Naimi finally allowed to retire, Saudi oil policy stays the same

Naimi, Falih May16

80-year olds are allowed to retire, even if they have to wait a year for final permission to be given.  But it seems a simple headline saying “Saudi Oil Minister retires after 69 year career” is not “exciting” enough in today’s media world?  So perhaps we can’t be too surprised to find some of the world’s media using headlines such as:

  • “Saudi Arabia just fired its oil minister”
  • “Saudi Arabia Dismisses Its Powerful Oil Minister Ali al-Naimi”

But it is still disappointing that a desire for “clicks” should over-ride the facts, particularly on such a critical issue.

It has, after all, been common knowledge that the 80-year old Naimi wanted to retire a year ago, after the death of Saudi King Abdullah.  He was only persuaded to stay on to provide continuity.  Now, just before Ramadan begins on 7 June, is an ideal moment for the long-planned handover to Saudi Aramco chairman Khalid al-Falih to take place.

One benefit of his year-long lead-in to retirement was that Naimi was able to give a “retirement interview” to Daniel Yergin at the IHS/CERA conference in February.  This was a tour de force of everything that Naimi had seen and learnt during his 69-year career in the oil industry, which began when he joined Saudi Aramco as an office boy in 1947.

The question-and-answer session with Yergin was highly revealing of Naimi’s and Saudi thinking on the outlook for oil prices, particularly when he dismissed suggestions that OPEC production might be cut to rebalance the market.

Arguing that this decision was made in November 2014, he described the freeze concept as being modest in scope, even it it was possible to make it happen, due to the “lack of trust” between the major producers:

A freeze is the beginning of a process and that means if we can get all the biggest producers not to add additional barrels, then this high inventory we have now will probably decline in due time, its going to take time.  It is not like cutting production, that is not  going to happen, because not many countries are going to deliver even if they say they will cut production, they will not deliver.  So there is no sense in wasting our time seeking production cuts, they will not happen.”

Today it is clear that even the freeze concept has been abandoned.  So in terms of oil market developments,now is a sensible moment for Naimi to move into his well-deserved retirement.  But lets be clear. He wasn’t fired or dismissed.

Equally important is that the change of personnel doesn’t mean any change is likely in Saudi oil policy.  This has always been a slow-moving process, controlled at the highest level of the government.  And as Naimi explained to Yergin, the key decisions were made as long ago as November 2014.

The fact that even a freeze has proved impossible to agree, reconfirms the rationale for the decision.

My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 57%
Naphtha Europe, down 53%. “Arbitrage window to Asia shut”
Benzene Europe, down 53%. “Market is still facing the structural challenges of limited liquidity”
PTA China, down 40%. “Weaker upstream feedstock prices and diminished buying sentiments dampened discussion levels.”
HDPE US export, down 27%. “Talk of falling values in a few Latin American countries.”
¥:$, down 5%
S&P 500 stock market index, up 5%

Oil prices remain at pre-2005 levels as inventories rise

Brent Feb16Its mid-winter in Russia, and the snow is deep in some parts of Moscow.  Meanwhile in Venezuela the economy is close to meltdown, and its hard to find even essentials in Caracas.  So it is no real surprise that this month saw their Oil Ministers head for “important discussions” in the warmer climate of the Middle East.  Similarly, the Gulf States were happy to provide hospitality:

  • Decades of bitter experience have proved that neither country ever delivers on its promises to restrain oil output
  • But just news of the meeting led credulous investors to bid up oil prices, making the discussions worthwhile

US oil and gas producers were even more delighted.   Hopes of higher prices have enabled them to sell $5bn of new equity since the New Year – a welcome boost to their balance sheets.  And prices on the forward curve for future delivery moved up to $45/bbl, triggering a surge of hedging interest from companies keen to lock in profitable economics for another few months.  As the head of Pioneer Natural Resources told his investors:

“You’ve got to use events like that to put hedges in the marketplace

Plus, of course, the high-frequency traders, who now dominate energy markets, were delighted.  Prices have raced up and down by several percent, providing them with effortless profitability.

Back in the real world of supply and demand fundamentals, nothing has really changed.

Russia has already denied that it actually agreed to a production freeze, and also denied that it intended to put pressure on Iran to agree,  Instead, it is finalising a $5bn loan to kick-start Iranian purchases from Russia, to support its collapsing economy.  And even news that the US rig count is back at 1999 levels has failed to show any major link as yet with declining production.

Thus the key to the outlook continues to focus on the price chart above:

  • It first signalled the coming collapse in August 2014, when the 5-year “flag shape” finally broke down
  • This led to the expected freefall in prices, as the bulls lost the power to sustain higher prices
  • Then prices went below the 200-day exponential moving average, confirming a bear market
  • Next, they dropped back below the $36.20/bbl level, and returned to the pre-2005 price era

The events of the past few weeks have provided an opportunity to test this level again.  And, so far at least, it has acted as resistance to higher prices.  This is typical of such moves, where traders understand that major change has taken place in the fundamentals, and that previous support levels have turned negative.

No doubt Saudi Oil Minister, Ali Al-Naimi, will be happy to continue talking up prices tomorrow, when he speaks in Houston.  But markets continue to suggest that the collapse has not yet hit bottom.  US inventories have reached new record levels, and current supply/demand balances continue to support the International Energy Agency’s suggestion that the recent rally was “a false dawn”.

$30/bbl was always my forecast price for oil in today’s New Normal world.  So I am not arguing that any further fall would be sustainable on a longer-term basis.  But it would certainly be unusual, to say the least, for prices to bottom at today’s level, whilst there are still so many players who believe they “must” go higher.

My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 70%
Naphtha Europe, down 66%. “Crack spread sinks deeper into negative territory”
Benzene Europe, down 58%. “There are several downstream turnarounds on the horizon from March into May, which could lead to an excess of benzene.”
PTA China, down 46%. “Downstream end-users in the polyester industry are not expected to increase their consumption rates until after the 15th day of the first month of the lunar new year”
HDPE US export, down 42%. “Domestic prices for export moved up a little during the week on sentiment that producers might have a chance for obtaining some increase domestically in March”
¥:$, down 11%
S&P 500 stock market index, down 5%



OPEC hit as ‘peak oil demand’ arrives and US imports fall

US oil imports Apr15

Oil market traders have been having fun in recent weeks, as they have managed to create guaranteed price movements every week:

  • US oil inventory data is published on Tuesday and Wednesday
  • This gives traders the chance to push prices lower as the inventories continue to rise
  • US oil rig data is published on Friday
  • This creates the chance to push prices higher again as the number of working rigs falls
  • In turn, this volatility also creates great opportunities for media coverage, further boosting trading interest.

However, in the real world, these trading games are simply a distraction.  Far more important is the massive change underway in world oil markets, as highlighted in the above chart of US oil imports:

  • It shows US crude oil and product imports since 1993, and confirms these peaked in 2006 at 14.7mbd
  • Since then, they have fallen by more than a third to just 9.3mbd (green line)
  • OPEC has been the big loser, with its exports down nearly 2/3rds from 6.4mbd to 2.4mbd (orange)
  • Critically, Canada’s exports have been higher than OPEC’s since May last year (red)

These developments are naturally being ignored by the traders.  But they go a long way to explaining why market share has become the prime objective for most oil exporters, as discussed in October’s pH Report, “Saudi Arabia needs much lower oil prices“.

Equally important is that the world is now arriving at ‘peak oil demand’.  As a new Bloomberg analysis confirms:

Saudi leaders have worried for years that climate change and high crude prices will boost energy efficiency, encourage renewables, and accelerate a switch to alternative fuels such as natural gas, especially in the emerging markets that they count on for growth. They see how demand for the commodity that’s created the kingdom’s enormous wealth—and is still abundant beneath the desert sands—may be nearing its peak….”

Oil Minister Naimi told reporters in Qatar three years ago, “Demand will peak way ahead of supply .

Plus, of course, demographic shifts are already reducing US gasoline demand, as I noted last month:

  • Average per capita miles driven have fallen 8.4% since 2004
  • Older people no long act as a taxi service for their children, and stop driving to work when they retire
  • Millennials (those born between 1983-2000) have far less interest in driving than their parents

A further headwind for demand growth is highlighted by the US Energy Information Agency’s new Annual Report:

“The need for imports will further decline after 2020 as increased vehicle fuel economy standards limit growth in domestic demand.” 

Saudi Arabia is clearly not being distracted by the oil traders’ temporary excitement   It knows it would risk being marginalised if it continued with the previous policy of cutting production to support prices.  As Naimi noted last month:

Saudi Arabia cut output in the 1980s to support prices. I was responsible for production at Aramco at that time, and I saw how prices fell.  So we lost on output and on prices at the same time,” al-Naimi said. “We learned from that mistake.”


My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Benzene Europe, down 42%. “There have been more exports out of Europe across the Atlantic since the end of March, helping to balance out the length seen on benzene since the start of the year”
Brent crude oil, down 41%
Naphtha Europe, down 36%. “Naphtha demand from the petrochemical sector is being undermined by cheaper propane, which is seen as the better feedstock”
PTA China, down 33%. “Prices were largely firmer owing to price gains seen in the upstream crude futures and feedstock paraxylene (PX) markets”
HDPE US export, down 23%. “Domestic export prices stayed the same”
¥:$, down 16%
S&P 500 stock market index, up 6%

Saudi lets ‘market decide’ on oil prices to maximise local jobs

OPEC refining Feb15

I was kindly invited last week to give a keynote address at the annual ME-TECH conference in Dubai.  Naturally, there was intense interest in my argument that oil prices were most unlikely to recover to the $100/bbl level.

Instead, I suggested they would likely return to their long-term historical average of $33/bbl (in $2014).  And I argued that this would be good news for the global and Middle Eastern economies.

The chart above highlights a key issue in my analysis.  Based on official OPEC data, it shows how:

  • OPEC’s own refining output grew 245% between 1980-2013, from 3.3 mbd to 8.1 mbd (blue area)
  • OPEC’s share of world refinery output grew as a result from 5.6% to 9.5% (red line)

This development highlights the change of direction underway in oil policy in key nations such as Saudi Arabia.  They now have a much greater stake in promoting downstream demand, in order to create local jobs in the region.

One key issue is that exports from this new refining capacity effectively increase OPEC’s total oil exports.  Commentators usually only focus on OPEC’s actual oil production.  Yet its exports of refined products are equally important to global oil supply and demand balances.

Even more important is the opportunity that new refining capacity provides to create jobs in downstream industries such as plastics and other value chains.  This is critical for social stability, as the Middle East is one of the few world regions with relatively young populations of median age 25 – 30 years.

Governments who wish to remain in power, know they have to provide jobs for these young people, or risk mounting social unrest.  And so whilst it may be more profitable to ship high-priced oil to markets in the US, Asia and Europe, job creation is becoming a more important priority.

Jubail refiningThus Saudi Arabia is in the middle of a major refinery expansion, as the picture on the right shows of the new Jubail refineries.  These add 0.8 mbd to Saudi capacity, with a further 0.4 mbd capacity planned at Jazan for 2017.  As Oil Minister Ali al-Naimi told the Wall Street Journal yesterday:

We are no longer limited to exporting crude oil.  This will make the kingdom one of the five largest countries in the world in terms of refined crude capacity and the second largest exporter of refined products after the US”.

In turn, this highlights a key rationale for Saudi’s market-driven pricing policy.  Not only does it have the lowest production costs in the world, and the largest oil reserves.  But it needs to maximise its refinery and downstream volumes to create jobs.

High oil prices do the opposite – they destroy demand.  Thus it should be no real surprise that, as I noted back in December’s pH Report, Naimi has made it very clear that in future, “the market sets the price”.

In my view, the various conspiracy theories that have been put forward to explain why Saudi encouraged oil prices to fall are wide of the mark.  Logic suggests that Saudi has little interest in trying to bankrupt Russia, or to close down US shale production.

Instead, it simply needs to maximise demand for its products in order to create as many jobs as possible, as fast as possible.

OPEC’s high prices have accelerated move away from oil to gas

BP gas Dec14Does OPEC have a future?  Or has it already disappeared as an effective force in oil markets?  I am not the only one now asking this question.  Saudi Oil Minister Ali al-Naimi asked the same question in the summer, suggesting OPEC Ministers should instead meet once a year, and have occasional videoconferences, adding:

We don’t need a meeting. People come and make nice when at the end of the day, Saudi Arabia carries the burden of balancing the oil market.”

Recent events have shown Naimi meant what he said.  He understands that major oil producers need to monetise their product quickly, as it is likely much of today’s vast reserves will end up being left in the ground.  This has already happened with coal, after all.

Nobody today worries about the potential for coal shortages set out in the Club of Rome’s famous 1972 Report, ‘The Limits of Growth’.  And the chart above, based on BP data, suggests oil will likely share coal’s fate:

    • Consumption of oil (red line) and gas (blue) were both growing at similar rates from 1965-75
    • Both were gaining market share versus coal in relation to total energy demand (green)
    • But OPEC’s high oil prices from 1973-1985 gave gas demand a major boost, which has continued ever since
    • The record prices seen since 2005 have further boosted gas and reduced oil consumption
    • They have also encouraged rival oil producers: OPEC’s now has a 42% oil market share versus 51% in 1974

EM energy Dec13The second chart from ExxonMobil’s 2013 ‘Outlook for Energy to 2040′ places these trends in a longer-term context.

  • Wood (brown) was the major fuel 200 years ago, but was then replaced by coal (orange)
  • Over the past 50 years, oil (green) has become the major fuel, but it is now being replaced by gas (red)
  • In 50 years, gas may well be rivalled by renewables, hydro-electric or nuclear as alternative fuels

So OPEC faces a future where its product, oil, is now inevitably losing market share to gas.  It made a terrible mistake by allowing prices to rise to unaffordable levels in 1974-1985.  And since 2005, it has repeated the same mistake.

Energy users have choices, after all.  Large numbers have chosen to abandon oil for gas or other fuels.  Those still tied to oil have been able to reduce consumption by improving energy efficiency.

Even the US has finally moved to adopt European fuel efficiency standards for its auto fleet.    Since 1980, US passenger car fuel economy has risen 27%, from 26 mpg to 33 mpg.  And this trend is accelerating as today’s more efficient cars replace older models.  The standard for new vehicles will be 35.5 mpg (15.09 km/l) in 2016.

Equally important is that most OPEC countries have been busy undermining its own oil production quota system:

  • They have built large numbers of oil-based refineries, as well as oil/gas-based petrochemical complexes
  • Those using oil effectively increase the country’s oil exports beyond its official quota
  • Those using gas increase its total energy exports, effectively cannibalising oil’s share of the energy market

Naimi has another reason for abandoning OPEC today, namely the growing geopolitical threat to Saudi and the other Gulf Co-Operation Council (GCC) countries.  The GCC are surrounded by potential enemies, all of whom would love to take a share of its current oil wealth.

In these circumstances, they cannot possibly continue to allow high prices to destroy the rationale for the US defence shield on which they have depended since 1945.  I will look at this critical issue in more detail tomorrow.


Oil slips back into the triangle, as QE3 is postponed

Brent Apr12.pngRemarkably, crude oil prices are continuing to trade in their triangle formation. As the chart shows, they tried to break out higher in recent weeks. But there was no follow-through.

The high-frequency traders were clearly hoping the US Federal Reserve would announce a new round of quantitative easing (QE3), and provide the firepower for a further increase. However, the Fed disappointed them. And so prices have come back down again.

Equally, the fundamentals of supply and demand continue to make today’s high prices look quite absurd. Not only is there no shortage of oil, as Saudi Oil minister Naimi reminded the world last week. But demand forecasts continue to be reduced, whilst supply is increasing.

Thus the US Energy Information Agency (EIA) has reduced its estimate for 2012 demand to 88.81mbd, whilst increasing its supply estimate to 88.97mbd. It notes that higher prices caused US gasoline demand to fall 2.8% in Q1, despite it being the warmest winter for 50 years. It also projects US production at 6mbd, the highest since 1998, and rising.

Of course, the bulls still hope for disruption in Iran. But US Defence Dept briefings suggest the US has very little desire to support any military action at the moment, terming it “a catastrophically bad idea”.

Equally, Saudi Arabia is understandably still upset by the alleged assassination attempt on its US ambassador. So its promises to make up for any Iranian shortfall seem very believable.