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Commodities

Austria and Russia: A Love Story in Oil

 4 min read / 

Russia relies heavily on oil and its voice in the world market, the state-owned company Gazprom. The Russian government owns over 50% of the firm, which engages in multi-billion dollar deals spanning the globe. Meanwhile, OMV, the Austrian player in the commodity, is the largest company of its country. The Austrian government controls 31.5% in OMV. Both companies play a significant role in wealth creation for the two nations, enjoying a mutually beneficial relationship.

A Blossoming Relationship

Back in 1968, one deal started the long-thriving collaboration between the two companies, as OMV became the first company to sign a long-term natural gas purchasing contract with the USSR. At the peak of the Cold War, Austria’s neutrality allowed executives to play on both sides of the Iron Curtain and arrange deals, together with establishing close political ties and an increase in the east-west trade.

This longevity of relationship between the two countries could mean that Russia’s political risk potentially correlates more with Austria’s political situation and economic output than with any other country with which Russia has ties. Vienna became, and still is, a hotspot for wealthy individuals from the Eastern bloc depositing money and building close relationships between Austrian banks and their own businesses. Lending transactions gained volume after the Soviet Union such that, according to Bloomberg, Austria’s banks have exposure to Russia worth $52bn as of today.

$52bn the value of Austrian banks’ exposure to Russia

The two firms recently entered into an asset swap. Gazprom will receive a 38.5% stake in the Norway-based sister company of OMV, OMV Norge, which focuses on exploration and upstream. In return, OMV will receive a 24.89% stake in one of the largest gas fields in Russia available for development.

Collaborations like these have happened multiple times in the past and portray how closely both companies profit from each other’s business activities and co-operations. Austria has been very smart when it comes to gas trade and acknowledged early on that there are only four major suppliers of pipeline gas globally.

OMV is conducting a substantial amount of business with Russia and has done deals in the past with Iran, 24.9% of it being owned by the International Petroleum Investment Company of Abu Dhabi. Last year OMV received one million barrels of crude oil from Iran in a spot delivery. Since the 2012 sanctions against Iran, this was the first oil distribution made by the Persian country, and OMV is working to strengthen its relationship with it. Austria’s demand for Russian gas supplies continues to soar.

Furthermore, Austria’s demand for Russian gas supplies continues to soar. In November 2016 Gazprom supplied Austria with 31.5% more gas than in the previous year, according to a Gazprom news release.

A Symbiosis of Power

The US might be able to learn a few lessons from Austria’s relationship in order to improve the political tension between America and Russia. In April 2016, Federal President Heinz Fischer met with Dmitry Medvedev in Moscow to discuss closer ties in trade, the world’s economic outlook, and foreign investments. Two cooperators working closely together, and their governments having a friendly and productive relationship stemming from those business activities, makes this relationship a perfect example of how to interact with Russia and conduct business. Valuable lessons can be learned here.

These close ties also mean that Austrian businesses and (especially) banks are more exposed to geopolitical risks shaking the markets. One of the most profitable markets for Austrian lenders has always been Russia, and Vienna has traffic links to Central and Eastern Europe.

An increasingly positive economic outlook for Austria depends on the forecasted outlook for Russia’s economy. The Central Bank of Russia expects profits for banks to hit the $16.6bn mark soon, a long way from the recession of 2014, sanctions, plummeting oil prices, and a currency decline. Austrian Banks, like Raiffeisen Bank and Bank Austria, which are operating in Russia, might be able to profit from the uptick in the sector’s outlook and market activity as well as increasingly positive investor sentiment.

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Asia

Saudi’s $7bn Renewables Push

Saudi Arabia renewables

Saudi Arabia intends to deploy $7bn into renewable energy projects this year. 

Editor’s Remarks: The drive will focus on building solar plants and tenders are to be issued later this year for eight separate projects with a total capacity of 4.125 gigawatts. The move is part of a wider drive to feed the kingdom’s growing demand for energy, which is currently eating away at oil the country intends to export. This latest move is also part of Prince Salman’s wider plan to diversify the economy and rely less heavily on crude production. This strategy has played out in a number of ways to date, including heavy investment into SoftBank’s $100bn Vision Fund.

Read more on Renewables:

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Commodities

Oil Prices Climb to Three-Year High

 1 min read / 

oil prices

Oil prices climb to a near three year high with Brent Crude trading at just under $70 a barrel. The recent rally has led to highs of $69.62 per barrel, up from $67.69 at the beginning of the week.

The price of oil has been a depressing case for a while now. Three years ago, overproduction led to an oil glut that had already seen a five-month slide. However, in November 2014,  the Saudi-dominated oil consortium, OPEC, refused to slow production, leading to a Thanksgiving bloodbath with prices tumbling nearly 15% by Christmas.

From summer highs of $101.94, prices continued to fall reaching lows of $34.37 at the beginning of 2016. It was not until November of the same year that OPEC conceded to international pressure and curbed output.

If the rally continues, oil prices could potentially surpass $70.15, not seen since the Thanksgiving meeting.

Keep reading |  1 min read

Asia

Turmoil in Iran: Will It Push Global Oil Prices Higher?

 5 min read / 

Global Oil Prices

The price of oil finished 2017 with a mini rally. The new year has started with protests and instability in Iran. Some analysts believe this might drive the oil price even higher – but the opposite actually looks much more likely.

Is the Recent Recovery Temporary?

U.S. oil prices have been on a steady rise in recent months and as expected ended 2018 strongly, above $60 a barrel. According to The Independent, the good news has continued into the New Year, and on Tuesday this week prices opened higher than at any time since 2014, driven in part by OPEC and Russian supply cuts but also by news from the Energy Information Administration (EIA) that the huge U.S. stockpiles are now falling.

Since 2016, US oil production has rocketed by 16% to almost 10 million barrels per day. In October crude exports rose to a record two million barrels per day, with production slated to rise as much as 20% over the first half of 2018. This means US supply is now close to parity with top producers, Russia and Saudi Arabia, and, according to the IEA earlier in the year, will likely create a supply surplus in the first half of 2018.

But is this recovery only temporary? And how will the Iran situation play into this backdrop?

Iran May Not Increase Prices

The demonstrations in Iran initially began in response to high food prices and the weak economy, but in recent days the rallies have taken on a distinctly political dimension. Protesters have begun chanting anti-government slogans and hundreds of people have been arrested. To date, more than 20 people have been killed in clashes with the Revolutionary Guard and the protesters show no signs of backing down.

This is turning into the biggest show of public defiance since 2009 and the Iranian leadership has been quick to respond, blocking access to social networks including Telegram and Instagram on Sunday. Though Iranian officials appear conciliatory, acknowledging the protesters’ grievances, one should not bet on this approach lasting very long at all.

Meanwhile, there are reports that the protests sweeping the nation are being used as a cover for militants operating within Iran, giving them the opportunity to strike at key infrastructure and oil production facilities. Ansar al-Furqan, an al Qaeda-linked jihadist group based in Iran, claimed to have blown up an oil pipeline near Omidiyeh in the southern Khuzestan province, the scene of other attacks by Arab separatists.

Traditionally, Middle East turmoil pushes up the price of oil, and the current spate of protests in Iran have undoubtedly played a part in recent price hikes. But while bad news from the Middle East can prompt an initial buying frenzy, sending prices soaring, there’s no reason to believe this hike is anything other than temporary.

In fact, in June last year, when the Middle East was at its most tumultuous, Brent crude remained unmoved. Years of oversupply kept reaction muted, and many market watchers now expect any further gains to be within a tight range.

The substantial growth spikes of the past are now unlikely and there is, in fact, a reason to believe that the world is on the cusp of big price fall.

Temporary Price Rises Prompt Selling

There are some good reasons to doubt that recent rises are part of a sustainable upward trend. Higher prices may tempt OPEC producers to cash in, release more output, and cause the production deal to fail. The non-OPEC producers (such as Canada and Brazil), not bound by the deal, will see the rises as an opportunity to increase production, and higher prices have already led many US drillers to boost activity.

But by far the most significant indicator of price slump caused by over-production is what’s happening in the US shale sector. Technology and new government regulation are two major forces that could tip world oil prices into a catastrophic slump.

To date, oil giants have been slow to capitalise on the opportunities presented by shale. But over the last six months, they’ve begun to focus on creating efficiencies by taking offshore automation and digitisation technologies and adapting them for use in shale drilling. For example, shale oil drills can now plunge deeper into the earth, pivot and tunnel sideways for miles until they hit an oil pocket.

The US isn’t the only country that appears to be taking energy security more seriously. The EU is also now looking at ways to bolster its own supplies, which could lead to a shale or renewables push in the UK and on the continent. Some people have also recently started looking at alternative, cost-effective renewable sources, like biogas Anaerobic Digesters. This could further increase new competition for oil.

This push by the big players in the US oil industry will bring more wells to production at a lower cost and could ramp up future output and company profits. In addition, the Trump administration is focused on oil. It has already approved the controversial Keystone XL pipeline, brought forward plans to allow oil drilling in the Arctic National Wildlife Refuge in Alaska, and is reported to be considering loosening offshore oil drilling regulations. These moves could easily cause an oil race and create a huge over-supply.

Conclusion

While the turmoil in Iran is playing into the price rises that have been seen in recent days, it’s only a small part of a very big picture. Rather than focusing on how the Middle East affects prices, the world should be lifting its vision and focus on the US and the major non-OPEC nations. It’s what they do next that will determine what happens to prices in global oil prices in 2018.

Keep reading |  5 min read

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