By: SYED RASHID HUSAIN

Opec’s next move on the global energy chessboard is eagerly awaited. Would it extend its output cut arrangement beyond June or not — remains a major issue?

In the wake of global stocks remaining high, this move remained crucially important to the energy markets.

“Opec is now facing the prospect of falling short of its objective,” Stephen Brennock of oil broker PVM was quoted as saying. “Bulging global oil stockpiles will not draw down to the five-year average unless Opec-led cuts are extended.”

Organisation of the Petroleum Exporting Countries (Opec) seems alive to the issue. Last Wednesday Qatar’s energy minister and its chief Opec envoy Mohammed Saleh Al-Sada told the Qatar-UK Business and Investment Forum in London that the agreement should be extended “beyond the third quarter of 2017” for the crude market stockpile overhang to ease. “Opec and non-Opec producers are trying to stabilise both the supply and demand balance, as well as the stockpile overhang. Opec has complied by up to 96 per cent of the cuts it promised, while non-Opec compliance is almost at 65 per cent; this is unprecedented,” he emphasised.

Al-Sada clarified that he would “like Opec cuts to continue” so that the markets can be rebalanced. “If the cuts are extended, we should get that sense of balance around the third quarter of 2017.”

And it was in this perspective that markets looked closely at the announcement last Sunday by a committee of ministers, from Opec and outside, agreeing to look at prolonging the output cut deal. However, with the ministerial group stopping short of the earlier draft statement, recommending to keep the measure in place, generated ripples in the market. The earlier draft of the statement had said the committee “reports a high level of conformity and recommends six-month extension”. But the final version said that the committee had requested a technical group and the Opec Secretariat to “review the oil market conditions and revert in April 2017 regarding the extension of the voluntary production adjustments.”

And this created a furor in the market. “The dropping of the recommendation to extend cuts in favour of technical review committee, is likely to lead to a lot of disappointment and potential further liquidation of long positions by money managers that will put downward pressure on oil prices,” Harry Tchilinguirian, head of commodities strategy at BNP Paribas in London, was quoted as saying.

Yet, the very news of Opec reviewing its strategy and the possibility of extending the cut beyond the initial period, helped the markets gain some strength and firmness. Fundamentals for oil are “improving as product inventories are drawn down, pulled back into their five-year ranges, while refinery runs are back to year-ago levels,” Matt Smith, the director of commodity research at ClipperData, was quoted as saying.

And all this is taking place amidst growing Opec compliance with output cut agreement. Opec output is likely to fall for a third straight month in March, a Reuters survey said, as the United Arab Emirates made progress in trimming supplies while maintenance and unrest cut production in exempt nations Nigeria and Libya. Oil prices also climbed following news that an armed group in Libya shut pipelines because of a dispute over wage issues, disrupting production of 250,000 barrels a day.

On the other hand with Saudi Aramco IPO drawing closer, Saudi Arabia announced resetting the income tax rates for producers of oil and hydrocarbons. The tax rate for investments exceeding 375 billion riyals ($100 billion) will be 50 per cent, Saudi Press Agency said. It also announced rates for producers with smaller investments.

As per the current rate, Saudi Aramco pays 85 per cent tax to the government. Many felt this could make Aramco IPO unattractive to investors. Hence, cutting the tax rate appeared imperative.

Analysts now believe that the proposed tax cut will increase Aramco’s after-tax income by 300 per cent — propelling its valuation considerably higher. This would also help increase the appetite for the Aramco IPO among major global investors. As per Matt Smith, Saudi Aramco’s market value could now be over $1 trillion, courtesy the taxation tweak by the Saudi government.

Saudi Arabia definitely understands the importance of the oil prices staying stable - at least until the Aramco IPO. The Opec move to possibly increase the output cut agreement for at least another six months and the Saudi move to cut the taxes on the oil sector - need to be seen in this very perspective.

Source: https://www.dawn.com