Just over a month ago Nigerian, Mohammed Sanusi Barkindo, was named the acting Secretary General of the Organisation of the Petroleum Exporting Countries (OPEC), replacing Libya’s Abdalla El-Badri who had been in the post for 9 long years, since 2007. Barkindo’s new appointment as Secretary General commences on the 1st of August 2016.
Barkindo takes the top position at one of the most challenging times OPEC has ever faced. Sustained low oil prices, continued growth in US fracking operations shifting supply trends, and tension between OPEC members Saudi Arabia and Iran.
However, Barkindo is not new to these types of challenges. Prior to his appointment last month he was the managing director of the Nigeria National Petroleum Corporation (NNPC) between 2009 to 2010, was Nigeria's representative to OPEC's Economic Commission Board for fifteen years, and even served as acting Secretary-General of OPEC in 2006.
The 72 year old, who originally studied in the UK and Caribbean, was also a director of the National Engineering and Technical Company (1991–1993), chairman of Stirling Civil Engineering Nigeria Limited (1991–2003) and chairman of the Federal Radio Corporation of Nigeria (2003–2005).
Barkindo will hope his extensive experience will help him navigate the OPEC ship through the stormy years to come. He will be buoyed by this week’s 23 cent gain in Brent Crude futures to $50.58 per barrel (as of July 5th 9:30 GMT). U.S. Crude was not left behind either as the Clc1 held gains of 17 cents to $49.16 per barrel.
However, there is no denying the severe volatilities that crude oil experienced over the last six months, making it nearly impossible to predict whether the "black gold" was going up or down at any particular time. Nevertheless, the main trend remained in an upward movement this week as investors continued to redevelop confidence in the once reliable commodity.
We can give Barkindo some credit for the rally in oil prices this week, after recent comments made by the OPEC chief and Khalid al-Falih, Saudi's energy minister. Perhaps the two most powerful men in OPEC agreed that the global oil market is nearing a point of normalisation. The duo also noted that an uptrend in crude oil prices would confirm the return of balance to the crude oil markets.
Barkindo was in Saudi Arabia as a guest of King Salman bin Abdulaziz for the Ramadan meal of iftar, in the holy city of Mecca. He no doubt also took the opportunity to discuss the impact of Iran re-entering the global oil market free of sanctions, which have held them back for many years. However, the oil rich Persian nation has hostile relations with Saudi Arabia and is keen to finally increase production to make up for export revenue they have missed out on, potentially destabilising a precariously balanced and over-supplied sector.
Barkindo will need to address the Iran situation, and has also planned talks with Russia “to discuss global oil markets, not mutual actions on global markets”, said Roman Morshavin, from the Russian Energy Ministry. The recent combined effort of OPEC and Russia to freeze production failed, with Saudi Arabia refusing to take part in any proposal that did not include Iran.
Back in Barkindo’s native Nigeria a June ceasefire with the Niger Delta Avengers militant group allowed a boost of output from 90,000 bpd from May, to a total 1.53 million bpd. Unfortunately, the ceasefire seems to have been temporary, as the Avengers again made headlines on Sunday with fresh attacks on oil infrastructure in the Delta.
All of this turbulence, both internal and external,
has called OPECs very existence into question, with several key figures calling
for the dissolution of the oil cartel. If Barkindo thought his appointment to the
hot seat was difficult, he will be looking anxiously ahead.
Can he influence and steer the cartel to what it was designed to achieve, a common sense win-win amongst member states? The world will be closely watching (and hoping) this August.
What do you think should be his top priorities in office?
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Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.
A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.
Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.
Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.
And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.
That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.
Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.
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