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Oil crash explained: How are negative oil prices even possible?

THE CONVERSATION, APRIL 20, 2020 - It’s hard to believe that the price of any commodity, let alone oil, can dip into negative territory. But that’s just what’s happened to oil prices. COVID-19 has prompted lockdowns, shuttered factories and stopped people from travelling. The global economy is contracting. The pandemic has also reduced global demand for oil by about 29 million barrels a day from about 100 million a year ago. OPEC and other producers agreed to cut production by 9.7 million barrels a day, far less than the decrease in demand, leaving a huge surplus of oil on the market and no buyers. Storage capacity on land has filled up quickly. Many oil-importing countries have stored large quantities of oil, taking advantage of cheap prices that may not last. Some oil producers, hoping to maintain their market share, have taken to storing their excess oil at sea, leasing tankers at high costs. Some are believed to be paying in excess of US$100,000 per day for each tanker. Oil prices will come back up So how have Alberta oil prices and even future prices for West Texas Intermediate (WTI) slipped into negative territory? It starts with the futures’ contracts for WTI — oil to be delivered in a few months at today’s price. It lost US$6 a barrel on Monday, fetching US$11.66, but ended the day at -US$37 as holders of future contracts tried to dump their contracts before oil is actually delivered with nowhere to store it. But Alberta oil, primarily derived from oilsands (referred to as Western Select), typically sells at US$10 to US$15 below the price of WTI, because it has to be extracted from deep rocky terrain. That makes it harder to refine, and it also has to be transported thousands of kilometres to American refineries. An oil refinery is seen in Kansas. Oil from Alberta’s oilsands is processed at American refineries. THE CANADIAN PRESS/AP, Charlie Riedel And so Alberta oil prices have become negative in the sense that the benchmark price is now lower than the cost of production, transport and storage. This state of affairs cannot be expected to last for long. Producers, in the short term, may accept prices below their variable cost as long as they are able to pay some of the costs they will incur even if oil production shuts down. As time passes, more and more rigs will stop operating (technically, a few will be kept operational in order to avoid being compromised) and a new balance between supply and demand will be established at prices that exceed total average cost. But this doesn’t bode well for either Alberta or the United States. Collateral damage Alberta oil is now the collateral damage of the oil war between Russia and Saudi Arabia, with COVID-19 launching an additional attack. Either of these two factors could have disrupted Alberta’s oil production. But the Saudi-Russia hostilities combined with the global pandemic have proven to be catastrophic for Canada, and could have a similar outcome for the U.S. energy industry. Russia and Saudi Arabia depend heavily on their oil revenues to sustain their economies. Of course, Saudi Arabia’s economy is less diversified than the Russian economy, but both share a similar distortion, where oil revenues represent a very high share of their GDPs (Saudi Arabia about 50 per cent, Russia 38.9 per cent), budgets (Saudi Arabia 87 per cent and Russia 68 per cent) and exports (Saudi Arabia 90 per cent and Russia 59 per cent. It’s difficult to believe that either country can do with such low prices. Russia needs a price of US$60 a barrel to balance its government budget and even a higher price to balance its current account, meaning exports of goods and services minus imports of goods and services, plus net short-term capital transfers. Saudis also need a much higher oil price Saudi Arabia, which remains the lowest-cost oil producer in the world, can make money when the price per barrel exceeds US$20, and Russia can at a price of US$40. Prince Abdulaziz bin Salman Al-Saud, Saudi Arabia’s energy minister, leads a recent virtual summit of the G20 energy ministers at his office in Riyadh, Saudi Arabia. (Saudi Energy Ministry via AP) But making a profit when prices are higher than cost is not sufficient. Saudi Arabia needs an US$80-per-barrel price to balance its budget, realize its plans to diversify its economy and sustain a heavily subsidized economy. In the balance is the stability of both the Russian and Saudi Arabian political systems and current regimes. The longer the COVID-19 pandemic lasts, the greater the damage oil producers will endure. It’s hard to tell now how high oil prices will rise once the pandemic subsides. They will likely go higher as marginal producers are eliminated, but not for long. Using oil and other fossil fuels is no longer consistent with avoiding the expected disasters of climate change. Oil is increasingly becoming a stranded asset.  Originally published by The Conversation at the following address: https://theconversation.com/oil-crash-explained-how-are-negative-oil-prices-even-possible-136829
  • Published in Energy

GUYANA | Nigeria ready to do business in Guyana says Senator Hadi Sirika

GEORGETOWN, November 23, 2018 - A Nigerian delegation, led by Nigerian Minister of State Aviation, Senator Hadi Sirika, today paid a courtesy call on Prime Minister Moses Nagamootoo, during which several areas of cooperation between Guyana and Nigeria were discussed.

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  • Countries Guyana
  • Published in Tourism

T&T | Rowley wants gas producing countries to develop gas-pricing index

PORT OF SPAIN,  Triniodad, November 14, 2018 - Trinidad and Tobago's Prime Minister Dr. Keith Rowley, has challenged member states of the Gas Exporting Countries Forum (GECF) to implement a gas-pricing index to safeguard natural gas producers from “suffering leakage” of its products by traders who “benefit unfairly” from a country’s gas production.
  • Published in Energy

GUYANA | Oil money will make 2020 "the mother of all elections" says Jordan.

GEORGETOWN, Guyana, November 11, 2018 - “The next election is the mother of all elections ever in this country...because  the oil would be coming on stream and they all want their hands on the oil. We have to keep those thieves away from the oil resources, ” says Finance Minister Winston Jordan as he addressed an estimated 400 attendees at a meeting held at the Stabroek Market Square in Georgetown ahead of Monday's Local Government elections.

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  • Published in Politics

Qatar’s $15 billion snub of Trump over Turkey puts another key US relationship in Middle East at risk

The U.S. and Qatar have been key allies for decades, with close military and economic ties. Qatar is home to the United States’ biggest base in the region, and in turn the U.S. has pledged to protect the small, oil rich country that juts out into the Persian Gulf. But the relationship is being tested like never before by the latest example of Qatar snubbing the interests of Uncle Sam – or, put more generously, its maverick foreign policy. The U.S. recently placed severe sanctions on Turkey’s economy for refusing to release an American pastor detained for almost two years, sparking a currency crisis. Qatar was the first, and so far only, nation to offer Turkey tangible aid in the form of a US$15 billion investment and other types of financial assistance. Although the Gulf country has long pursued policies out of step with the U.S., such as maintaining good relations with Iran and aiding various groups that the U.S. considers terrorists, its very visible support for Turkey in the dispute poses a direct challenge to the Americans. And while the U.S. has in the past practiced patience with its sometimes wayward ally, President Donald Trump is often willing to toss out the rulebook and has previously lambasted Qatar on Twitter. As a longtime observer of the region’s complicated economic and political developments, I believe that Qatar’s interjection in the U.S.-Turkey crisis raises two important questions: Why is Qatar willing to risk its close relationship with the U.S.? And why has the U.S. let it get away with this behavior for so long? U.S. Defense Secretary Jim Mattis greets military dignitaries at Al Udeid Air Base in Qatar. Reuters/Jonathan Ernst Punching above its weight A country of just 320,000 citizens – as well as 2.32 million expatriate residents – Qatar has a habit of using its massive oil and natural gas reserves to exert influence in the Middle East and beyond. Such a hyperactive foreign policy is very unusual for a small state like Qatar. Qatar made its offer to Turkey during a recent visit by Qatari leader Sheikh Tamim Al Thani to Ankara. The announcement helped stem the rout in the lira, which lost a third of its value in a month. It was followed by a so-called currency swap agreement that will allow Turkey to bypass the U.S. dollar in bilateral trade and financial transactions with Qatar. While Iran and several Arab countries including Kuwait have expressed opposition to the U.S. sanctions, none so far has offered tangible financial support similar to Qatar’s. Meanwhile, the U.S. is trying to put economic pressure on Turkey in hopes it spurs the release of the American pastor, who has been detained for nearly two years on allegations he supported the failed July 2016 coup. Qatar’s aid clearly counteracts that pressure. So far, the U.S. hasn’t publicly reacted to Qatar’s actions. U.S. sanctions prompted a currency crisis in Turkey. AP Photo/Lefteris Pitarakis Allies aiding adversaries This gesture of support for Turkey is not the first time that Qatar has taken a stand that conflicts with U.S. foreign policy objectives. On several occasions in the past two decades, the U.S. has expressed concern about Qatar’s support for various Islamist and extremist groups, such as the Muslim Brotherhood, as well as its relations with Iran. In May U.S. officials issued a warning after a newspaper reported evidence of clandestine contacts between Qatar and Iran’s revolutionary guards and other groups it supports. This behavior may seem puzzling because ever since its creation as an independent state in 1971, Qatar has relied on the United States for its external security. At the same time, Qatar hosts about 10,000 U.S. military personnel at Al Udeid Air Base, home of the U.S. Air Force Central Command, which is used to conduct operations in Syria, Iraq and elsewhere. The United States also maintains strong economic relations with Qatar as its largest foreign investor – particularly in oil and natural gas production. All smiles as Qatar’s Emir Sheikh Tamim Bin Hamad Al Thani and Turkish President Recep Tayyip Erdogan. Presidential Press Service/Pool via AP Qatar’s possible rationale So why would Qatar risk jeopardizing the relationship by aiding Turkey so publicly? One possible explanation is that Turkey itself has become an important strategic and economic partner. The two signed a military cooperation agreement in 2014, which allowed Turkey to maintain a small base in Qatar. When fellow Gulf Cooperation Council states Saudi Arabia and the United Arab Emirates broke diplomatic relations with Qatar in 2017 and imposed a trade embargo, Turkey increased the number of its troops at the base to deter military action. This was important to Qatar because the U.S. seemed to be showing more support for Saudi Arabia and the UAE in the standoff, a perception reinforced by highly critical tweets from Trump. Qatar’s recent expansion of trade with Turkey also helped it survive the embargo as Turkish consumer goods flowed in, leading to a surge in trade between the two countries. Bilateral investment between Qatar and Turkey has also increased in recent years. Qatar has nearly $20 billion in investments in Turkey, and a large number of Turkish construction firms are active in Qatar. Another possible explanation is that Qatar’s leaders simply believe that the U.S. needs Qatar more than Qatar needs the Americans. The rationale is that the American military bases there are vital to its ability to project power in the region. Meanwhile, Qatar’s significant reserves of oil and gas make it a valuable economic partner. As a result, Qatar may believe the U.S. will continue to show a high level of patience, even in the face of support for Turkey. Things are a bit frostier in the Oval Office with Trump. Reuters/Kevin Lamarque US patience running thin? It is true that the United States has tended to be patient with Qatar’s maverick foreign policy, including over Iran. But Qatar’s government would be wise to have a realistic understanding of the erratic and unpredictable nature of American foreign policy under the Trump administration. Just as Turkish President Recep Tayyip Erdogan was shocked by Trump’s sudden impositions of harsh sanctions this month, Qatar might also face a similar American reaction for going too far in its support for Turkey, or getting too close to Iran. In addition, Qatar must keep in mind that Turkey could never replace the U.S. as a partner both in terms of military protection or the advanced American oil and gas technology it receives. In other words, if Trump is willing to risk the United States’ relationship with Turkey so easily, Qatar should not assume that it is immune from his wrath – or could find as useful an ally. Perhaps a better strategy for Qatar is to maintain a balance between its two important allies.

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