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Fitch: Crude Oil Prices to Average $52.50/b this Year

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Heritage Oil
  • Fitch: Crude Oil Prices to Average $52.50/b this Year

Fitch Ratings has forecast that crude oil prices would average $52.50 per barrel this year, representing an increase of $7.4 per barrel over $45.1 per barrel of 2016. As Fitch’s estimation was simmering in the market, oil prices rose to a one-month high on the missile attacks on Syria by the United States.

Fitch, which revealed its projection in a report on 14 major oil exporting countries in the Emerging Europe, the Middle East, Africa (EEMEA)(Nigeria inclusive) also stated that Nigeria needed an oil price of $139 per barrel to balance its budget.

Fitch, one of the world’s leading rating agencies, posited that the crude oil price forecast for this year was still below fiscal break-even levels under Fitch’s forecasts for 11 of 14 major Fitch-rated EEMEA oil-exporting sovereigns. Fiscal break-even level is the oil price at which the government’s fiscal balance would be zero.

Most major oil exporting countries in EEMEA still faced pressure from low oil prices nearly three years after the oil price shock hit, Fitch said, however, pointing out that, “Oil prices have started to recover, but remain below levels that would balance government budgets in a majority of large EEMEA exporters.”

The rating agency also pointed out that, only Kuwait had a 2017 fiscal break-even price appreciably below its forecast oil price. According to the report, “Fiscal break-even prices fell for most of these sovereigns last year, as national authorities responded with measures such as spending cuts, subsidy reforms, increasing production, and in some cases currency devaluation. However, these adjustments lagged the oil price fall. For three EEMEA sovereigns – Nigeria, Angola and Gabon – our forecast fiscal break-evens for 2017 are substantially higher than 2015, in part due to rising government spending.”

The Fitch’s forecast 2017 break-even oil prices, per barrel are “Nigeria at $139; Bahrain at $84; Angola at $82; Oman at $75; Saudi Arabia at $74; Russia at $72; Kazakhstan at $71; Gabon at $66; Azerbaijan at $66; Iraq at $61; Abu Dhabi, United Arab Emirates, at $60, and Republic of Congo at $52.”

Besides, Fitch Ratings stated that , another measure of exposure to low oil prices was the ratio of Sovereign Net Foreign Assets (SNFA) to GDP, which showed that the resources available to compensate for lost hydrocarbon revenue, finance deficits and smooth economic adjustment.

SNFA , it disclosed, declined by $200 billion for the 14 EEMEA exporters in aggregate, with Saudi Arabia accounting for more than half of this. But SNFA/GDP has spiked in Abu Dhabi, Qatar and Kuwait due to a contraction in nominal GDP.

“Our sovereign ratings assessment incorporates the policy framework and quality and timeliness of the authorities’ policy responses. Russia’s coherent and credible policy response resulted in the revision of its Outlook to Stable in October 2016, marking the first positive rating action for any major Fitch-rated oil-exporter since the 2014 price shock.

“It is not always clear whether exporters will maintain policy responses. Fiscal adjustment has generally slowed as oil prices have risen, and some of the improvement in break-even oil prices in Gulf Co-operation Council exposures resulted automatically from lower power generation costs and falling fuel and utility subsidy bills. This will be partly reversed as oil prices recover, to the extent that prices have not been fully liberalised or brought above cost recovery levels,” Fitch stated in the report.

Meanwhile, the prospect of an uptick in tensions in the Middle East buoyed oil prices, with both Brent and West Texas Intermediate crude surging more than 1.2 per cent on Friday, according to Bloomberg.

Bloomberg reported that the US missile attacks on Syria triggered an instant reaction across everything from stocks to commodities and currencies.

Also, according to Reuters, oil, gold, foreign exchange and bonds initially reacted strongly to the attack but reversed some of the sharp moves later in the session after the release of weaker than expected monthly U.S. employment figures.

Brent crude futures were up 15 cents at $55.04 a barrel at 1336 GMT after reaching an intraday peak of $56.08, the highest since March 7, shortly after the U.S. missile strike was announced.

U.S. West Texas Intermediate (WTI) crude futures were up 22 cents at $51.92 a barrel, having reached an intraday high of $52.94.

“Oil markets are back in bullish mode after the setback of the previous weeks. This news flow seems to bring geopolitical risks back on the radar,” said Frank Klumpp, oil analyst at Landesbank Baden-Wuerttemberg, based in Stuttgart, Germany.

Although Syria has limited oil production, its location and alliances with big oil producers in the region mean any escalation of the conflict has the potential to increase supply-side fears.

Oil pared some of the gains later in the session as concerns about an escalation faded and U.S. economic data weighed on global markets, according to Reuters.

Other analysts Reuters spoke with, said the conflict in Syria had no bearing on oil fundamentals and the political risk premium could fall as quickly as it had appeared.

“This might just be a speculative move higher because there’s nothing fundamental that’s supporting this rise,” said Hamza Khan, head of commodities strategy at ING.

Nevertheless, oil futures had been on the rise in previous sessions on signs of higher U.S. demand and lower product inventories.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Commodities

Lagos Commodities and Futures Exchange to Commence Gold Trading

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gold bars

With the admission of Dukia Gold’s diversified financial instruments backed by gold as the underlying asset, Lagos Commodities and Futures Exchange is set to commence gold trading.

According to Dukia Gold, the instruments will be in form of exchange-traded notes, commercial papers and other gold-backed securities, adding that it will enable the company to deepen the commodities market in Nigeria, increase capacity, generate foreign exchange for the Nigerian government to better diversify foreign reserves and create jobs across the metal production value chain.

Tunde Fagbemi, the Chairman, Dukia Gold, disclosed this while addressing journalists at Pre-Listing Media Interactive Session in Lagos on Thursday.

He said, “We are proud to be the first gold company whose products would be listed on the Lagos Futures and Commodities Exchange. The listing shall enable us facilitate our infrastructure development, expand capacity and create fungible products.

“This has potential to shore up Nigeria’s foreign reserve and create an alternative window for preservation of pension funds. A gold-backed security is a hedge against inflation and convenient preservation of capital.”

“As a global player, we comply with the practices and procedures of London Bullion Market Association and many other international bodies. Our refinery will also have multiplier effects on the development of rural areas anywhere it is located,” he added.

Mr Olusegun Akanji, the Divisional Head, Strategy and Business Solutions, Heritage Bank, said the lender had created a buying centre for verification of quality and quantity of gold and reference price to ensure price discovery in line with the global standard.

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Crude Oil

Oil Nears $70 as Easing Western Lockdowns Boost Summer Demand Outlook

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Crude oil

Oil prices rose for a third day on Wednesday as easing of lockdowns in the United States and parts of Europe heralded a boost in fuel demand in summer season and offset concerns about the rise of COVID-19 infections in India and Japan.

Brent crude rose 93 cents, or 1.4%, to $69.81 a barrel at 1008 GMT. U.S. West Texas Intermediate (WTI) crude rose 85 cents, or 1.3%, to $66.54 a barrel.

Both contracts hit the highest level since mid-March in intra-day trade.

“A return to $70 oil is edging closer to becoming reality,” said Stephen Brennock of oil broker PVM.

“The jump in oil prices came amid expectations of strong demand as western economies reopen. Indeed, anticipation of a pick-up in fuel and energy usage in the United States and Europe over the summer months is running high,” he said.

Crude prices were also supported by a large fall in U.S. inventories.

The American Petroleum Institute (API) industry group reported crude stockpiles fell by 7.7 million barrels in the week ended April 30, according to two market sources. That was more than triple the drawdown expected by analysts polled by Reuters. Gasoline stockpiles fell by 5.3 million barrels.

Traders are awaiting data from the U.S. Energy Information Administration due at 10:30 a.m. EDT (1430 GMT) on Wednesday to see if official data shows such a large fall.

“If confirmed by the EIA, that would mark the largest weekly fall in the official data since late January,” Commonwealth Bank analyst Vivek Dhar said in a note.

The rise in oil prices to nearly two-month highs has been supported by COVID-19 vaccine rollouts in the United States and Europe.

Euro zone business activity accelerated last month as the bloc’s dominant services industry shrugged off renewed lockdowns and returned to growth.

“The partial lifting of mobility restrictions, the expectation that tourism will return in the near future, and the lure of the psychologically important $70 mark are all likely to have contributed to the price rise,” Commerzbank analyst Eugen Weinberg said.

This has offset a drop in fuel demand in India, the world’s third-largest oil consumer, which is battling a surge in COVID-19 infections.

“However, if we were to eventually see a national lockdown imposed, this would likely hit sentiment,” ING Economics analysts said of the situation in India.

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Energy

APICORP: Middle East and North Africa (MENA) Energy Investments to Exceed USD805 Billion Over Next Five Years

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The Arab Petroleum Investments Corporation (APICORP), a multilateral development financial institution, estimates in its MENA Energy Investment Outlook 2021-2025, which it launched today that overall planned and committed investments in the MENA region will exceed USD805 bn over the next five years (2021–2025) – a USD13 bn increase from the USD792 bn estimate in last year’s five-year outlook.

The report attributes this modest rise to four factors: A strong confidence in the rebound of global GDP, rising energy demand, the comeback of Libyan projects – which alone accounts for around USD10 bn in planned projects – and the accelerated pace of renewables in the region. Per current estimates, MENA will add 3GW of installed solar power capacity in 2021 alone – double that of 2020 – and 20GW over the next five years.

The region’s economic forecasts suggest that commodity prices and exports will drive the rebound expected for most MENA countries in 2021. However, economies remain under fiscal strains due to unprecedented high debt levels and decline in oil prices, tourism/Hajj revenues, and personal remittances.

Dr. Ahmed Ali Attiga, Chief Executive Officer of APICORP, said: “APICORP’s MENA Energy Investment Outlook 2021-2025 indicates that energy industries are entering a period of relative stability in terms of investments as most MENA countries return to GDP growth in 2021 and the energy transition showing no signs of slowing down. We anticipate a slow but steady recovery of the energy sector from the fallout of the COVID-19 pandemic, supported by continued investment from the public sector and an upswing in demand.”

Gas investments

Committed gas investments in MENA for the period 2021-2025 are expected to total USD75 bn – USD9.5 bn less than the previous outlook. The decline is attributed to the completion of several megaprojects in 2020 and countries being more cautious to new project commitments in an era of gas overcapacity.

Qatar, Saudi Arabia, and Iraq are the top three MENA countries in terms of committed gas investments. This is owed to Qatar’s North Field East megaproject, Saudi Arabia’s gas-to-power drive and the massive Jafurah unconventional gas development – which is poised to make the kingdom a global blue hydrogen exporter – and Iraq’s gas-to-power projects and determination to cut flaring and greenhouse gas emissions.

Planned investments meanwhile held relatively steady at USD133 bn for 2021-2025, signalling the region’s appetite for resuming its natural gas capacity build-up – particularly the ambitious unconventional gas developments in Saudi Arabia, UAE, Oman, and Algeria – once macro conditions improve.

Power investments

Power investments in MENA for 2021-25 remain largely unaffected compared to APICORP’s 2020-24 outlook. Notably, the sector’s total investment amount of USD250 bn is the highest of all energy sectors – with an estimated USD93 bn and USD157 bn in committed and planned projects, respectively, over the next five years.

With a share of around 40%, renewables form a significant part of those investments as countries push ahead with their energy diversification agendas. In the GCC, Saudi Arabia’s Renewable Energy Project Development Office and Public Investment Fund projects continue to progress. North African countries are also showing measurable development in renewables realm, with Algeria establishing an independent authority to oversee the development of country’s strong pipeline of projects, and Egypt working to resolve regulatory issues related to its wheeling scheme and the unbundling of its power market.

This shift to renewables is a chief factor behind the rising share of investments in transmission and distribution (T&D) in the power sector value chain, as the integration of renewables into power grids requires significant investments to enhance and digitize grid connectivity, not to mention storage to accommodate the surplus power capacity they generate.

Petrochemicals investments

Planned investments in the MENA petrochemicals sector are forecast to increase to USD109 billion in 2021-2025, a USD14.2 bn jump compared to last year’s outlook. By contrast, committed investments dipped by USD7.7 bn to around USD12.5 bn due to the completion of several megaprojects in 2020.

Despite MENA petrochemical markets seeing an overall improvement in demand owed to the increased consumption of basic materials as vaccination drives continue and economies recover, some MENA committed petrochemical investments are nonetheless being re-evaluated and rationalized due to fiscal strains, capital discipline and cost efficiencies and evolving market dynamics.

Renewables investments

As a whole, the MENA region expects to add an estimated 3GW of solar power in 2021 – doubling its total from 2020 – and almost 20GW by 2025. Wind and other sources such as hydropower are also coming into their own as countries step up their energy diversification plans.

Jordan, for example, managed to increase the percentage of power generated from renewables from just 1% in 2012 to around 20%. Morocco’s 4GW of renewables (wind, solar and hydro) constitute around 37% the country’s total generation mix and almost 90% of its current 3.5GW project pipeline. Egypt’s total installed renewables capacity amounts to around 2.3GW, including 1GW of solar PV and 1.3 GW of onshore wind.

In the UAE, renewables constituted around 6% of total installed capacity and 3% of power generated as of 2020. Although it may just miss its short-term targets, the UAE’s solar capacity is projected to grow the fastest in the region with nearly 5GW of solar projects in the pipeline.

In Saudi Arabia, only 330MW of utility-scale solar PV projects and just one 2.5MW wind demonstration project developed jointly by Saudi Aramco and General Electric were operational as of 2020. Even when combined with the tenders under its National Renewable Energy Program, the total renewables capacity of the Kingdom totals 3.3GW, around 24GW short of its stated target of 27.3GW by 2024.

Despite ongoing procurement of largescale utility projects, Oman is also far from achieving its short-term target of generating 10% of its power from renewables by 2025, with a single 105MW utility solar PV project and a 50MW onshore wind project comissioned over the past 2 years.

As for Iraq, the first solar bid round for projects totalling 755MW capacity was announced in May 2019 and bids of short-listed companies were disclosed in Septmeber the following year. Overall, the country aims to reach 10GW of solar power generation capacity by 2030 and generate 20% of its power from solar.

Developing Energy Storage is Key

The expanding share of renewables, growth in power demand, and balancing supply and demand on a real-time basis necessitates the integration of modern, digitized energy storage solutions. Despite its significant potential in this area, the MENA region suffers from the limited role of storage in networks. To overcome this, regulations will need to evolve to reflect energy storage’s current functions, including leveraging flexibility from consumer aggregation or grid congestion.

The hydrogen and ammonia race

MENA is also a strong candidate for becoming a major hydrogen-exporting region thanks to its combination of low-cost gas resources and renewable energy. A few countries, such as Saudi Arabia and Morocco, have already made headways as low-cost exporters of blue and green hydrogen, net-zero ammonia and other low-carbon products, while other countries, such as Oman, UAE, and Egypt are attempting to catch up.

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