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Oil crash explained: How are negative oil prices even possible?

THE CONVERSATION, APRIL 20, 2020 - It’s hard to believe that the price of any commodity, let alone oil, can dip into negative territory. But that’s just what’s happened to oil prices. COVID-19 has prompted lockdowns, shuttered factories and stopped people from travelling. The global economy is contracting. The pandemic has also reduced global demand for oil by about 29 million barrels a day from about 100 million a year ago. OPEC and other producers agreed to cut production by 9.7 million barrels a day, far less than the decrease in demand, leaving a huge surplus of oil on the market and no buyers. Storage capacity on land has filled up quickly. Many oil-importing countries have stored large quantities of oil, taking advantage of cheap prices that may not last. Some oil producers, hoping to maintain their market share, have taken to storing their excess oil at sea, leasing tankers at high costs. Some are believed to be paying in excess of US$100,000 per day for each tanker. Oil prices will come back up So how have Alberta oil prices and even future prices for West Texas Intermediate (WTI) slipped into negative territory? It starts with the futures’ contracts for WTI — oil to be delivered in a few months at today’s price. It lost US$6 a barrel on Monday, fetching US$11.66, but ended the day at -US$37 as holders of future contracts tried to dump their contracts before oil is actually delivered with nowhere to store it. But Alberta oil, primarily derived from oilsands (referred to as Western Select), typically sells at US$10 to US$15 below the price of WTI, because it has to be extracted from deep rocky terrain. That makes it harder to refine, and it also has to be transported thousands of kilometres to American refineries. An oil refinery is seen in Kansas. Oil from Alberta’s oilsands is processed at American refineries. THE CANADIAN PRESS/AP, Charlie Riedel And so Alberta oil prices have become negative in the sense that the benchmark price is now lower than the cost of production, transport and storage. This state of affairs cannot be expected to last for long. Producers, in the short term, may accept prices below their variable cost as long as they are able to pay some of the costs they will incur even if oil production shuts down. As time passes, more and more rigs will stop operating (technically, a few will be kept operational in order to avoid being compromised) and a new balance between supply and demand will be established at prices that exceed total average cost. But this doesn’t bode well for either Alberta or the United States. Collateral damage Alberta oil is now the collateral damage of the oil war between Russia and Saudi Arabia, with COVID-19 launching an additional attack. Either of these two factors could have disrupted Alberta’s oil production. But the Saudi-Russia hostilities combined with the global pandemic have proven to be catastrophic for Canada, and could have a similar outcome for the U.S. energy industry. Russia and Saudi Arabia depend heavily on their oil revenues to sustain their economies. Of course, Saudi Arabia’s economy is less diversified than the Russian economy, but both share a similar distortion, where oil revenues represent a very high share of their GDPs (Saudi Arabia about 50 per cent, Russia 38.9 per cent), budgets (Saudi Arabia 87 per cent and Russia 68 per cent) and exports (Saudi Arabia 90 per cent and Russia 59 per cent. It’s difficult to believe that either country can do with such low prices. Russia needs a price of US$60 a barrel to balance its government budget and even a higher price to balance its current account, meaning exports of goods and services minus imports of goods and services, plus net short-term capital transfers. Saudis also need a much higher oil price Saudi Arabia, which remains the lowest-cost oil producer in the world, can make money when the price per barrel exceeds US$20, and Russia can at a price of US$40. Prince Abdulaziz bin Salman Al-Saud, Saudi Arabia’s energy minister, leads a recent virtual summit of the G20 energy ministers at his office in Riyadh, Saudi Arabia. (Saudi Energy Ministry via AP) But making a profit when prices are higher than cost is not sufficient. Saudi Arabia needs an US$80-per-barrel price to balance its budget, realize its plans to diversify its economy and sustain a heavily subsidized economy. In the balance is the stability of both the Russian and Saudi Arabian political systems and current regimes. The longer the COVID-19 pandemic lasts, the greater the damage oil producers will endure. It’s hard to tell now how high oil prices will rise once the pandemic subsides. They will likely go higher as marginal producers are eliminated, but not for long. Using oil and other fossil fuels is no longer consistent with avoiding the expected disasters of climate change. Oil is increasingly becoming a stranded asset.  Originally published by The Conversation at the following address: https://theconversation.com/oil-crash-explained-how-are-negative-oil-prices-even-possible-136829
  • Published in Energy

GUYANA | Russia yet to withdraw “False” statement about UK constructing military base in Essequibo

GEORGETOWN, August 20, 2019 - TGhe Russian Foreign Ministry is yet to withdraw what Guyana says is a false allegation made by Russian Foreign Ministry spokesperson Maria Vladimirovna Zakharova, that Britain was “completing the construction of a military base on one of the islands at the mouth of the Essekibo (sic) River under a plausible pretext – supposedly to stop the smuggling of weapons and drugs.”

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  • Countries Guyana

China, Russia Will Support Stabilization in Venezuela: Putin

MOSCOW, Russia, June 5, 2019 - President Vladimir Putin and his Chinese counterpart Xi Jinping met Wednesday in Moscow in order to discuss bilateral agreements and strategic interests, while also discussing the situation in Venezuela, vowing that their governments would work hard to "stabilize."

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US-Russia Talks on Venezuela Stall Over Role of Maduro

ROME —  High-level U.S.-Russian talks on how to defuse Venezuela's crisis ended on Tuesday with the two sides still at odds over the legitimacy of President Nicolas Maduro. Russia has said Maduro remains the country's only legitimate leader whereas the United States and many other Western countries back Juan Guaido, head of the opposition-controlled National Assembly who invoked a constitutional provision in January to assume an interim presidency. "No, we did not come to a meeting of minds, but I think the talks were positive in the sense that both sides emerged with a better understanding of the other's views," U.S. special representative Elliot Abrams told reporters. The Russian side also said the two sides now understood their respective standpoints better after the two-hour talks in Rome but Moscow's delegation chief, Deputy Foreign Minister Sergei Ryabkov was blunter. "Perhaps we failed to narrow positions on this situation...," Russian state news agency TASS quoted Ryabkov as saying. "We assume that Washington treats our priorities seriously, our approach and warnings." Ryabkov was quoted by Russia's RIA news agency as saying the talks were difficult but frank and that Moscow had warned Washington not to intervene militarily in Venezuela. Abrams said "who gets the title of president" in Venezuela was still a point of contention. He called Tuesday's talks useful, substantive and serious and said both sides agreed "on the depth of the crisis." Ryabkov said Russia was increasingly concerned by U.S. sanctions on the Latin American country. Hours earlier, the United States imposed sanctions against Venezuela's state-run gold mining company Minerven and its president, Adrian Perdomo. U.S. President Donald Trump has said all options are on the table for Venezuela, a position Abrams said the Russian side brought up at Tuesday's meeting. High-ranking military officers are seen as crucial to keeping Maduro in power in the face of a hyperinflationary economic meltdown that has spread hunger and preventable disease and led to an exodus of some 3 million people since 2015. Maduro's government, which retains the backing of Russia and China, drew widespread international condemnation after he was re-elected last year in a vote widely regarded as fraudulent. Abrams cited recent estimates that over the next few months Venezuela's vital oil exports would fall below a million barrels a day and that the country's oil exports were declining by about 50,000 barrels a month. "This a catastrophe for Venezuela," Abrams said.

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  • Countries Latin America
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