declined to comment. 

The information he is providing investigators, including details on Flores’ alleged role in the drug-trafficking plan by her nephews, is deemed credible by U.S. authorities, according to people familiar with the probes. Mike Vigil, a former DEA chief of international operations, told Reuters the DEA gives “high significance” to Lamas’ testimony. 

“Revolutionary calling” 

Flores was born October 15, 1956, in Tinaquillo, a small city in northwestern Venezuela. The youngest of six siblings, she lived in a mud-brick shack with a dirt floor, locals recall. Her father was a salesman, traveling to nearby towns to hawk sundry goods. While still a child, she and her family moved to Caracas, Venezuela’s capital. 

A good pupil, Flores enrolled in a private university and studied criminal law. There, she met Maikel Moreno, a lifelong friend and a lawyer she would eventually help become Venezuela’s chief justice. Moreno, a Maduro ally and a controversial figure in his own right, was one of those indicted by Washington last March. Moreno didn’t respond to requests for comment; in a tweet, he denounced Washington for trying to “hijack Venezuelan justice.”

As a student, Flores showed little interest in politics, according to people who knew her. She worked part-time at a police station, transcribing statements from witnesses, and married a longtime boyfriend, a police detective, with whom she had three boys. Upon earning her law degree, she worked for most of the next decade as a defense attorney for a private firm.

In 1989, a fuel hike sparked riots that shook Caracas and awakened in Flores what she later described to state television as a “revolutionary calling.” Hundreds of protesters, angry with corruption and widening inequality in the oil-producing country, died in clashes with security forces.

The event, known as the Caracazo – roughly, the big Caracas awakening – also inspired Chávez. As inflation, food shortages and other hardships worsened, Chávez, an Army lieutenant colonel, in 1992 staged a failed coup. He was arrested and jailed at a military barracks. 

Flores discovered a hero. She took to spraypainting Chávez’s name around Caracas. “I saw him in that moment as I would in the 20 years I spent near him,” she later told state television. “Authentic.”

She sent Chávez a letter offering to aid his defense. He accepted. Soon she was counseling Chávez and helping him answer letters from thousands of supporters.
On one early visit, she met a Caracas union leader who was also advising Chávez: Maduro. In a televised speech years later, Maduro said he was drawn to her “fiery character.” He began to wink at her, he said.
As it happened, both were divorcing their spouses. They began dating and eventually became a couple. “We shared the same dreams,” Flores later told state television.

In 1994, Chávez received a presidential pardon. Flores and other advisors suggested he reinvent himself as a civilian and rally support with promises to empower the poor. By 1997, Flores was part of the campaign committee that would secure Chávez’s election the next year as president. Maduro was elected as a legislator.

Wednesday, May 27, 2020

Oil on Floating Storage Soars to Record Highs, But Peak Still Some Way Off

Floating storage already in excess of 180 mil barrels. Freight rates stay elevated as storage tightens spot tonnage. Inland storage crisis may have been averted but demand still in doldrums.

Oil on floating storage is now at its highest level in the history of the oil market and despite modest signs of a demand recovery, industry sources and analysts say the peak for these volumes is still some way off.

There are some signs that oil is starting to improve based on global road traffic and congestion data as travel restrictions start to ease. But looking at the amount of oil on water on a real time ship tracking platform, there are many signs that the imbalance of supply and demand remains very skewed.

There are currently more than 200 million barrels of oil and products on floating storage, representing around 5% of global carrying capacity, according to data from S&P Global Platts trade flow software cFlow.

Around 10-20% of the global tanker fleet represents a reasonable ceiling for floating storage, which would allow the storage of around 400 million-800 million barrels of crude and products, according to Platts Analytics.

Energy research firm Kpler estimates that floating storage volumes were as high at 180 million barrels for the week beginning May 11, making it the largest ever volumes for oil on floating storage.
This is a rise of almost 95% in the past two months, as data showed that floating volumes of crude and oil products were as high as 92.09 mill barrels for the week beginning March 9. The data includes volume of commodities on tankers that are idled offshore for seven days or more.

“Floating volumes are likely to keep going up in the next few months as many vessels that were recently fixed on floating storage are still sailing to their destinations or in some cases have not been loaded,” Erik Broekhuizen, head of Tanker Research & Consulting at Poten & Partners, said recently during a webinar.

But there are some signs that oil on water is beginning to decline as production cuts from OPEC+ along with involuntary production cuts from the US, Canada, Brazil and Norway start to come into play.

Oil on water, which includes the total volume of crude and products on tankers, was estimated to be around 1.25 billion barrels for the week beginning May 11, from 1.30 billion barrels the previous week.

Freight Impact

Shipping sources remain skeptical about whether oil on water will start to fall unless demand does start to rise steadily and more production cuts are enacted. And, looking at the tanker market, sources say it could be a long time before any balance is close to being found.

Oil going on water is still set to increase given the overproduction compared to current demand,” said Paul Marsh, research director at Navig8 said during a webinar.

How long it will take to unwind oil from ships is a million dollar-question,” he said. “There are widely diverging views about when this is set to happen, but it will surely take more time to offload storage than it took to build it. This could be anywhere between one and two years, maybe more.

Shipping sources noted that despite a slight fall in crude cargo inquiries, freight rates for VLCC and Suezmax tankers had found some support from time charter bookings

With so many tankers booked on time charter, the tonnage list on the spot market has tightening considerably, pushing up freight. “New ships are being booked on time charter given the overproduction, although the rate has slowed“, a shipbroker said.

He said demand for West African crude still remained particularly lackluster. “The spot market is looking bleak in the long term given the low demand,” he said. “We are seeing a number of cargoes unsold in June, which would mean more vessels would go on storage.

During the floating storage rush at the end of March, time charter bookings for short periods of around six months were estimated at around $120,000/day for VLCCs, and periods up to one year at around $85,000/day.

Ship owners are continuing to ask for expensive rates despite weaker spot market. This week, VLCC daily earnings for spot fixtures were estimated at around $55,000/day, according to Marsh.

Pace of Recovery

Production cuts from OPEC and its allies came into place this month and with hefty involuntary shut-ins from producers in the US, Canada, Brazil and Norway, supply is beginning to fall.

But demand remains in the doldrums and despite slight improvements, the fundamentals remain far from ideal. The International Energy Agency continued to call on oil producers to do more to contain the impact of the coronavirus on the oil markets.

Demand will not jump from one day back to levels we had before the crisis and we still have a huge amount of surplus and plus a lot of floating oil around the world, so therefore one needs to be very careful if one doesn’t want to change,” the IEA’s executive director Fatih Birol said during a webinar.  

Platts Analytics said the fall in production so far this month had helped to avert an inland storage crisis and that $25-30/b was a fair value for Dated Brent for the coming months.

The current supply losses, OPEC’s determination, and trend towards opening up point to stronger oil prices than we believed earlier,” it said in a note. “[But] we are not overly bullish as much anxiety persists, particularly around demand and the impact of opening up from lockdowns on the infection rate.

Amount of Stored Oil Expected to Peak in 2nd Quarter, EIA Says

The amount of crude oil in storage tanks is expected to peak in the second quarter, before demand significantly increases around the world.

Storage tanks around the world added 6.6 million barrels of oil per day during the first quarter, but that accelerated to 11.5 million barrels per day in the second quarter as shutdown orders related to the coronavirus pandemic stunted travel and economic activity, the U.S. Energy Information Administration said Tuesday.

Those shutdown orders are expected to ease around the world during summer, boosting demand and oil prices, the EIA said.

Starting in the third quarter, the EIA said, global consumption of crude oil, gasoline, diesel, jet fuel and other products will increase for at least six consecutive quarters — reducing inventories and raising prices. The price of U.S. oil was just above $30 on Tuesday.

Global consumption of oil, gasoline and other related products is expected to average 92.6 million barrels per day in May, an 8 percent decrease from 100.7 barrels per day during the same time period last year, the EIA reported.

Economic growth and global consumption of crude oil and other fuels is expected to increase in 2021 but remain lower than 2019 levels, the agency said.

Tuesday, May 26, 2020

A new oil price war is just a few dollars per barrel away

The oil market has had a month of significant recovery. Since the historic cuts by Saudi Arabia and Russia took hold, and the US shale industry began to contract, crude prices have jumped around 70 percent and seem to have established a “floor” at $30 a barrel and a trading range of around $35.

That is nowhere near enough for oil-producing states that count on energy revenue to fund their budgets, but it is a move in the right direction after the carnage of “Black Monday.” It shows that the oil market can be at least partly regulated by supply actors, even in the midst of the most savage demand destruction in history because of global economic lockdowns.

The recovery was mainly due to signs that the energy-guzzling economies of East Asia — principally China, Japan and South Korea — were resuming economic activity at a faster-than-anticipated rate, and also the realization that “tank top” — exhaustion of the world’s storage capacity — was not going to happen.

The big storage facility at Cushing, Oklahoma, was never at serious risk of breaching capacity, and demand for expensive floating storage is declining.

There is still a lot that could go wrong like a serious second wave of coronavirus or a complete rupture in trade relations between the US and China but, barring these, the outlook for oil is better than you might have reasonably expected a month ago. Analysts are looking at an average of around $35 this year and perhaps more than $50 in 2021.

A lot is riding on the OPEC+ deal led by Saudi Arabia and Russia. This will be the subject of talks at the OPEC meeting next month, when participants will have to decide whether to reduce the level of cuts from 23 percent to 18 percent of output. There is a considerable body of opinion within the organization that the 23 percent level should be adhered to for an extended period. Saudi Arabia has already gone even further than that, with an extra one million barrels per day reduction, backed by other Gulf producers.The other significant variable in the OPEC equation is the level of compliance with the cuts. Russia, which has long argued that big cuts were impossible for its oil business because of geological and climatic reasons, appears to have found a way around those challenges.

For Iraq, Nigeria and Libya, the financial situation is dire enough to distract them from the precise terms of the OPEC+ deal and maybe tempt them to sell as much as possible while prices hold.

But the big imponderable is in US shale. On all the indicators — well shut-ins, fall in rig count, job losses and bankruptcies — the past month has been savage, especially in the Texas heartland of the industry, as the price of West Texas Intermediate fell through the floor.

Rising prices change the economics again. Not many shale operators are viable at $30, but as the price creeps upward it makes sense for them to start thinking of pumping again. Upward of $40, there could be a renewed surge in shale production.

This would drop a spanner in the works of the global industry. It would make no sense at all for Saudi Arabia to continue with its market-changing cuts, which are exacting a big price in terms of lost revenue, if the US was swamping the world with oil again. The battle for market share — with the Kingdom turning the pumps full throttle again — would be back on.

We’re not there yet by any means. Much depends on whether President Donald Trump’s administration adds the oil industry to its list of sectors needing support in the big pandemic support package struggling through Congress. The Democrats don’t like that idea but, in an election year and with promises of environmental concessions by Big Oil, they might be persuaded.

Even as the oil industry congratulates itself on its policy response to the pandemic, it has to be aware that a new oil price war is just a few dollars per barrel away.

• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai

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

Friday, May 22, 2020

Majority of marine fuel buyers anticipate price rises, but limited risk management in place


Despite recent low bunker prices a significant proportion of marine fuel buyers still do not have any risk management strategies in place to mitigate anticipated price rises. 
Two thirds of LQM Petroleum Services clients polled in a webinar last week (12 May) thought that marine fuel prices would rise in the next 12 months. But at the same time, only half the participants said that they currently use risk management strategies to mitigate this risk.
“This trend reflects the wider industry’s understanding of the tools available to manage bunker price volatility,” said LQM Chief Executive Daniel Rose. “But we were encouraged by the fact that three quarters of participants on our call stated that they would be interested in locking in today’s low prices.” 
LQM Petroleum Services is a hybrid bunker broker and trader which protects itself from energy price changes by entering into fuel oil swap agreements. 
“We fully understand the reluctance by some owners and charterers to enter into the fuel oil futures market: it’s an area which leaves some overwhelmed and those with relatively small clip sizes feeling overlooked,” said Daniel Rose. “But we’re in the unique position of being both a broker and experienced trader. We can guide potential participants through the entire process and help clients manage their specific hedging needs.” 
He noted that the fuel swaps market has independent credible benchmark pricing, robust clearing solutions and good liquidity. These are the fundamentals for a successful futures market,” he said.
Opinions as to the duration of the current market volatility were less clear-cut. 21% of the webinar participants thought that current conditions would continue only for the next three months; 32% thought between three and six months whilst 36% felt that six to 12 months a more likely scenario.
Several shipowners, charterers and traders attended the webinar and responded to the poll.

Thursday, May 21, 2020

Crisis Talk — with Christophe Salmon, CFO of Trafigura, on hedging oil’s biggest crash

Trafigura Christophe Salmon 

Christophe Salmon
Group Chief Financial Officer

As a crucial middleman in the oil business, Trafigura has had to cope with concerns about the creditworthiness of some of its counterparts, and unprecedented volatility in the oil price that saw the West Texas Intermediate (WTI) contract turn negative at the end of April. Christophe Salmon, the company’s chief financial officer, explained how the company has coped with the crisis, and how its funding approach, based on deep banking relationships and a secured financing structure, proved resilient to the chaos around it.

When did you realise how serious the crisis would be?

Let’s not forget that the virus crisis started in China much earlier than March 2020, when it reached Europe.

We have a strong presence all around the globe, and we could already see in January the impact of the virus. Our directly employed staff in China went off for Chinese New Year and did not come back to the office for more than a month.

With our team of analysts we saw, probably a bit earlier than others, that the virus issue in China was having a huge impact on the economy and was more serious than was realised in Europe. This gave us more time to think and to assess the consequences of the virus for the types of commodities we trade.

What were the main challenges for Trafigura?

The first challenge was, at a basic level, to make sure the company continued to run as a business. We are not an investment firm, we are trading physical commodities, moving goods from point A to point B, and that requires a lot of manpower in chartering ships, managing the finance, contracts and so on.

We needed to continue to run our business without impairing our risk management framework, and we can say now, two months into the lockdowns in India and Europe, that it is mission accomplished in that respect. It was a big effort from our business continuity teams — in our back office in India, for example, we had to make sure everyone had sufficient bandwidth to be able to connect directly into our systems and to maintain the integrity of our information technology.

The second challenge, though, was responding to the rapidly changing market conditions.

The commodity that has seen an extraordinary level of volatility has been oil. We have seen the oil price crashing with this combination of a shock in demand and a shock in supply. Opec+ turning on the taps to the market at the same time as global demand was crashing drove the price down very significantly. We have since seen a big effort from Opec+ to reduce supply, but then prices began to collapse again because everyone could see that the effort to contain supply was not at the level of the demand destruction.

All these changes in the space of perhaps eight weeks amounted to something that had never been seen before, and we reached the extreme point of the April maturity of the Nymex WTI contract turning negative one day before the maturity date.

Our job as a commodities trader is to balance physical supply and demand. This shock in demand has triggered a huge need for the market to absorb excess supply and to place this excess supply into storage. Companies like Trafigura and a few of our competitors have stored very significant volumes of crude oil all around the globe to respond to this shock.

The market has gone deeply into contango, and is incentivising physical players to store and sell oil on a forward basis, with the price difference covering the storage costs, and allowing companies engaged in this “cash and carry” strategy to profit.

Companies like Trafigura and a few other peers have done very well in this period by being able to absorb the shock.

How does that storage trade and the volatility in oil affect your funding?

Trafigura does not take any speculative position on outright commodity price. We are never long or short on the commodity we trade, we always hedge our market risk position on the flat price.

Practically speaking, if you have a quantity of crude oil which isn’t sold, we have a reverse derivative position on Nymex or ICE, which fully mitigates and balances any drop in the cash price of the physical leg.

A commodity trading firm is naturally long physical and short derivatives — when the oil price collapses, the derivatives market will transfer to you a lot of margin. So when the oil price collapsed, we received a lot of money back from the exchange. With this cash, we adjusted the loan-to-value of the inventories with our banks.

We have structured our financing so that banks finance the mark-to-market value of the inventory, with the mark performed typically every week.

So when the price goes down, we receive our margin first and we pay that to the banks over the week. It’s always easier when you receive the cash first, and you use the cash to amortise or adjust the value of your financing against the physical inventory.

When the market goes up, the process goes in reverse — we have to pay up front to meet a margin call on the derivatives, and get the money back from the banks the following week when the banks adjust their funding to the increased value of the inventory.

A physical commodity that’s properly hedged, properly insured and managed from an operational perspective can be seen as quasi-cash — that’s why the banks are comfortable financing 100% of it.

A second point, and probably a reason we had an easier life than others in the recent volatility, is that we need to deploy less working capital to finance the same volume of oil. A cargo of oil that was worth $70m in January, is now worth $30m — the same molecules, same crude oil but the value has more than halved.

The main pillar of Trafigura’s funding is to grant security to its banks over the inventories that the banks are financing — and that is the most robust type of funding you can have in place, because banks adjust their funding volumes based on the same value that drives your funding needs.

During these crises, a company like Trafigura always has a low level of utilisation of its credit lines — during the whole of the crisis in March and April we were able to maintain a significant liquidity position and low utilisation, because of the drop in commodities prices.

They say there’s no such thing as a perfect hedge — did that matter for you?

What we have left in our business is basis risk, due to the difference in correlation between the derivative contracts and the physical commodities we trade.

Sometimes the correlation between the hedging instrument and the commodity is not perfect. In the context of the Covid-19 crisis and the high level of volatility, we have seen an increase in our value-at-risk, but our VaR was kept at below 1% of our group equity.

Value-at-risk is there, but it’s an amount that’s small in the grand scheme of things.

How about counterparty risk?

We were doing well in this period, but some of our business counterparties were not — the airline companies, for instance, and some other big energy users.

So we have worked very carefully through our credit department and commercial division to make sure counterparty or performance risk was properly understood and properly measured and mitigated.
Two or three months after the beginning of the crisis, we have not had material issues in this period with counterparty risk. One can say that it is a matter of time. The conditions of our counterparties really depend on how long the virus crisis lasts — are we out for another one month, three months or six months? There is only so much pain that certain industries can sustain. We are, however, confident that the end of the lockdown, combined with significant stimulus from public policies, are limiting the downside for the global economy.

In the normal course of business, we try to mitigate risks as much as we can — we are very significant users of all the credit risk mitigants, you can imagine. CDS not so much, though, because the companies where the CDS market is available are only a tiny portion of the client base.

But we are very significant users of bank letters of credit, or silent payment guarantees from banks, and of insurance. Trafigura is a significant buyer of credit insurance in the Lloyds market in London.

In this crisis, we have tried to be proactive, and to mitigate the credit risk we have to take, and to decrease it. We have put more emphasis on getting down-payments from our clients, or having a letter of credit covering our next shipment.

How about your long-term funding approach?

Today, most of our funding comes from banks. Capital markets funding represents under 10% of our funding needs.

The benefit of this funding mix is that you can put a face to a name. For me, it is not “Bank XYZ”, it’s “Mr ABC”, where we have had a relationship lasting for years.

Especially during crisis times, the debt capital markets can be very volatile and very sentiment-driven. With banks, you have a person or a group of expert people to talk to, which in a stressful environment can be a much more reliable partner.

So we have no intention of changing this funding approach.

We have around 135 banks in our group, as one of our core principles in funding has been diversification. Each of these banks has their competitive edge — some banks are funding transactions in South America that others cannot because they don’t have any regional expertise. Some banks have expertise in the financing of metals in sub-Saharan Africa, and the others have not.
We try to find the right match between our needs and the bank’s expertise — that’s why we have so many banks around the world.

But we do have a core group of around 20 banks, which have a billion dollars or more of mainly secured self-liquidating facilities out to Trafigura, with whom we have an even more privileged relationship, even more of a partnership approach.

How did your banking group respond to the crisis?

Especially since the end of March, we have seen the cost of funds increase for some of these banks. The banks have seen huge drawdowns on corporate revolvers, mainly in dollars, and the non-US banks have seen an increase in their cost of funds to access dollars from their original currency through the cross-currency markets.

For a short period of time, perhaps two to three weeks, we saw a significant increase in cost of funds, which basically offset the drop in the Libor rate. The net effect for us was almost a flat price.

But the increased cost of funds for the banks was temporary — the mechanisms of the central banks to inject liquidity to banks and to the debt capital markets meant the funding pressure subsided. But there was a lag between the announcements and the execution.

Since the second half of April and [in the first half of] May, things have more or less come back to normal.

What about the issues we have seen with bankruptcies in commodity trading?

When these price movements occur, that is when you see a number of badly managed companies going under in our sector.

So companies that are either speculating, or lack the proper risk management frameworks, get into trouble. We have seen a number of bankruptcies of smaller regional players, especially in southeast Asia, and this has put a lot of strain on the banks, who will have to provide for these losses.

But they are looking to the large players like Trafigura as a kind of flight to quality. We have seen a stress on the bank side, not targeted at the leaders of the sector, but at the medium-sized regional players, who may have more difficulty accessing funding.

We expect an acceleration of the consolidation of the sector around the big players, but also an acceleration of the development of solutions such as blockchain in trade finance — we are working with the government of Singapore, the International Chamber of Commerce and a few banking partners on a blockchain solution to secure transaction and save cost.

Have your securitization programmes been affected?

We have a significant trade receivables securitization programme, which has been going for 16 years, and so it has been through a number of different economic cycles. To date there have been no defaults under these programmes — the fact that we deal with a commodity which is essential to our counterparts has been a good mitigant.

During the course of March and April, we have put in place additional credit monitoring for some of these obligors in the programme.

But we are a long-term player in our sectors, so our business counterparts which are here today will be there tomorrow — sometimes with a different shape, but they will be there.

So we wanted to make sure that we act in partnership with our end buyers. In a number of cases, that meant we had requests from some clients for deferred payment. In each case, we have had a very bespoke approach, depending on our analysis of the credit situation of the client, and the quality of the long-term relationship.

This was going on through March and April, but since the end of April we have not seen any new requests for payment deferrals — an acknowledgement that our clients have absorbed the shock, or found ways to monitor and manage their liquidity in an appropriate fashion.

What do you expect for the future of the oil industry, given recent market conditions?

What is likely to happen is a combination of bankruptcies in the exploration and production sector, and, as a consequence, mergers and acquisitions.

The last time when prices really went to the rock bottom — when Brent was at $12 and WTI at $11 — was in the late 1990s. During these years you had major consolidation. Total bought Elf and Fina, Chevron bought Texaco, same thing with Exxon Mobil.

Any period where there is a significant decrease in oil prices, you have M&A.

The big event of the past few years is the very rapid development of the US shale oil and gas production. Now, the production of US, Saudi Arabia and Russia are almost at the same level.

In the US, this is not one single company, it is multiple companies, and especially in the shale industry, you have multiple very small companies.

Some are going to go bankrupt and will be merged into bigger companies — probably some of the US oil majors will take the opportunity to consolidate the E&P sector.

How has Trafigura’s status as an unrated, private company changed how the crisis has affected you?

More than just being private, we are a partnership. Trafigura is an association of key partners — 700 people out of the 8,000 members of staff at Trafigura are shareholders in the business, and, when you think about it, this is the best system for alignment between management and shareholders. We think this is a key recipe of success.

Having said that, being private doesn’t mean opaque — we publicly release our financials twice a year, and the quality of our financials is the same as for listed companies.

The second point — we do not have a public rating, and we like to keep it that way. We have an implicit low investment grade rating, and that is what our core banks see in their internal models. We like to keep it that way because, at the end of the day, we are extracting most of our funding from banks which understand our business model rather than making credit decisions on the basis of a third party rating.

In addition, holding a rating could cause Trafigura to take more short-term-focused decisions in order to maintain a particular rating level, which would conflict with the group focus on long-term value creation.
By Owen Sanderson / 13 May 2020

Wednesday, May 20, 2020

OPEC+ Deal Could Collapse As Oil Prices Shoot Up

The OPEC+ coalition appears determined to ease the global oil glut and lift the oil prices that had cratered in April because of OPEC+ wrangling and crashing global demand in the pandemic.

Oil prices have rallied since the start of the new OPEC+ cuts. These cuts, along with curtailments in North America, have combined with improved global oil demand and the new notion that the worst of the demand collapse is likely behind us, to instill confidence in the market that it is now heading for a deficit.

The more bullish sentiment, however, raises another question—will producers be tempted by rising crude oil prices to disregard quotas within OPEC+? Will U.S. shale resume drilling activity sooner than the market needs it?

OPEC and its partners in the pact realized early last month that they had underestimated what turned out to be a devastating impact of COVID-19 on global demand. With oil revenues for petro states crashing as oil demand and oil prices collapsed, OPEC’s leader Saudi Arabia and all other producers in the OPEC+ group soon realized that they need to quickly force the market into balance to save their oil-dependent economies from taking an additional hit on top of the pandemic-related slowdown.

Three weeks into the new OPEC+ deal to cut production, the market sentiment has markedly shifted.

When the pact announced the deal on April 12, analysts were saying that these cuts—albeit 10 percent of typical global demand—would be ‘too little too late’ to save the oil market from the abyss.

Now the mood has improved, and so have oil prices. The price of oil is now 80 percent higher than it was in mid-April, and analysts are pointing out that the cuts from OPEC+, combined with economics-driven curtailments in North America to the tune of 4 million bpd, is bringing the oil market closer to deficit in the coming months.  

Improving global oil demand and faster-than-expected production curtailments from outside the OPEC+ pact are set to push the oil market into deficit in June, Goldman Sachs said last week.

OPEC+--with huge help from North America’s cuts because of unsustainably low oil prices for its producers--managed to swing the market mood to expectations of a deficit as soon as next month. OPEC and its de facto leader and largest producer, Saudi Arabia, have a track record for purposefully tightening the oil market whenever Saudi Arabia and perhaps a few other major oil producers in the cartel have a strong incentive to see higher oil prices, Reuters analyst John Kemp wrote this week.

This spring, the Saudis had the biggest incentive to reverse the flood-them-all-with-oil policy from March and April—money. With oil prices at $20 or below and demand crashing in the pandemic, the world’s top oil exporter had to save face and its economy.

So far, Saudi Arabia, OPEC, and Russia are declaring unwavering support to market stabilization, promising to go the extra mile to rebalance the market—and to see higher oil prices.  

OPEC members and their ten non-OPEC partners have slashed oil exports by a massive 5.96 million bpd for the first 13 days of May compared to April averages, oil-flow tracking company Petro-Logistics said at the end of last week.    
Saudi Arabia has pledged an additional 1 million bpd of cuts on top of its promised cuts as part of the OPEC+ deal. Even Iraq, the biggest cheater in all the previous pacts, said that it is committed to the production cuts.  

Saudi Arabia and the leader of the non-OPEC countries, Russia, put out a statement last week, saying that they “remain firmly committed to achieving the goal of market stability and expediting the rebalancing of the oil market.”

“We would like to especially commend the efforts of responsible producers around the world who have willingly adjusted their production out of a sense of shared responsibility,” Saudi Energy Minister Prince Abdulaziz bin Salman and Russia’s Energy Minister Alexander Novak said.

For U.S. producers, curtailments have nothing to do with “shared responsibility”—the economics are unfavorable, storage availability is still scarce, and demand is still low. The U.S. shale patch has announced more than 1.5 million bpd in cuts for Q2, lifting the oil prices and market sentiment over the past two weeks. But with prices rising, some producers could be tempted to resume activity, nipping a sustained market recovery in the bud.

“Further strength in the oil market would send the wrong signal to producers, with them likely more reluctant to cut output in a rallying market,” ING strategists Warren Patterson and Wenyu Yao said on Wednesday.  

By Tsvetana Paraskova for

Tuesday, May 19, 2020

Belying Oil’s Price Volatility, Cushing Has Always Had Ample Storage Space For U.S. Producers’ Crude

US-ECONOMY-ENERGY-MARKET-OIL AFP via Getty ImagesAn aerial view of a crude oil storage facility is seen on May 5, 2020 in Cushing, Oklahoma. - Using his fleet of drones, Dale Parrish tracks one of the most sensitive data points in the oil world: the amount of crude stored in giant steel tanks in Cushing, Oklahoma. The West Texas Intermediate oil stored in the small town in the midwestern United States is used as a reference price for crude bought and sold by refiners in Asia, hedge funds in London and traders in New York. (Photo by Johannes EISELE / AFP) (Photo by JOHANNES EISELE/AFP via Getty Images)

Cushing is going to fill up!  Cushing is filling up!!!  Of all the hyperbolic, buffoonish comments uttered by talking heads on CNBC and in the financial media, this is the worst.  According to the most recent data provided by the EIA, Cushing has 93.346 million barrels of storage capacity, of which 76.093 million barrels’ worth is classified as working storage.  The EIA’s weekly data showed 65.446 million barrels in storage at Cushing as of May 8th, a figure that declined by 3 million barrels in last week’s data.  So, even at its peak, Cushing was 86.0% full.  Then how could Cushing storage possibly be “running out” with 14% of existing capacity available and more implicitly in reserve?
Cushing has never run out of storage. Cushing never will run out of storage. 

In the past eight years, Cushing’s working storage capacity, as measured by the EIA, has increased 58.5%.  The amount of oil stored at Cushing is more than three times the amount stored there 15 years ago.  America is producing more oil.  America’s midstream companies somehow noticed this trend and have produced more storage tanks in which to store that oil.

But as the contract for West Texas Intermediate crude for June delivery finished its trading life Monday at 2:30 ET quoted at $32.13 per barrel, that does not explain what happened the last time.  Last month’s contract (for May delivery) finished trading on April 21st at $11.57 per barrel, after famously closing at (-$37.63) per barrel on the day prior to expiration. 

It’s all part of a trade.  Last month that trade was “short oil.”  This month the trade became “long oil.”  It’s that simple.  The commodities markets are characterized by wild swings in sentiment and just as wild swings in price.  This is why producers and consumers hedge, and use oil contracts to balance out their natural biases (producers are naturally short and consumers are naturally long.) 

But the headlines in April screamed “oil prices turned negative because there was no place to put it,” when the government’s own figures show there was, in fact, ample space to store oil.  Why?  Well, renting Cushing storage—controlled by big midstream players—is not as easy as renting a U-Haul or as scalable as leasing server space from Amazon AMZN .  As the EIA stated in its April 27th, 2020 Today in Energy publication:

Although EIA data indicate that some storage remains available at Cushing, some of this physically unfilled storage may have already been leased or otherwise committed, limiting the uncommitted storage available for financial contract holders without pre-existing arrangements. In this case, these contract holders would likely have to pay much higher rates to storage operators for any uncommitted space available.  Taken together, these factors suggest that the phenomenon of negative WTI prices is mainly confined to the financial markets.

As with any financial product, when amateurs get caught short market inefficiencies occur.  

The existence of the USO oil ETF, a frequent target of my criticism in my Forbes columns, only exacerbates this situation.  Because USO’s sponsor, USCF, states quite clearly in its many SEC filings that it has no means to take delivery of physical oil and no desire to do so, USO serves to create more paper contracts and offset the natural balance of hedging.  As those contracts are rolled—though USO has changed its contract purchasing/selling process several times in the past month—that creates a net shortage of the paper, and the markets can get wacky.  

So, for those who like to proclaim European superiority over American methods, the Euros have us beat when it comes to oil pricing.  Brent oil trades only in paper form, and unlike Cushing, Brent is not a physical town, but a location of offshore platforms (three of four of which have been shut down as the field matures) in the North Sea.  No one can deliver oil to Brent because there is no such place, although the contract price is composed of a mix of three other locations that are actually physically sited.

This is not meant as any disrespect to the good folks of Payne County, Oklahoma.  Cushing is important, and a quick check of any pipeline map would show that most of the U.S.’ massive hydrocarbon superhighways have been built to stop by Cushing to “count” in oil delivery figures before heading elsewhere to be refined.  The nearest refinery to Cushing is a one-hour drive north up OK-18 in Ponca City at Phillips 66 PSX ’s facility, and the salt caves that hold the U.S.’ strategic petroleum reserve sit in four sites along the Gulf Coast, the closest one to Cushing located in Bryan Mound, TX, about 550 miles away.  

So, contrary to the takeaway from articles like this credulous Bloomberg piece, Cushing has plenty of space. Those who hold short positions in oil may not want you to believe that, but it's the truth.  Remember always that those same folks are just as likely to be the ones telling you—via compliant reporters in the mainstream financial media—that all is fine and dandy in the energy markets when they happen to be long those very same contracts.  
It’s probably best not to listen to them at all.

Monday, May 18, 2020

Oil Price Continues to Rally as Economies Reopen

Crude oil prices increase

Oil prices closed on a third straight weekly high on Friday as prices continued to rally on economies reopening from their COVID-19 lockdowns.

Brent was up at $32.50 on Friday’s trading, with West Texas Intermediate (WTI) on $29.43, as both benchmarks kept up their sustained rallies on positive market sentiment and hopes of oil prices having bottomed out during the end of April, which saw WTI going negative.

“Oil prices extended their recovery for a third week running as sentiment toward demand improves as more countries ease their lockdown conditions and allow for economic life to return to something approximating pre-coronavirus conditions,” said Edward Bell, commodity analyst at Emirates NBD.

“For the month of May alone the improvement in oil futures has been dramatic: Brent has gained nearly 30% while WTI is up by around 56%. June WTI futures expire this week but the relative improvement in sentiment toward crude and easing concerns over whether storage was reaching tank tops should prevent a repeat of last month’s hysteria when expiring futures moved into negative prices for the first time ever,” he added.

Production Cuts Play Their Part

Also assisting with the continued price recovery have been the production cuts that came into affect from the start of this month according to Ole Hansen, head of commodity strategy at Saxo Bank, as the worst case scenario of storage facilities reaching full oil capacity having been averted for now.

“Crude oil continues to push higher and in hindsight the short-lived collapse to a negative WTI price last month probably saved the market and set in motion the recovery currently seen.

“Major producers around the world, potentially faced with heightened risk of tank tops and the price collapse spreading, stepped up their efforts to cut production. A development which together with a pick-up in demand was highlighted by the International Energy Agency in their latest oil market report as key reasons for the recovery seen during the past month,” he added.

The IEA in their May outlook report revised their global demand numbers, with demand set to go down by 8.6 million barrels per day (bpd) this year, from an earlier estimate of 9.3 million bpd. “With estimates that demand may not fully recover for at least another year, we suspect that the current recovery may eventually run out of steam.

“Also considering the risk that U.S. shale oil producers, some desperate to survive, will be able to restart shut-in production as the price reaches economically viable levels above $30/b,” he added.

Markets Are Rebalancing

Speaking at Adnoc’s virtual majlis last week, Dr Sultan Ahmad Al Jaber, UAE Minister of State and Group CEO of Adnoc, said signs were pointing to an oil market that was rebalancing itself. “When it comes to oil, there are signs that the market has tightened in recent weeks. The Opec+ agreement, voluntary cuts outside Opec-plus plus, and production shut-ins are working together to start to rebalance the market.

“This will take time. As economies begin to open up, demand will follow, but the path to the next normal is not a straight line,” he added. Al Jaber also highlighted how Adnoc was well positioned to handle the current downward in prices thanks to its low cost production.

“Through our transformation, we have focused on what we can control and that is our costs. We’ve been laser-focused on being one of the lowest-cost producers in the world,” he said.

“This has given us the flexibility and the resilience that we need at times like these. In this environment, we are continuing to work even harder to preserve our resources, and maximise our profitability,” Al Jaber added.

Gulf’s Oil Producers Well Placed for Oil’s Eventual Upturn

Oil rigs are being frequently targeted by pirates.

As demand for oil crashed amid the coronavirus outbreak, many traders seized the opportunity to store cheap oil stock to resell at a higher price. However, this scenario wasn’t an easy task for everyone.

The shipping costs increased sharply and storage facilities surpassed the 90 per cent occupancy mark for the first time in five years. This caused the West Texas Intermediate (WTI) delivery prices for May to reach a historic negative value for the first time ever.

In other words, the delivery contract owner had to pay the receiver of the oil shipment, as there was no storage facility available to accommodate the incoming oil shipments.

The current outlook for the oil market nevertheless is gaining positive momentum as global lockdowns are starting to ease up in the EU, China and southeast Asia. These indicators should quickly reflect in a negative manner on existing oil stockpiles, which will then increase overall demand and driving prices upwards by July and August as stockpiles head towards a 60-65 per cent occupancy.

Meanwhile, the implementation of the OPEC+ agreement of reducing 9.7 million barrels per day has served as a moderate market sedative. It has managed to demonstrate the commitment of OPEC’s major producers – Saudi Arabia, the UAE and Kuwait – towards a more balanced market. Their adoption of a responsible approach is in the best interest of the oil industry, their fellow OPEC members and allies.

Two weeks after the production agreement came into effect, the three states pledged an additional combined cut of 1.18 million barrels per day and raising the total amount contributed by OPEC+ to 10.88 mbd. This drove Brent crude past the $30 mark for June shipment deliveries.
Sidelining shale

The production cut was not the only factor. The oversupply of crude due to the shutdown of airports and the global scale of lockdowns severely reduced demand for fuel, halted major industries which account for most of the refined products’ consumption, and that in turn reflected primarily on high-cost unconventional hydrocarbon producers.

The effect of oversupply has driven shale oil producers in the US, Canada and other parts of the world to shut down their producing wells. The smaller oil producers with a higher breakeven averages were also forced to sell their assets at big discounts to larger corporations, while others filed for bankruptcy, which resulted in a forced production reduction unlike the voluntary approach by the OPEC majors.

By April, more than 41 smaller producers in the US filed for bankruptcy as they could not sustain their output with the current market situation and as debtors and shareholders lost faith in their feasibility and competitiveness.

Meanwhile, the three largest oil producers in the GCC had announced before the coronavirus outbreak, plans for more exploration and production enhancement projects.

They have not been reducing their capital spending plans, even with market conditions turning extremely fragile unlike international oil companies (IOCs), which have been suffering much in the current crisis.

The cost of oil extraction is relatively less for the UAE, Saudi Arabia and Kuwait, where it is below the $16 per barrel mark.

Together, they account for a staggering 17.5 mbd of crude oil production capacity that is unrivaled by any producer in the world. The 18 per cent of global market production capacity at the hands of the three states have provided a strong negotiating advantage within OPEC.

Their level of coordination has proved to be very resilient through decades of constructive cooperation for the best interests of OPEC as an organization and the wider industry. Smaller producers do not enjoy these competitive advantages.

The government support to national oil companies (NOCs) has earned the three countries greater leverage and confidence in the global markets, while other big players such as Occidental Petroleum struggle with their $40 billion loan.

The NOCs in the Gulf enjoy a much stable cashflow position and have secured ample reserves during times of higher oil trading prices. This has encouraged larger consumers such as China and India to further turn to GCC crude imports.

Given these conditions, the Gulf NOCs are anticipated to be the biggest beneficiaries in regards to global marketshare as COVID-19 lockdowns ease.