Experts said, countering the rising influence of Iran, Russia, and China, energy interests have pushed Biden to travel to the Saudi Kingdom, his first visit to the Middle East since becoming the US President.

The US President left the Middle East without getting an immediate commitment from Saudi Arabia to boost oil output or public support for U.S. efforts for a regional security axis that would include Israel.

The US is eager to see Saudi Arabia and its Organization of the Petroleum Exporting Countries(OPEC) partners boost oil production, as the high gasoline prices have fuelled inflation in the United States to the highest in 40 years.

The US National Security Adviser Jake Sullivan had low expectations of the meeting, saying he did not expect Saudi Arabia to boost oil output immediately and would instead look at the outcome of an OPEC+ meeting on August 3.

“I don’t think you should expect a particular announcement here bilaterally because we believe any further action taken to ensure that there is sufficient energy to protect the health of the global economy, it will be done in the context of OPEC+,” Jake Sullivan said.

Biden came to Saudi Arabia hoping to convince the OPEC, but the Kingdom held firm on its strategy that it must operate within the framework of the OPEC+ alliance, which includes Russia, and not act unilaterally.

Spare capacity within OPEC is running low, with most producers pumping at maximum capacity. It is unclear how much extra supply Saudi Arabia could bring to the market and how quickly.

OPEC+ decided last month to increase output targets by 648,000 barrels per day in August, ending record production cuts that it brought at the height of the COVID-19 pandemic to counter collapsing demand.

Energy Deals
Biden’s visit resulted in the signing of 18 partnership agreements in fields that include energy, communications, space, and healthcare.

Among those were agreements in clean energy projects, nuclear energy, and uranium, according to Saudi state news agency SPA, as well as deals with US aerospace and defense firms Boeing and Raytheon and healthcare companies Medtronic, Digital Diagnostics, and IQVIA.

Israel-Saudi relations
Gulf OPEC members are investing in renewable and clean energy while also stressing the continued importance of hydrocarbons for global energy security at a time of growing calls for a shift away from fossil fuels.

Washington and Riyadh also agreed on the importance of stopping their mutual foe Iran from acquiring a nuclear weapon further deterring its interference in the internal affairs of other countries.

The statement said Biden affirmed the United States’ continued commitment to support Saudi Arabia’s security and territorial defense, and facilitating the Kingdom’s ability to obtain necessary capabilities to defend its people and territory against external threats.

Meanwhile, the U.S. and Israel signed a joint pledge to deny nuclear arms to Iran, a show of unity by allies long divided over diplomacy with Tehran.
The declaration was part of Biden’s efforts to rally regional allies around U.S. efforts to revive the 2015 nuclear pact with Iran.

As Iran signed a deal with six major powers to limit its nuclear program, to make it harder to obtain a weapon in exchange for relief from economic sanctions.
In 2018, then-US President Donald Trump pulled the United States out of the pact, saying it was insufficient to keep Iran from developing nuclear weapons, as Saudi Arabia and Israel were not happy with the deal brokered by former President Barack Obama’s administration.

Biden assured that the United States is willing to use force as a last resort if talks fail and Iran continues to develop nuclear weapons. While Tehran denies it has been seeking nuclear weapons.

Both Saudi Arabia and the UAE want regional concerns over Iran’s missile program and regional proxies to be addressed soon

The post Takeaways from Joe Biden’s first trip to Middle East appeared first on International Finance.

Under the terms of a budget bill which is under review, oil production over the next fiscal year will be 10.5 million tons or nearly 210,000 barrels per day. This reduction in oil production will be in line with the decision made by the Organisation for Petroleum Exporting Countries (Opec) and its allies in production cuts. 

Last year, oil production in the company had stood at  220,000 barrels per day, media reports said. However, the official figures for the production are yet to be released this year and the figures for next year are anticipated to be lower on the back of the continued cuts by Opec+. 

That said, Assala Energy is investing $24 million to modernise the oil giant’s Gamba export infrastructure. It is reported that that export is important to the Gabonese economy as 30 percent of crude oil exports in the country pass through it. Daniel Marini, Managing Director of Assala Gabon, told the media, “Despite the global economic crisis, the uncertainties linked to the price of oil and the current health crisis, we remain very confident in Gabon’s capacity to stay a strong petroleum player in Central Africa. This investment also testifies to the concrete progress of our program to modernize key infrastructure, in order to produce Gabonese oil in a clean and sustainable manner.”

The post Gabon’s oil production cuts for 2021 is in line with Opec appeared first on International Finance.

Saudi Arabia  is concerned that the coronavirus epidemic could lead to a decrease in oil consumption, media reports said. The Opec+ oil cut discussion is taking place in Vienna this week. In fact, Saudi Arabia has pushed for a larger oil cut compared to the suggestion made by the Goldman Sachs’ technical committee. 

It is reported that the panel has recommended 600,000 to 1 million barrels per day reduction in the second quarter of the year. Goldman Sachs was the first Wall Street Bank to predict a shrink in oil demand this year. 

The Opec+ was formed four years ago. Jim Burkhard, vice president and head of oil markets at IHS Markit, said, “This is a sudden, instant demand shock. The scale of the decline is unprecedented.”

More recently, Morgan Stanley updated its oil demand forecast in China for 2020. According to the forecast, it expects a near-zero demand on the mainland. 

The Environmental Impact Assessment (EIA) was also skeptical of revising its oil demand outlook by 378,000 bpd. EIA said that the growth in oil demand could drop by 190,000 bpd because of the epidemic. 

The EIA, Morgan Stanley and IEA have revised their forecast for growth in oil demand, with IEA’s outlook being the most pessimistic. 

The post Saudi urges Opec+ to cut 1.5 mn bpd as coronavirus affects oil demand appeared first on International Finance.

February 8, 2016: If the oil price slumps, the stock prices plunge: Cheaper oil is clearly now regarded as negative, unlike in earlier times. We assess whether the economic correlations have really changed. Our analysis shows that a falling oil price is not always an economic stimulus programme for the USA and Europe. Fears that slumping oil prices could push the Western economies into a recession are exaggerated though.

The pure observation that the oil price has fallen sharply tells us very little. To assess the consequences of a lower oil price it essentially depends on why it has fallen. An analysis must therefore start at the supply and demand conditions.

Demand shock: If the global economy cools, global demand for crude oil falls and its price drops at a given production level. Under these conditions, the lower oil price is bad news. Amid falling sales expectations, businesses will cut investment even if their input costs fall due to lower energy prices. The smaller burden on companies and consumers because of the lower oil bill will at best dampen the shock to the economy.

Supply shock: If on the other hand oil producers significantly expand their production at unchanged demand, the price likewise falls. In this case however, a positive effect on consumer countries can be expected. Companies can expect higher margins and should increase their investment. In a smoothly running economy, consumers will generally spend their savings at the filling stations on other things rather than save, provided they view the oil price fall as lasting.

Consequently, the verdict of “oil down, economy up” is not categorically true, but rather the classic answer of economists that “it depends”. And even if it is clear what type of shock the oil price reflects, the forecaster faces two more difficulties:

Oil price rises and falls have an asymmetric impact: Rising oil prices are a direct blow to businesses and private households. These have no immediate alternatives and the rising energy bill therefore directly reduces their financial scope. How businesses and private households  use spare  funds, though, is  not clear.  If,  for example, consumers use the financial leeway from lower oil prices for higher savings and not additional consumption, the lower oil price would have only a slight positive impact on the economy.

Our calculations show that this tendency can be observed for Germany at least since 2010. So, we simulate the savings ratio based on private households’ expenditure on energy and their disposable income. Based on the actual savings ratio in Q1 2010, we assume that the savings ratio changes in subsequent years solely in that households save on all lower expenditure resulting from the oil price and finance all additional expenditure at a higher oil price through saving less. According to this calculation, the savings ratio of private households fell with the rising oil price between 2010 and 2013, while the savings ratio has risen again with falling oil prices since 2014.

Wait and see

The behaviour of private households and businesses depends strongly on their expectations of how sustainable they view the oil price slide. If consumers believe that the oil price slump is short lasting and oil prices will recover quickly, like in the financial and economic crisis in 2008/09, they are more likely to save this unexpected gain¹. If private households “learn” over time that the oil price will remain low on a lasting basis, they will change their behaviour and increase investment and consumption. In the USA, different reactions of consumers to oil price movements can be observed in the past decade. The second oil crisis of 1980 shows the clearest “classical” effect on consumption: consumers had to pay much more for fuel, real consumption slumped. As oil prices eased,  real  consumption  also  normalised  again.  In the further course of the 1980s a renewed oil price fall no longer had any impact on consumption and this generally continued up to the turn of the millennium. Consumers currently have to spend much less of their income at the service stations. Parallel to that, consumption has risen.

Producers are suffering a recession

For the industrial countries, a positive impact of an oil price slump can be established at most in the longer term, especially if the price fall is perceived as being lasting. On the other hand, the negative effect on oil producers is clearer. This is even visible in the USA, where corporate investment in oil production has almost halved in the last four quarters, which in purely arithmetic terms has lowered economic growth by half a percentage point. This strong reduction has been offset, however, by the rise in investment in other areas. In Q3 2015, investment in commercial construction and equipment came to 8.8% of GDP. The investment ratio has remained stable overall. In other words, this new theory that falling oil prices are clearly negative for the US economy cannot be proven either; the “recession” is limited to the oil sector.

The situation is worse in countries that mainly live from oil production, for instance the OPEC states or Russia. This even applies to the richest member of the “oil club”, Saudi Arabia. The economic output of the country, accounting for over an eighth of global oil production, depends on the oil price and reflects its movements. The rise of oil prices eased after the first oil price crisis in 1973, while oil prices fell from the mid-1980s. Parallel to this, real economic growth weakened considerably in the second half of the 1970s and the Saudi Arabian economy actually shrunk by up to 10% in the 1980s. Only with the recovery of oil prices after the turn of the millennium has Saudi Arabia’s economic growth recovered on a sustained basis. It is therefore indisputable that Saudi Arabia’s economy will come under noticeable pressure again in the latest oil price slide.

What applies to Saudi Arabia also holds true to other oil producing countries, which do not have as deep pockets as the Kingdom on the Persian Gulf. The Russian economy has not been able to reduce its dependency on oil any more than the OPEC states have.² The economic difficulties facing the country are also very apparent from the huge depreciation of the rouble in past months.

What are the consequences for the global economy?

OPEC and Russia are sales markets for German and US exporters. The importance of these markets should not be overestimated though, as they account for only 5% of the total exports of the USA and less than 6% of German exports. Even if US exports to these oil countries were to halve – a drastic and very unlikely scenario – this would be only 0.2% of US GDP, which would be within the bounds of normal estimation uncertainty.

From a holistic perspective, the importance of oil for the global economy has declined in any case. Before the first oil crisis in 1973, oil consumption of industrial countries rose in line with economic output. The following drastic rise in the price of oil triggered substantial improvements in efficiency and the restructuring of economies. Consequently, oil consumption and economic output have decoupled themselves since 1980. By way of example, oil consumption and real GDP in the US both rose by 220% between 1949 and 1979, while between 1980 and 2014 oil consumption increased by only 12% and GDP by almost 150%. A similar picture can be seen for Germany and the rest of the world.

Financial market risks of US fracking industry are limited

The real economy may therefore be better protected from oil shocks than in the past. But what about the financial markets? Indeed, oil has become an important asset class. One type of “oil assets” is the bonds US shale oil firms issued to finance their rapid. Could a financial collapse of this sector like in 2007 trigger a global financial and economic crisis? After all, some 15% of high-interest bonds (“Junk Bonds”) are in the energy sector. However, compared to the total market for corporate bonds, the volumes of this asset class are relatively low.

Turning to equities, in the S&P-500, energy stocks have a weighting of 6.4% and large and capital-strong companies dominate, not start-up oil “frackers”. Regarding assets under management by investment funds, stocks from the energy sector comprise only 1¼% of the total stocks under management. Of the bonds managed by investment funds, the share from the energy sector is less than 3%.

There is still a certain residual risk though; presumably no financial shocks can trigger a herd instinct, precisely when investors react sensitively in a fragile global economic environment like the current one. This applies all the more when individual banks with strong involvement in the oil sector slide into difficulties.

In short, if there’s a fire, then not at the oil well

The global economy will hardly slip up on oil. The attention currently being paid to the oil price can therefore only be attributed to its function as a weathervane. The slump of oil prices might indicate global economic problems that have not yet been reflected in the usual economic data. This would make the oil price merely a symptom of the crisis; the actual cause would lie elsewhere.

To be noted:

[1] In other words, their expectation of permanent income has not changed.

[2] In the case of Russia, the consequences of the Crimean crisis have also harmed the economy, although the slump in oil prices was probably much more painful than all Western sanctions.

The post Will falling oil prices drive global economy into a crisis? appeared first on International Finance.