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Moody’s: Oil Supply Faces Oversupply Risk

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  • Moody’s: Oil Supply Faces Oversupply Risk

Oil and natural gas prices will be volatile in 2019, Moody’s Investors Service predicted in its annual report outlining key credit themes in oil and gas for 2019.

The report noted that while the recent announcement that OPEC and Russia would cut production helps alleviate concerns about oversupply, the pivotal questions in the coming year is whether OPEC and Russia would maintain their production discipline and what might happen in June, when the current agreement expires.

Moody’s expects the medium-term price band for West Texas Intermediate (WTI) crude, the main North American benchmark, to be $50-$70 per barrel (bbl), and North American natural gas at Henry Hub to average $2.50-$3.50/MMBtu.

“Market expectations for continued strong oil demand growth remain in place, despite concerns about slowing demand growth as a result of weaker economic growth, the impact of tariffs and a strong US dollar,” Moody’s Managing Director for Oil & Gas, Steve Wood said.

“Very high Saudi and Russian production, in particular, has heightened supply volatility, so whether OPEC and Russia maintain production discipline and renew agreements to limit output are key concerns going into the new year.”

Investors in exploration and production companies would continue to wait for better returns in 2019, Moody’s stated.

Although capital efficiency has improved and commodity prices are higher than in 2015-16, infrastructure constraints have lifted transportation costs, the report stated.

And though the oilfield services sector would see earnings increase by 10-15 per cent, they currently remain at low levels, and most of the recovery would occur only later in the year.

Conversely, refiners’ distillate margins would begin to expand from already strong levels in the second half of next year.

In North America, wide differentials for regional oil and natural gas would narrow as infrastructure coming into service in late 2019 and 2020 eases bottlenecks in the Permian Basin, western Canada and other regions, relieving stress on commodity prices.

Meanwhile, the Mexican energy sector faces risks from factors including a new government policy that shifts PEMEX toward refining and away from oil production, and Asian national oil companies contend with risks from volatile commodity prices, rising shareholder returns and evolving fuel-price regulations.

“While we will see only a gradual increase in rig activity in 2019, oilfield services (OFS) costs will likely rise over the medium term. Higher oil prices will encourage more production activity, which will stimulate already rising OFS prices, raising the breakeven cost of the marginal barrel and potentially raising medium-term oil prices.

“In North America, strong demand from shale producers is driving up pricing for high-calibre “super spec” drilling rigs, and for various production services. In Texas, strong economic growth and low unemployment have led to widespread labour shortages, escalating labour cost inflation. International activity is picking up in certain markets.

“But it will take higher oil prices to develop the more expensive conventional barrels that are ultimately needed to meet increasing global demand and offset natural production declines.

“Prices toward the upper end of the oil price-band will encourage increased supply as US production grows and OPEC countries reduce their compliance with their production quotas.

“Shale oil production in particular features relatively low extraction costs and short time lags from drilling to production, and shale’s drilling efficiencies have increased substantially over the past few years. US shale producers are paying increasing attention to capital discipline and return-focused performance, but even at current lower prices, we believe US shale production will continue to grow, increasing global production and keeping a lid on prices.

“We believe prices will remain largely within our expected range —although they will be volatile—amid increases in US shale production, reduced but still significant global supplies, and potential declining compliance with agreed production cuts, especially if growth in demand is more tepid,” the report added.

To the Vice President – Senior Analyst Exploration and Production (E&P), Amol Joshi, investors looking for higher shareholder returns would continue to wait in 2019, despite strides in capital efficiency and higher commodity prices since the 2015-16 downturn.

E&P revenues correlate closely to oil and gas prices, but profitability depends on numerous other factors, including operating costs, product mix and quality, transportation costs and financial policy. “While profitability influences valuation and shareholder returns, supply/demand imbalances and market sentiment can make investor returns volatile. E&P companies in 2019 will continue to exercise spending discipline and focus on capital efficiency.

“While labour inflation has increased their operating costs, rising production has largely contained their costs per unit. “Higher demand for OFS has raised the costs of drilling and completing onshore wells, but efficiencies have helped most E&P companies offset some of these higher capital costs. Still, elevated oil prices through most of 2018 did not benefit many producers in the Permian, the dominant US producing basin.”

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.

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UN Chief Welcomes Historic’ IMF Liquidity Boost for Governments in Need

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As the COVID-19 crisis continues to exacerbate restrictions on government spending throughout the world, the UN chief on Tuesday welcomed the decision by the International Monetary Fund (IMF) to approve a $650 billion allocation of Special Drawing Rights to “boost liquidity”.

Secretary-General António Guterres issued a statement on the policy change towards Special Drawing Rights or SDRs, a type of foreign reserve asset that is IMF defined and maintained, as additional funding that could help to pay down debts.

He also underscored that economies not in need of access to cash should “consider channeling these resources to vulnerable low and middle-income countries that need a liquidity injection by replenishing the IMF’s Poverty Reduction and Growth Trust Fund”.

‘Historic decision’

Yesterday’s IMF’s allocation makes new borrowing available to the fund’s 190 member countries, roughly in proportion to their share of the global economy.

“This is a historic decision – the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis”, said IMF Managing Director Kristalina Georgieva.

“The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis.”

Halting debt default

The Secretary-General stressed that it is also “critical to quickly establish the proposed Resilience and Sustainability Trust at the IMF…[for] a comprehensive response and recovery, including providing more support for vaccinations and debt management and to support the efforts of developing economies in restructuring for inclusive growth”.

Last month, he urged the world’s largest economies to spearhead a global COVID-19 vaccination plan and expand debt relief to developing countries battered by the pandemic.

Bulwark against default

He also advised supporting a new $50 billion IMF investment roadmap aimed at ending the pandemic and driving a fast recovery.

As many developing countries are “teetering on the verge of debt default”, the UN chief encouraged the G20 leading industrialized nations to channel unused SDRs to the Fund’s new resilience and sustainability plan, for these nations.

“Special Drawing Rights also need to be considered as additional funding, not deducted from Official Development Assistance”, he reminded.

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IMF Approves Largest SDR Allocation In History to Boost Global Liquidity

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The Board of Governors of the International Monetary Fund (IMF) has approved a general allocation of Special Drawing Rights (SDRs) equivalent to US$650 billion (about SDR 456 billion) on August 2, 2021, to boost global liquidity.

“This is a historic decision – the largest SDR allocation in the history of the IMF and a shot in the arm for the global economy at a time of unprecedented crisis. The SDR allocation will benefit all members, address the long-term global need for reserves, build confidence, and foster the resilience and stability of the global economy. It will particularly help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis,” IMF Managing Director Kristalina Georgieva said.

The general allocation of SDRs will become effective on August 23, 2021. The newly created SDRs will be credited to IMF member countries in proportion to their existing quotas in the Fund.

According to the IMF, about US$275 billion (about SDR 193 billion) of the new allocation will go to emerging markets and developing countries, including low-income countries.

“We will also continue to engage actively with our membership to identify viable options for voluntary channeling of SDRs from wealthier to poorer and more vulnerable member countries to support their pandemic recovery and achieve resilient and sustainable growth”, Ms. Georgieva said.

One key option is for members that have strong external positions to voluntarily channel part of their SDRs to scale up lending for low-income countries through the IMF’s Poverty Reduction and Growth Trust (PRGT). Concessional support through the PRGT is currently interest-free.

The IMF is also exploring other options to help poorer and more vulnerable countries in their recovery efforts. A new Resilience and Sustainability Trust could be considered to facilitate more resilient and sustainable growth in the medium term.

In April last year, Nigeria collected $3.4 billion—equivalent to 100 percent of its quota— under the IMF’s Rapid Financing Instrument, RFI, to tackle the funding gaps created by COVID-19, especially when the crude oil market stagnated.

The financial support, approved by the IMF Executive Board on April 28, 2020, provided critical support to shore up Nigeria’s healthcare sector and shielded jobs and businesses from the shock of the COVID-19 crisis while helping to limit the decline in the nation’s external reserves.

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ECOWAS@46: Commission Seeks Trade Partnership With OPS To Deepen Intra-African Trade

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The Economic Community of West African States (ECOWAS) in commemoration of its 46th anniversary has sought partnership with the Organised Private Sector (OPS) to deepen intra-African trade and lift millions out of poverty.

This was revealed yesterday by the president of the ECOWAS Commission, Mr. Jean-Claude Brou, at a webinar organised in collaboration with the Lagos Chamber of Commerce and Industry (LCCI) yesterday.

The theme of the webinar is “Optimising Sustainable Trade, Investment and Regional Economic Integration through Effective Partnership between ECOWAS Institutions and the Organised Private Sector”.

Jean-Claude, represented by Mr. Kolawole Sopola, Acting Director, Trade, ECOWAS, said the commission, in recognition of the private sector’s role, created a stronger framework to boost the sector’s capacity for enhanced trade.

He said that the commission had also adopted more than 100 regional standards with 70 others under development on some products.

Brou listed mango, cassava, textile and garments as well as information and communication technology among such products.

“The growing importance of informal trade compels the ECOWAS to create a framework expected to engender more availability and reliability of up to date information on informal trade.

“The framework also seeks to implement reform that is essential to eliminate obstacles to informal trade among others.

“It is important to improve investment, particularly, private investment, in all sectors and I stress that digitalization must be at the center of activities for economic recovery.

“Infrastructural deficit must be addressed as well as sustainable and cheaper energy for the competitiveness of products.”

“The commission is developing projects on roads, renewable energy and education, needed for private sector development; all these to lift millions in the sub-region out of poverty,” he said.

Dr. George Donkor, President of, ECOWAS Bank for Investment and Development (EBID) said that many western states showed numerous hurdles to overcome as countries continue to export raw materials, therefore maintaining low levels of development.

Donkor, however, said that reforms were already underway to accelerate the capacities of the Micro, Small and Medium Enterprises (MSME) to spur private sector development for intra-African trade.

He noted that the EBID 2025 strategy was aimed at ensuring that the private sector benefitted up to 65 percent of the $1.6 billion available facilities.

“A vibrant private sector is key in driving regional integration and securing its active participation and has the potential to create a win-win situation for all participants.

“Increasing credit to the private sector will enhance capacity and the EBID is ready with strategies to ensure that the sector’s capacity is boosted,” he said.

Also, Otunba Niyi Adebayo, Minister of Industry, Trade and Investment, said that collaboration across societal sectors had emerged as one of the defining concepts of international development in the 21st century.

He stressed the need for ECOWAS member states to work together as a bloc to take advantage of the opportunities in the African Continental Free Trade Area.

“Since the establishment of ECOWAS in 1975, various protocols and supplementary protocols regulating member countries conduct have been signed.

“Our world has limited resources — whether financial, natural, or human — and as a society we must optimize their use.

“The fundamental of a good partnership is the ability to bring together diverse resources in ways that we can together achieve more impact, greater sustainability and increased value for all.

“This is so because it emphasises the need to work together as a bloc to leverage and take advantage of the opportunities offered by the African Continental Free Trade Area.

“My Ministry will do everything possible to ensure that the vision of the commission is taken to the next level,” he said.

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