I’ve known Robin Mills for more than a decade and he is always one of my favorite people to see on my Dubai visits. In one sitting, Robin will take you on a tour d’horizon of the Middle East energy landscape. It’s not surprising to me that Foreign Policy called him “one of the energy world’s great minds.” He is currently CEO of Qamar Energy, and a non-resident fellow at several global think tanks. I spoke with him on the phone recently about the state of oil markets in the wake of the novel coronavirus pandemic and the Saudi-Russia Cold Oil War. Some excerpts from our conversation below:
“This is looking like it will be a long and painful oil slump. Even a Russia-OPEC deal, not too likely, will not help much in addressing the enormous demand destruction and buildup of excess stocks. The demand decline in oil markets is massive: 20 million barrels per day or more, not all of which will return even after the crisis ebbs. The price wars have become almost a sideshow, and in their absence, the demand destruction would still hit very hard. There would have been heavy oversupply. It’s hard to see oil going back to the $60-80 range for quite some time. Prices are likely to go much lower with a slow recovery afterwards.”
“Shale oil will collapse in a extended price war. So, the Gulf becomes volumetrically more important to China again over time, albeit at much lower prices.”
Why the Saudi-Russia Price War?
There are two stories at play. In the first, Saudi was pushing for deeper cuts. Russia said no. Saudi pushed back, maybe misjudged, walked away and declared a price war.
The alternative theory is that the Saudis saw the writing on the wall. They thought we were headed this way toward lower oil prices, so they thought: let’s flood the market to hit shale hard and blame the Russians. There are some signs they were at least prepared for a “no deal” scenario.
Who Will Hurt More? Saudi Arabia, Russia, or Shale?
This will hurt shale producers more than it will the Russians. The American narrative of “energy dominance” has dissolved in the first storm.
Russia is not as exposed today as it was in 2014 [when oil prices fell]. They can weather it. The ruble can depreciate, which will cut capital spending. Ordinary Russians will bear the cost in falling living standards, which is ultimately a test of Vladimir Putin’s popularity and security.
Saudi Arabia has a weaker position. They don’t have a flexible exchange rate. They will burn through cash reserves and will need to make sizeable spending cuts, at a time that the non-oil economy is shut down by coronavirus and needs financial support. However, they can keep going for 2-3 years and expect to drive out higher-cost competitors.
Who Will Get Hit the Hardest?
When you look at the Gulf states, Oman is the most vulnerable. They have a big budget deficit, lots of debt and a limited government wealth fund. Oil production is relatively high cost and will not increase much. In the vicinity, Iraq is even worse-off: a very undiversified economy, an ongoing political crisis, a likely serious virus outbreak, and a heavy budget deficit even before the price crash.
As for Iran, they don’t lose much on crude sales which are already very low because of sanctions, though the remaining exports to China may dry up almost entirely. More seriously, their petrochemical and gas revenues will drop further– end prices are related to oil, and their main customers are now struggling from virus-related crises.
Middle East and North Africa Top Business Stories – March 31
Dubai/Emirates Airline – “The Dubai government pledged support for Emirates, the world’s largest long-haul airline, as the coronavirus pandemic hits the global aviation industry, triggering a crescendo of pleas from carriers around the world for state aid,” The National reports.
Turkey Economy – “President Tayyip Erdogan is under growing pressure from unions and the opposition for a lockdown to slow the spread of coronavirus, but insists that Turkey should ‘keep wheels turning’ in the economy and that people continue going to work,” Reuters reports.
Iran Coronavirus – “Iran’s death toll from coronavirus has reached 2,898, with 141 deaths in the past 24 hours, Health Ministry spokesman Kianush Jahanpur told state TV on Tuesday, adding that the total number of infections has jumped to 44,606,” Reuters reports.
Iraq/Umm Qasr Port – “French container transportation and shipping company CMA CGM, has announced the first closing of its agreement with China Merchants Port (CMP), with the sale of its stakes in eight port terminals to Terminal Link. Among the facilities involved is the Umm Qasr Terminal in Iraq,” Iraq Business News reports.
Lebanon Banks – “Banks in cash-strapped Lebanon have suspended dollar withdrawals until the airport reopens, a banking source said on Monday, after authorities grounded flights to halt the spread of the novel coronavirus,” Jordan Times/AFP reports.
Egypt/Sawiris – “Businessman Naguib Sawiris warned Sunday against the continuation of the curfew after the two scheduled weeks, noting that the private sector is forced to cut salaries and cut out part of the employment,” Egypt Today reports.
Algeria/Sonatrach – “Sonatrach group intends to reduce by 50% its budget in 2020 and postpone non-urgent projects following the impact of the new coronavirus (Covid 19) on oil markets, said CEO Toufik Hakkar in an interview with “El-Khabar” daily released Sunday,” Algeria Press Service reports.
Middle East and North Africa Top Business Stories – March 30
Oil Price – “Oil prices fell sharply on Monday, with U.S. crude briefly dropping below $20 and Brent hitting its lowest in 18 years, on heightened fears that the global coronavirus shutdown could last months and demand for fuel could decline further,” Reuters reports.
Dubai Expo – “The Expo 2020 Dubai is expected to be delayed by up to a year due to the coronavirus pandemic, according to sources familiar with the matter,” Gulf News/Reuters reports
Lebanon Economy – “Lebanon’s Finance Minister Ghazi Wazni warned that the country’s GDP could drop by 12 percent in 2020 due to the deteriorating conditions,” The Daily Star of Lebanon reports.
Saudi Oil – “Saudi Arabia has announced it will raise its oil exports to a record 10.6 million barrels per day starting from May amid an escalating price war with Russia,” Arabian Business/Bloomberg/AFP reports.
Turkey Banks – “Turkey’s banking sector recorded 15.1 billion Turkish liras ($2.4 billion) net profits as of end-February, the country’s banking watchdog said on March 30,” Hurriyet Daily News reports.
Israel/Aviation – El Al Chairman Eli Defes says that time is running out to save the airline, which seeks a $200-300 million state guaranteed loan, Globes of Israel reports.
Egypt/Coronavirus – “Egypt’s President Abdel Fattah al-Sisi has told the relevant authorities to boost strategic reserves of staple goods, a presidency spokesman said on Monday, as global concerns about food security rise amidst the coronavirus crisis,” Reuters reports.
Middle East-North Africa Top Business Stories – March 29, 2020
GCC/MENA Slowdown – “Oil exporting countries in the Middle East and North Africa (Mena), especially the GCC countries are expected to experience a drastic slowdown in economic growth due to the impact of coronavirus outbreak (COVID-19) and a plunge in oil prices and global oil demand, according Institute of International Finance (IIF),” Gulf News reports.
Lebanon Debt – “Lebanon’s economic model of a high interest rate regime that attracted billions of dollars in deposits is “broken” and the country is committed to carrying out a four-point recovery plan that it hopes to finalise before the end of the year,” The National reports.
Lebanon/Coronavirus – “Lebanon’s confirmed coronavirus disease (COVID-19) tally jumped to 412 on Saturday, prompting one medical expert to warn the country faces its peak infection rate next week,” Arab News reports.
Tourism – “The Arab Tourism Organization estimated the decline in the sector’s revenues at $30.6 billion in Arab countries by the end of April, if the pandemic is not controlled,” Egypt Today reports.
Qatar/Aviation – “Qatar Airways will have to seek government support eventually, Chief Executive Akbar al-Baker told Reuters on Sunday, warning the Middle East carrier could soon run out of cash needed to continue flying,” Daily Sabah reports.
Iran/Aviation – “Iranians airlines have canceled nearly 90 percent of their flights planned for a holiday season after the novel coronavirus pandemic caused many travelers to stay home,” Iran Daily reports.
Iraq Economy – “Iraq is cratering on almost every front. Oil revenues, the government’s main source of income, have plummeted as the world price of oil has crashed and the government has resorted to asking for donations to help it weather the pandemic,” The New York Times reports.
Middle East/North Africa Top Business Stories – March 28
Saudi/OPEC Oil – “Saudi Arabia said it was not in talks with Russia to balance oil markets despite an attempt by Moscow to increase the members of the Opec+,” Gulf Daily News reports.
GCC Banks – “Downward pressure on profitability and loan quality due to deteriorating operating conditions resulting from low oil prices and the impact of coronavirus (COVID-19) outbreak is likely to result in more credit rating downgrades of banks in the region, according to rating agencies,” Gulf News reports.
Sovereign Wealth Funds – “On top of the collapse of oil prices and meltdown in global markets, Gulf sovereign wealth funds are channeling some of their billions back to counter the recession triggered by the coronavirus pandemic. The decline in assets could exceed $300 billion this year, according to the Institute of International Finance, the industry’s global association,” Arabian Business reports.
Saudi Arabia Bonds – “Saudi Arabia has sold more than SR15 billion (nearly $4 billion) in Islamic bonds, as the Kingdom seeks to develop its local debt market,” Arab News reports.
Lebanon Debt Restructuring – “Lebanon has appointed DF King Limited, an Orient Capital Company, to help identify holders of the country’s Eurobonds as it works out a broad debt restructuring, a finance ministry statement said Friday,” The Daily Star/Reuters reports.
Morocco/Covid-19 – “Despite a significant increase in Morocco’s current account deficit (CAD) and external finances due to the Covid-19 pandemic, the country will overcome the challenges, predicts a recent report from American credit rating agency Fitch Ratings,” Morocco World News reports.
Thailand’s economy is in trouble. The Bank of Thailand said on Thursday that the Southeast Asian nation’s economy is headed for a 5.3% contraction. The dual shock of a dramatic slowdown in tourist arrivals and in merchandise trade will hit the economy hard.
Thailand Business News reports that the “Thai economy would markedly contract in 2020 as tourist figures and merchandise exports were severely affected by the COVID-19 outbreak, the slowdown of trading partner economies, and supply chain disruptions in many countries.”
Thailand generally receives 100,000 foreign visitors a day, according to government figures, and that number is now hovering at nearly zero, Thailand Business news reports.
Middle East Top Business Stories – March 27
AIRLINES – “As coronavirus grounds airlines, plunging the industry into unprecedented crisis, Middle East carriers that have been in the red for years must urgently tap assistance from governments facing their own revenue slump,” AFP/Arab News reports.
SAUDI ARABIA – “A group of Republican senators claimed Wednesday that Saudi Arabia and Russia have embarked upon economic warfare against the United States, urging the kingdom to leave the Organization of Petroleum-Exporting Countries (OPEC) and instead become a ‘free market energy powerhouse,'” The Daily Sabah reports.
OIL – “Oil prices fell on Friday as demand destruction caused by the coronavirus outweighed stimulus efforts by policymakers around the world and the United States faced the prospect of becoming the next global epicenter of the pandemic,” Reuters reports.
JORDAN – “IMF Executive Board Approves US$1.3 billion Extended Arrangement Under the Extended Fund Facility for Jordan,” the IMF reports in a press release.
REGIONAL – “Governments across the Middle East and North Africa have taken increasingly draconian steps over the past couple of weeks to contain the coronavirus outbreak and, as a result, there will be much more economic damage than we had previously thought. We now expect the region as a whole to contract by around 1.7% this year, which would mark the worst performance since the early 1980s,” Capital Economics Reports.
EGYPT – “A 3% interest rate cut by the Central Bank of Egypt and a financial lifeline worth 20 billion Egyptian pounds ($1.27 billion) have lifted Egypt’s equities over the past week. However, the positive effects may be short-lived if the COVID-19 crisis persists,” Al-Monitor reports.
GLOBAL – Global foreign direct investment (FDI) is expected to fall 30 to 40 per cent during 2020-21 due to restrictions put in place to fight the spread of coronavirus, according to a new report from the United Nations, The National reports.
Middle East Top Business Stories – March 26, 2020
JORDAN – “Jordan’s finance minister said on Wednesday the IMF had approved a four-year, $1.3bn funding program that signalled confidence in the country’s reform agenda as it took measures to cushion its economy from the fallout of coronavirus,” Arab News/Reuters reports.
SAUDI ARABIA – “Saudi Arabia on Wednesday sealed off the capital Riyadh and two of Islam’s holiest cities and extended curfew hours as it reported its second death from the new coronavirus,” Arabian Business reports.
OIL PRICES – “Oil prices fell on Thursday, ending three sessions of gains, as movement restrictions worldwide to contain the coronavirus destroyed demand and overshadowed expectations that a U.S. $2 trillion emergency stimulus will bolster economic activity,” Reuters reports.
LEBANON – “Lebanon will stop paying all dollar-denominated eurobonds as it seeks to come up with an exit plan from its worst economic crisis in three decades and tries to restore stability and preserve its foreign exchange reserves,” The National reports.
IRAN – “Iran has started an intercity travel ban, an Iranian official said in a televised news conference on Thursday, a day after Iran’s government spokesman warned the country might face a surge of cases in the coronavirus pandemic,” Reuters reports.
In an unprecedented move, Saudi Arabia has sealed off three major cities, barring exit or entry to the country’s capital Riyadh, and the two holy cities of Mecca and Medina in response to the coronavirus pandemic, as reported in global news agencies.
The Kingdom also imposed a wide-ranging nation-wide curfew on residents that will begin at 3 PM and end at 6 AM every day for a three week period. Heavy fines will be handed out to those who flout the curfew.
“The kingdom barred entry and exit from Riyadh as well as Mecca and Medina and prohibited movement between all provinces, the official Saudi Press Agency reported, as the health ministry said the total number of infections spiked to 900,” AFP reported.
Saudi Arabia last week announced some $32 billion in stimulus measures to support its economy hit hard by both the global coronavirus crisis and a dramatic fall in oil prices.
Fareed Mohamedi is one of the smartest guys I know on oil markets, the geopolitics of energy, the New Silk Road, and the political economies of oil-rich states. He has worked at Statoil, PFC Energy, Moody’s Investor Service, the Institute of International Finance, and Wharton Econometrics, among other places.
I’ve known him for two decades, and have always been enriched by his insights. I called him to discuss Covid-19 and where we stand. Here are some of his thoughts, edited for brevity.
Shale: Troubles Ahead
“Shale oil in the US is so capital and labor intensive, and lower oil prices will continue to squeeze many of these producers. The important point to remember is that most of these shale producers do not generate a lot of cash. What they generate is growth. They show growth. They say to Wall Street: ‘You should invest in me. I am X today, but I will be 2x tomorrow, so continue financing my cash flow and then I’ll flip this company to an Exxon or a major.’ That story worked for a while, but Wall Street is losing their romance with shale. They are saying in return; ‘I’m too exposed to you and would like to leave now.’ This Wall Street loss of faith in shale will be just as important as the falling oil price. Without appropriate funding, many of the active shale producers today simply cannot survive.”
“Their revenues will be much lower than costs and Wall Street will abandon them.”
“For Obama, the shale oil sector saved him in those bleak days of 2008-9 because it created a lot of jobs. We could see lots of job losses in shale over the next year.”
Oil Prices and the Saudi-Russia Oil War
“I think all sides will come to their senses and start playing nicely again. If you want $5 oil, the market will give you $5 oil, and nobody wants $5 oil.”
“We are running out of storage capacity. Distressed tankers all over the world are looking for a market.”
“If we begin to see cooperation again from Riyadh and Moscow, we could get back to $40 oil. The China rebound will come and demand will be restored to China. Balances will tighten up. Let’s say the Saudis cut back to 9.5 mbpd and UAE and Kuwait go to 2.8 mbps, and demand starts to revive in China, but is still weak in the West, we could see the price firming and inching upward.”
“The second quarter is often weak for prices in general because many refineries go on turn around (technical term?), but by the third quarter we could get back to $40, and possibly even $50 for the fourth quarter.”
The Future of Oil
“The writing is on the wall. Oil’s best days are behind it.”
“The majors will be ok in the short-term. When we think of a traditional big oil play, there is a lot of capital up front and you harvest it for 25 years. The majors can finance everything off their balance sheets. Although they too are struggling to keep Wall Street interested in them — for that they have to pay big dividends which in a low oil price environment will require them to borrow”
“This is really going to hurt oil producing countries. It will accelerate the move away from oil, even though oil is cheap.”
“We could see one last big price boost by the mid 2020s. By late 2020s and early 2030s, and then we’ll be entering the twilight of oil. Don’t get me wrong. The world will still demand a lot of oil, but the growth in demand will slow dramatically and sort of plateau.”