Saudi Arabia, the oil cartel’s biggest
producer, may be faced with a stark choice: Take on the lion’s share
of oil-output cuts, or walk away from a deal if other producers won’t help,
writes The Wall Street Journal.
If Libya and Nigeria—which are recovering from output cuts due to violence—are exempt from output reductions and Iran and Iraq insist on being exempt from the oil pact, then Saudi Arabia is the key to keeping a deal together.
The main question is whether Saudi Arabia and its Persian Gulf Arab allies—Kuwait, Qatar and the United Arab Emirates—will take on the burden of cutting output enough to affect global supply and demand. Those countries account for almost half of OPEC’s 33.6 million barrels a day of production, and they are the cartel’s richest members.
FAITH IN OPEC DEAL TURNS OPTIONS TRADERS INTO OIL BULLS
Despite the uncertainty emanating from oil producers in Vienna, traders are betting that OPEC will come through with a curb on production that will boost oil prices, reports Gunjan Banerji.
Crude prices have jumped 8.7% since Nov. 14 when OPEC said its members agreed to cut output. Options players are betting on another 17% run-up in prices. As of Friday, traders have concentrated on contracts that pay out when West Texas Intermediate hits $55 a barrel.
While prices of crude futures have been whipsawed by uncertainty ahead of the oil cartel’s meeting this week, market participants have built up bullish positions in options.
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Headline crude prices for the week beginning 11 March 2019 – Brent: US$66/b; WTI: US$56/b
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In 2017, Norway’s Government Pension Fund Global – also known as the Oil Fund – proposed a complete divestment of oil and gas shares from its massive portfolio. Last week, the Norwegian government partially approved that request, allowing the Fund to exclude 134 upstream companies from the wealth fund. Players like Anadarko Petroleum, Chesapeake Energy, CNOOC, Premier Oil, Soco International and Tullow Oil will now no longer receive any investment from the Fund. That might seem like an inconsequential move, but it isn’t. With over US$1 trillion in assets – the Fund is the largest sovereign wealth fund in the world – it is a major market-shifting move.
Estimates suggest that the government directive will require the Oil Fund to sell some US$7.5 billion in stocks over an undefined period. Shares in the affected companies plunged after the announcement. The reaction is understandable. The Oil Fund holds over 1.3% of all global stocks and shares, including 2.3% of all European stocks. It holds stakes as large as of 2.4% of Royal Dutch Shell and 2.3% of BP, and has long been seen as a major investor and stabilising force in the energy sector.
It is this impression that the Fund is trying to change. Established in 1990 to invest surplus revenues of the booming Norwegian petroleum sector, prudent management has seen its value grow to some US$200,000 per Norwegian citizen today. Its value exceeds all other sovereign wealth funds, including those of China and Singapore. Energy shares – specifically oil and gas firms – have long been a major target for investment due to high returns and bumper dividends. But in 2017, the Fund recommended phasing out oil exploration from its ‘investment universe’. At the time, this was interpreted as yielding to pressure from environmental lobbies, but the Fund has made it clear that the move is for economic reasons.
Put simply, the Fund wants to move away from ‘putting all its eggs in one basket’. Income from Norway’s vast upstream industry – it is the largest producing country in Western Europe – funds the country’s welfare state and pays into the Fund. It has ethical standards – avoiding, for example, investment in tobacco firms – but has concluded that devoting a significant amount of its assets to oil and gas savings presents a double risk. During the good times, when crude prices are high and energy stocks booming, it is a boon. But during a downturn or a crash, it is a major risk. With typical Scandinavian restraint and prudence, the Fund has decided that it is best to minimise that risk by pouring its money into areas that run counter-cyclical to the energy industry.
However, the retreat is just partial. Exempt from the divestment will be oil and gas firms with significant renewable energy divisions – which include supermajors like Shell, BP and Total. This is touted as allowing the Fund to ride the crest of the renewable energy wave, but also manages to neatly fit into the image that Norway wants to project: balancing a major industry with being a responsible environmental steward. It’s the same reason why Equinor – in which the Fund holds a 67% stake – changed its name from Statoil, to project a broader spectrum of business away from oil into emerging energies like wind and solar. Because, as the Fund’s objective states, one day the oil will run out. But its value will carry on for future generations.
The Norway Oil Fund in a Nutshell