Oil and Petroleum Products

It’s happened several times before: geopolitical tensions between Saudi Arabia and Russia have led to a dramatic drop in oil prices in years past. But the breakdown in Saudi-Russian cooperation in oil markets over the weekend is strikingly different this time.

The new coronavirus has led to a slowdown in economic activity in China and East Asia more broadly. The global price of oil has now fallen to $53 a barrel. This is beginning to affect the oil-exporting countries of Africa. According to Africa Confidential, three-quarters of Nigeria’s and Angola’s oil production ear-marked for export in April is unsold. Similar deficits are reported from Chad, Republic of Congo, and Gabon. Though oil is a declining percentage of African economic activity, many governments remain overly dependent on it for their revenue. In Nigeria, oil accounts for as much as 70 percent of total government revenue (federal, state, and local) and 90 percent of export earnings; in Angola, oil accounts for around 75 percent of total government revenue and 90 percent of export earnings. The budget of the Federal Republic of Nigeria, however, is based on an oil price of $57 per barrel. The Nigerian finance minister, Zainab Ahmed, is accordingly conducting a review of the national budget.  Thus far, Africa appears to be less directly affected by the coronavirus than other parts of the world. Sub-Saharan Africa has only eight reported cases as of March 5. (Including North Africa brings the total to forty-three.) But it is not clear whether the weakness of public health systems means that the disease is present to a greater extent than statistics would indicate. Still, the experience of West Africa and Democratic Republic of Congo with Ebola may have left those health systems more prepared to prevent coronavirus from spreading.  Governments in Africa overall remain weaker and less developed than in other parts of the world. Countries there, particularly where governments are heavily reliant on commodities for revenue, are likely to suffer more from the general global economic slowdown, even if they avoid a major local coronavirus outbreak.

Though the current Delta insurgency has been underway since 2005, discussions of Nigerian insecurity at present tend to overlook it. Instead, the focus is on the northeast, where the jihadist Boko Haram is at war with the Nigerian government, and the Middle Belt, where communities and militants fight over land, water, and cattle and often exacerbated by ethnic and religious differences. What sets the Delta apart is that it produces most of Nigeria’s oil, which is the source of most of the Nigerian government’s revenue and essential for the stability of Nigeria’s current political system. A recently published annual report by the Foundation for Partnership Initiatives in the Niger Delta (PIND) is a salutary reminder of violence in the Delta. The report, the Niger Delta Annual Conflict Report [PDF], shows that there were 416 violent incidents resulting in over one thousand recorded deaths in 2019. In 2018, there had been 351 episodes resulting in 546 deaths. PIND ascribes much of the increase to organized crime, political rivalries, communal disputes, “cult clashes,” and land disputes. Cults are often quasi-criminal, quasi-religious, and often have political connections. PIND notes that political violence increased while communal violence declined. The states most affected were Rivers, Edo, and Delta.  Oil was discovered in the Delta in marketable quantities in the 1950s and came to dominate Nigeria’s market economy after the end of the civil war in 1970. In some parts of the Delta, the petroleum industry has so polluted the environment that the way local people had traditionally earned their living—fishing and farming—no longer was possible. More generally, there is resentment that the region does not benefit enough from the oil wealth. Under the principle of “federal character,” oil revenue is shared out by the federal government to the states and local governments. The federal government retains for its use about half of the revenue. There is a bonus paid to the oil producing states that is contentious; the recipients see it as too small, while much of the rest of the country sees it as too large. Under these circumstances, discontent is endemic among people in the Delta and periodically erupts into insurrection. At present, the federal government keeps the insurrection at a relatively low level by payments to militia leaders, or “amnesty payments,” which date back to the end of the worst of the insurrection. When the Buhari administration tried to stop them, militants resumed attacks on the oil infrastructure, crippling government revenue, compelling the Buhari administration to resume them.  Thus far, the increase in violence does not appear to have led to more sabotage of oil producing facilities, nor to a decline in oil production. The concern, however, must be that if unchecked it will eventually affect oil producing facilities. The Delta is inherently unstable, with multiple warlords and militias competing for power and a larger share of the government payoff.

As nations prepare for a possible health emergency, world leaders are realizing that the new coronavirus is going to be harder to contain than previously hoped. Mobilization is continuing, and concerns are mounting about both health and economic consequences. Washington, like other global capitals, is starting to worry about the economic effects of the coronavirus. Today’s reports that the city of Milan, Italy’s financial hub and its second largest city, was close to lockdown as a result of hints of a spread of the coronavirus in northern Italy was further evidence that the disease, and its economic consequences, are not under containment. Italy’s largest bank, UniCredit SpA, is among Italian firms encouraging its employees to work from home. South Korea has also been hit with the coronavirus outbreak as well as declining imports and exports to and from China. Automobiles are one of South Korea’s major export sectors and car manufacturing has been struck by the economic disruption in China. In both South Korea and Japan, major financial institutions are asking employees to work remotely from home. A telling economic indicator that the coronavirus is starting to take a global economic toll and not just a toll on China is falling prices in global oil and gas markets. Prices for liquefied natural gas (LNG) were already on a downturn from rising supplies and mild winter weather, but now have fallen to near rock bottom levels, with a few U.S. producers willing to pay potential users to take their surplus domestic natural gas away. Oil also started dropping again on Monday as it became clear that disruptions to global shipping and trade could go beyond China. Eighty percent of the world’s goods move by ship, and demand for shipping is starting to slip noticeably. To name one example, in the Persian Gulf, February loadings of large crude carriers dropped dramatically to single digits, down from the usual thirty tankers or more. A Citi update on the coronavirus this week noted that overall Korean exports are down by almost ten percent so far this month while imports are lower by fifteen percent. The bank predicts worsening trade effects on South Korea for March. The Port of Long Beach is also reporting a significant drop in container ship volumes by as much as forty percent. Demand for marine fuel globally was expected to average around 4.2 million b/d, according to statistics from the Organization of Petroleum Exporting Countries (OPEC). Aviation oil use is another 6.6 million b/d. Total transportation oil use averages around 58 million b/d, of which thirty nine percent reflects usage related to freight including twenty three percent from trucking, OPEC estimates. So far, analysts are only projecting a loss of 135,000 b/d of jet fuel demand in Asia. That could prove optimistic if travelers globally lose confidence in the safety of air travel as locations with coronavirus outbreaks continue to proliferate. In sum, the full influence of coronavirus disruptions on oil markets is likely yet to come. But perhaps, more important and lasting than the instantaneous loss of the economic value of trade and tourism, is the realization by leaders from around the world of how vulnerable their economies are to global supply chains. The Donald J. Trump administration was already focused on reducing the dependence of the U.S. defense industry on Chinese magnets, rare earth minerals, and other metals processing inputs and manufacturing. Now, some conservative voices are getting louder, including President Trump’s trade advisor Peter Navarro, who recently called on the U.S. pharmaceutical and medical supply industry to reduce its dependence on imports. In an unrelated move, Congressional Republican Senator Marco Rubio and Democratic Senator Chris Murphy sent a letter to the U.S. Food and Drug administration asking if it is prepared to screen the safety of pharmaceutical, food and medical supply imports from China. On the flip side, China could not be in a position, or willing, to export any vital medical equipment. Gordon Chang, a professor of American studies at Stanford with a focus on American-Chinese relations including the history of Chinese railroad workers in America in the nineteenth century, published a blog today warning that the economic chaos from China could make itself felt to American consumers by April. A possible unintended consequence of the coronavirus could be a tightening of supply chains back to a national economic champions policy in major economies. Since China’s vast population has served as an economic engine to the entire global economy in general, and oil, in particular, such a change would be dramatic. Already, the United States and Europe have focused on the risks of relying too heavily on Chinese equipment to establish Fifth Generation (5G) telecommunications networks. Earlier this month, U.S. Attorney General William Barr floated the idea that the U.S. and its allies should take a “controlling” stake in European telecom firms Nokia and Ericsson as a way to prevent Chinese firm Huawei from dominate 5G wireless markets. The Europe Commission has also approved $3.5 billion in state aid towards the European Battery Alliance aimed at making the continent independent in raw materials, processing facilities, battery manufacturing plants, and recycling facilities needed for the electric car industry. If the economic after-effects of the spread of the coronavirus cripple major economic supply chains of more crucial industries, expect to see an acceleration of such trends.

The first priority in addressing the coronavirus is preserving global health. Lessons from the past show that the herculean task requires timely and credible action by governments, coordinating leadership from the World Health Organization, and constructive cooperation among nations. But as containment of the respiratory illness continues to face uncertainties, the fallout of the coronavirus is spreading beyond national and global health systems into the economic sphere. The coronavirus has also taken center stage as a black swan in global oil and gas markets, and first signs are that its influence could be dramatic. Depending how long the health crisis lasts, it is worth considering whether there could be larger ramifications than just a few weeks of market volatility. Many analysts are referencing the Severe Acute Respiratory Syndrome (SARS) epidemic of 2003 in thinking about how long and how extensive the outbreak could be on international travel. Studying similar past events can often provide clues for how a new black swan event can accelerate or decelerate existing trends. One unexpected outcome of the SARS epidemic was that it accelerated the surge in car buying in China in 2003 as urban populations began to shun public transit. Car culture was definitely on the upswing in China at the time. But car sales in China rose by over 30 percent in 2003 compared to a year earlier, as anxiety about being in crowded places elevated. With over 46 million people in China under a temporary quarantine order due to the coronavirus, it is worth considering what unexpected consequences could result this time around. For example, telecommuting could become more accepted and widely practiced post-coronavirus, not because people remain afraid to go to work, but because working or holding meetings remotely could be found to offer productivity gains to businesses, especially where employees are in different locations or time zones. Several Wall Street banks have lowered their oil price expectations for the first half of 2020 based on the coronavirus. Barclays is suggesting the effects could be transitory, with a loss in oil demand from China in the range of 600,000 to 800,000 b/d in the first quarter of 2020, resulting in about a $2 a barrel lower price expectation over the year. Citi’s projections are more dramatic, suggesting current freight and passenger traffic could be down substantially for several weeks, totaling a loss of about 1 million b/d of oil demand off China’s norm of 13.1 million b/d for oil use. Citi estimates freight is running 40 percent lower than usual, with consumer use even more substantially affected. As a result, Citi is lowering their oil price forecast for the first quarter of 2020 from $69 a barrel for benchmark Brent crude to $54 a barrel, warning that a dip to $40 could be possible, especially when combined with current warm winter temperatures. The fall in the volume of global tourism is also hitting jet fuel demand. Chinese tourists made over 150 million overseas trips in 2018, double the rate of the next largest nation of travelers, and were expected to account for a quarter of all tourism by 2030. Beyond flagging oil use, China is currently turning away cargoes of liquefied natural gas (LNG). China’s temporary exit from the LNG market has worsened oversupply in the LNG market already hit hard by ample new production and weaker than usual winter demand. Asian LNG prices hit an all-time record low last week. These projections raise the question of how transitory the weakness in China’s energy importing will be in the coming weeks and whether there will be any long run ramifications for energy use that are not yet anticipated. The U.S.-China trade deal had targeted $50 billion in energy purchases by China of U.S. oil, natural gas, and coal. That figure already looked like a stretch and could be even harder to reach now. Even before the coronavirus outbreak, falling global spot prices for LNG had prompted Chinese state firm Sinopec to delay signing a $16 billion multi-year supply arrangement with American firm Cheniere to purchase U.S. LNG. Trade volumes in global goods, in general, had already taken a hit in 2019 as companies looked to reorganize supply chains to reduce geopolitical risk. That trend is unlikely to be reversed this year, with ramifications for projections that global freight demand would support greater oil use and offset any losses in oil demand that could come from an upsurge in sales of electric automobiles and other inroads for energy efficient technology adoption. For the time being, supply disruptions from Libya and a possible new round of cuts from the Organization of Petroleum Exporting Countries (OPEC) could bail out U.S. independent producers whose revenues, and to some extent, production rates are highly sensitive to oil price trends. But the boost expected to come to the U.S. energy sector from new trade deals could evaporate quickly if China is unable to get its economy back on its feet quickly as a result of the coronavirus outbreak.

The war between Libya’s rival governments is intensifying as more countries wade into the conflict, and analysts fear that a proxy war is brewing in the North African nation.

Saudi Arabia’s crown prince will take money from investors in the national oil company—but he’ll be giving up far more than he thinks.

Iran poses an acute threat to oil infrastructure across the Middle East, potentially allowing it to extort concessions from world powers.    

Anti-government protests could mean humanitarian crisis in Haiti, a country with a long history of instability.

It has been four weeks since a major military attack on critical oil facilities in Saudi Arabia shocked the world and very little has happened to suggest such an event couldn’t happen again. That begs the question: Why are oil prices falling? If you are a politician sitting in Washington D.C., it could be tempting to explain the calm as stemming from the changed crude oil supply situation of the United States where rising crude oil production – now exceeding 12 million barrels a day – has allowed the United States to become a major crude oil exporter. Citigroup is projecting that the startup of a new Texas oil pipeline will allow U.S. crude oil exports to expand into 2020, up from the 3 million b/d recorded over the summer. That’s created the impression that rising U.S. oil production can replace any disruption from the Middle East. Unfortunately, the numbers don’t actually suggest that. Before the United States takes an energy independence victory lap, it could be wise to consider that America’s crude oil import balance isn’t all that different than it was ahead of the 1973 oil crisis. Yes, that’s right. You did not misunderstand me. I am saying we relied on the same percentage of crude oil imports in 1972 as we do today. In 1973, the United States was a crude oil importer. In 2019, the United States is a crude oil importer. The United States still has to worry about a major disruption in global oil supply. Here are the numbers: In 1972, the United States consumed an average of 16.4 million barrels a day (b/d) of oil. That same year, U.S. crude oil production was 11.2 million b/d and imports of foreign crude oil, to the tune of 5.2 million b/d represented 32 percent of U.S. consumption. By the fall of 1973, U.S. crude oil imports were about 6.2 million b/d. In July 2019 (the latest month for official U.S. government statistics), U.S. crude oil production was 11.9 million b/d, an impressive rise since 2008 when U.S. crude oil production bottomed out at 5 million b/d. Oil consumption in July 2019 was 21.1 million b/d. The deficit of 9.2 million b/d of crude oil or 43 percent of U.S. consumption is complex. That’s because U.S. shale production includes an additional 4.8 million barrels a day of natural gas liquids, some of which can be used in U.S. oil refineries. Ultimately, the United States imported about 7 million b/d of crude oil from other countries in July 2019. We exported 2.9 million b/d of U.S. light sweet crude oil from tight oil plays in Texas, Oklahoma, and other states for net crude imports of 4.2 million b/d. The net import number is about 20 percent of U.S. oil consumption, better than the 32 percent in 1973, but not enough to matter. The 7 million barrels a day of physical crude oil imports from abroad, which includes oil from Mexico and Canada, is 33 percent, roughly the same level as in 1973. The United States is, however, also a large exporter of refined products. Presumably, in an extreme war situation, the United States could limit those exports to prevent physical shortages in the United States. Saudi Arabian oil production represents about 10 percent of global oil supply. If it were substantially knocked out by a second or third military attack, it would be hard for U.S. oil producers to replace that amount of oil in a short period of time. Saudi Arabia was exporting 7.4 million b/d of crude oil prior to September 14 when a combination of cruise missiles and attack drones damaged major crude oil processing plants at Abqaiq and important facilities at the large 1.5 million b/d Khurais oil field. Expedited repairs and redundant equipment and facilities have allowed Saudi Arabia to restore export levels quickly, but a second attack would be harder to bounce back from. Spare oil production capacity is constrained and inventories are being drawn down. Moreover, other regional oil facilities in Southern Iraq, in the United Arab Emirates and in Kuwait could be vulnerable to similar attacks. By comparison, U.S. oil production grew close to 2 million b/d in 2018 and that was an amazing technical accomplishment, but it is less likely that U.S. producers could increase output by three, four, or five million b/d in short order to replace lost Saudi or Iraqi barrels. It would likely take the United States several years to achieve this larger level of increase. While U.S. tight oil production from shale could be expected to increase in three to six months following a major rise in oil prices, bottlenecks could hinder a fast response. Hiring additional work crews, purchasing drilling equipment, and other logistical obstacles could slow down the U.S. industry response initially. The time lag could leave markets more vulnerable to any major disruption of oil from the Middle East that lasts longer than a month or two. U.S. shale production grew less than 1 percent in early 2019 as operational issues plagued firms such as Concho Resources, which suffered a production setback when the company found it was placing its wells too close together. Stock values of some smaller U.S. independent oil producers have taken a beating this year, and some speculators are positioning themselves in credit swaps markets to benefit from any fall in oil prices that could worsen U.S. shale producers’ performance. Institutional investors and their hedge fund managers have seen volatile returns since 2014 when holdings in shale companies turned suddenly negative from the collapse in oil prices. As a result, easy capital to expand drilling programs in the event of an oil price rise could be harder to come by this time around. Giant U.S. independent oil producer ConocoPhillips just announced it was raising its dividend by 38 percent and buying back 5 percent of its shares in an effort to please investors. All of this should mean that oil prices should be carrying a war premium. Instead, prices are falling. Cornerstone Macro suggests in a recent note that it is possible that oil markets have “deduced from all this that the odds of a negotiated way out of strife and sanctions, and an imminent return of Iran’s supply to market” is built into oil price expectations. The macro analysts say they are “less sanguine” about that outcome. It does seem optimistic under the circumstances of escalating attacks on regional oil facilities since January 2018. Europe, Japan, and most recently Pakistan, have actively tried to defuse the conflict between Iran and Saudi Arabia. But even if a ceasefire does seem to take hold in Yemen, for example, the military leverage Iran has over major installations of its neighbors would not be alleviated unless the region saw some substantial movement towards demilitarization of weapons systems. That seems unlikely given the number of active conflicts and internal protests across the Middle East. Another explanation for falling oil prices are fears that oil demand will sink significantly in 2020 as recession grips major economies. Oil demand in the industrialized economies fell by 400,000 b/d in the first half of 2019, compared to a year earlier, including a 200,000 b/d drop compared to last year for Europe’s big five economies – Germany, France, UK, Italy and Spain. Sentiment is that continuation of the U.S.-China trade war will start to take its toll on Asian oil demand as well, though Asian oil demand is expected to average 28 million b/d this year, up from 27.1 million b/d in 2018. Global oil demand is running about 1 million b/d higher this year than 2018 levels. There could also be a simpler, structural explanation for languishing oil prices. There are fewer speculators willing to bet the price of oil up. Many of the heady oil traders known for making big bets have retired in recent years.  Also hedging by oil companies in which shale firms sell their production forward to lock in oil prices as they were rising this fall has effectively kept a lid on the market. The combination of these two market features has lessened the momentum to speculative bubbles in oil. Long-term investors also worry that oil demand will peak eventually as new oil saving technologies take hold and governments act to limit greenhouse gas emissions, and this has reduced interest in long-short commodity funds. Still, on September 14 when Saudi Arabia’s oil facilities were attacked, U.S. oil prices went up 15 percent in one day. Traders who were betting the price of oil would continue to go down had to adjust their bets and that created a large price increase. The problem with Iran has not, in fact, been resolved and markets could see a similar black swan event. Any global event will affect U.S. markets, regardless of how much oil we have at home. Oil is a global commodity and its pricing is determined by global supply and demand. Since the United States is part of the global market and imports crude oil from abroad, U.S. crude oil prices are influenced by global pricing trends. The easiest way to explain this phenomenon is to consider water in a swimming pool. If someone comes with a giant bucket and takes water out of the shallow end of the pool, the water level goes down not just in the shallow end of the pool but for the entire pool equally. By the same token, if more water is put in the pool by a water hose, the water level goes up throughout the pool and not just on the side where the hose pours in. The oil market is the same. If the oil market loses Saudi or Iranian or Iraqi oil, all oil commodity prices are affected for all users of oil, not just users of the disrupted oil. Washington pundits could be advised to keep that in mind as they consider how the United States will prepare for the volatile situation across the Middle East. 1973 could seem like a long time ago and U.S. production could be rebounding, but it is not the case that the U.S. no longer has to “care.” There are 276 million vehicles on the road in the United States of which 99 percent run on oil. We should change that, but so far, we are not moving quickly in that direction. Just saying…

As the 2019 UN Climate Action Summit concludes, world leaders need some outside the box thinking about steps to strengthen their national commitments to shrink their greenhouse gas emissions ahead of the next phase of the Paris Agreement.

The president is in the difficult position of either backing down in the face of Iranian threats and suspected attacks or escalating the conflict in ways he clearly wants to avoid.

In the swirl of conflicting reports about who might be responsible for the latest attack against Saudi Arabian oil installations, it is important not to miss what makes this latest attack categorically different from past skirmishes. Saudi Arabia and Iran have been engaged in a deadly proxy war for a number of years, and their respective proxies engaged in oil sabotage as far back as early 2018. More recently, Iranian-backed proxies have hassled international oil tankers, bombed an ExxonMobil operations center in Southern Iraq, targeted a key Saudi pipeline, and attacked a strategically important oil storage hub in the United Arab Emirates. These previous incidents, while signaling the vast vulnerabilities of the Gulf region’s massive energy operations, failed to rise to an emergency because the damages involved were relatively easy to ameliorate. Many considered these early aggressions as an ominous warning sign that more serious attacks could come if tensions continued to escalate. That day has arrived. The perpetrators of this past weekend’s attack on critical infrastructure at Saudi Arabia’s second largest oil field at Khurais and its large and vital crude oil stabilization center at Abqaiq selected high value targets that could potentially maximize the size and length of a partial cessation of Saudi crude oil exports. A U.S. government assessment suggested that the Abqaiq facility that is used to strip impurities such poisonous hydrogen sulfide out of raw crude oil to prepare it for shipping and use suffered from direct hits in at least 17 different places. Damaged stabilization towers and gasoil separation plants (GOSPs) that remove natural gas, sand, and natural gas liquids from raw crude, can be costly and time-consuming to repair or replace.  The targets were selected with an eye to disrupt a large portion of Saudi Arabia’s oil deliveries to market for a long time, not the couple of days more typical of a minor pipeline attack or small volume of a diverted oil tanker.  Shutting down oil fields in a sudden, unplanned manner, which resulted from the extensive damage to the stabilization units, can also create its own unique set of problems. U.S. security analysts have been gaming a missile attack on the Abqaiq stabilization complex for years, apparently not terribly accurately.   The immediate interruption of 5.7 million barrels a day of Saudi crude oil exports due to the attack generated the largest price jump in U.K. Brent crude futures on record. The disruption is currently being offset by sales of oil from Saudi storage facilities. Increases in production from unused Saudi oil fields and from spare capacity from other countries such as the United Arab Emirates will provide offsets in the longer run.  About 5.2 million b/d was lost to markets in the aftermath of Iraq’s invasion of Kuwait in 1990. During the eight year Iraq-Iran war that ended in 1988, the oil export infrastructure of both Iran and Iraq was mostly destroyed. The problem moving forward for Saudi Arabia (and for the United States, should it desire to intervene) is that it may prove tricky to thwart new oil-related attacks by Iran and its proxies. It is very unclear if a U.S.-led coalition preventative attack against missile batteries could even be effective. Iranian proxies and direct Iranian military assets are located on multiple fronts along the Saudi border. Distances are close and oil installations of other countries could also become at risk in any forceful escalation of violence. With so many armed parties across the Middle East, identifying and eliminating major threats to oil facilities will be challenging. Such threats can take many forms including missiles, armed drones, and cyber-attacks. Both the United States and most likely Iran have capability to engage in cyberattacks against each other’s electricity networks.  The real question is why has the deterrence of more conflict, even potentially against targets inside the Iranian homeland, failed to discourage such a large jugular attack on Saudi Arabia’s critical oil nodes? The explanation that it is the best way to force a negotiation rings hollow. The larger move against Saudi Arabia’s oil lifeblood puts the United States in a quandary. On the one hand, the Trump administration has been eager to consider stricter measures, including military strikes, that might deter Iran from new provocations. On the other hand, the United States and its allies surely want to avoid triggering a wider conflict. The attacks on Abqaiq and Khurais seem to give Iran several benefits, including putting the Saudi regime under greater financial pressure, creating a vast political dilemma for President Donald Trump in an election year, and enhancing perceptions of Iran’s hard power in the region.   If one could turn back the clock, doing more to end the bloodshed in Yemen might have provided more maneuvering room before things got to this regrettable juncture. Gestures toward negotiations, including the shuffling of higher volumes of IOU Iranian crude oil exports towards Asia and talk of credit lines, appear stillborn. The region is lurching towards potential economic disaster that will be made so much worse as the climate warms.  Iranian leaders might see geopolitical victory on their horizon but it could turn out to be a hollow one for their 80 million people.

The attacks on the sprawling Saudi oil facility bear all the hallmarks of an Iranian operation, marking a dangerous new phase in Gulf tensions.

Saudi Arabia’s oil industry is on the move with strategic changes in leadership, investments, and a broadening of its global businesses. The moves, which include larger investments in refining and petrochemicals as well as global natural gas, should help the kingdom weather the large changes coming in global energy markets. Studies show that integration across the petroleum value chain can enhance long range profits for large businesses like Saudi Aramco. Saudi Arabia has also focused efforts on reducing the swings of the oil price cycle through its leadership to broker production cut agreements between the Organization of Petroleum Exporting Countries (OPEC) and other major producers like Russia (OPEC plus). Speaking at the sidelines of a major energy gathering, Saudi Arabia’s new oil minister, Prince Abdul Aziz Bin Salman, whose long service in the highest ranks of the Saudi oil sector spans multiple oil boom and bust cycles, told reporters that the OPEC plus alliance “was staying for the long term.”  Even as Saudi Arabia positions itself for the future, current challenges to Saudi aspirations for a higher oil price remain thorny. Continuation of the U.S.-China trade war has raised fears of a recession in Asia, a major growth market for oil use. The Asian economic flu of 1998 ushered in a period of low oil prices. Prospects that more oil will be coming to markets from Iran is another headwind for oil prices. Deterioration of U.S.-China trade relations creates a disincentive for China to abide by U.S. sanctions against Iranian oil exports. French efforts to keep the Iranian nuclear deal afloat is another similar wildcard on the level of Iran’s oil exports. Iraq’s production is also at record levels and the United Arab Emirates is still moving ahead with its plans to increase its oil production capacity to 4 million b/d by the end of 2020. Limited OPEC spare oil production capacity is one factor that has underpins oil prices. Oil price edged higher earlier this summer amid Iranian attacks on shipping and oil installations in and around the Strait of Hormuz but ultimately concerns about a possible weakening in oil demand were attributed as a key variable acting to keep a lid on oil price levels. Markets are also still adjusting to the role U.S. tight oil plays in potentially shortening the oil price cycle. While the U.S. shale industry aggregated capitalization was battered in 2018 in the U.S. stock market, leading some to predict a slowdown in U.S. crude oil output growth, cost-cutting and automation is expected to turn the tide for many companies. Rystad Energy reported that the grouping of the 40 top dedicated U.S. shale companies achieved positive cash flow in the second quarter of 2019, indicating that dilemma OPEC faces in trying to underpin oil prices. The hedging practices of the shale industry also influences the oil cycle. As prices rise, shale producers have moved to lock in prices in futures markets, which in effect adds selling pressures in futures markets upticks. In a presentation to investors, for example, Occidental Petroleum revealed that it hedging program covered a sizable 300,000 b/d of production via a three way collar hedge structure for 2020 that included a short put at $45 (floor sold price), a long put at $55 (floor purchase price) and a short call (ceiling sold price) at $74.09 in addition to selling similarly priced call options in 2021. Non-OPEC production continued to be on the rise this summer, with sizable gains from Brazil and Norway. U.S. oil production is set to gain close to 1 million barrels a day in 2020. U.S. oil production including natural gas liquids was up almost 2 million barrels a day between June 2018 and June 2019. OPEC’s 2019 agreement was helped along by an extended contamination problem at Russia’s Druzhba crude oil pipeline and caused Russian production to hit a three-year low of 10.8 million barrels a day in July 2019. It remains to be seen what Russia’s position will be as its pact with OPEC comes due for renewal in early 2020. The state of U.S. oil production and the overall health of the global economy will likely be pivotal variables. Saudi Arabia’s Crown Prince Mohammed Bin Salman, the architect of Saudi oil policy, discussions with Russian President Vladimir Putin at the G-20 meetings in Osaka Japan lay the groundwork for the current OPEC plus production agreement. But the Russian leader has also expressed in the past satisfaction with current oil prices of $60 a barrel, a level in line with current prices.