Frank Bajak

OPEC, allied nations extend nearly 10M barrel cut by a month

DUBAI, United Arab Emirates (AP) — OPEC and allied nations agreed June 6 to extend a production cut of nearly 10 million barrels of oil per day through the end of July, hoping to encourage stability in energy markets hard hit by the coronavirus-induced global economic crisis. Ministers of the cartel and outside nations led by Russia met via video conference to adopt the measure, aimed at cutting the excess production depressing prices as global aviation remains largely grounded due to the pandemic. The curbed output represents some 10 percent of the world’s overall supply. But danger still lurks for the market, even as a number of nations ease virus-related lockdowns, and enforcing compliance remains thorny. Algerian Oil Minister Mohamed Arkab, the current OPEC president, warned meeting attendees that the global oil inventory would soar to 1.5 billion barrels by the mid-point of this year. “Despite the progress to date, we cannot afford to rest on our laurels,” Arkab said. “The challenges we face remain daunting.” That was a message echoed by Saudi Oil Minister Abdulaziz bin Salman, who acknowledged “we all have made sacrifices to make it where we are today.” He said he remained shocked by the day in April when U.S. oil futures plunged below zero. “There are encouraging signs we are over the worst,” he said. Russian Energy Minister Alexander Novak similarly called April “the worst month in history” for the global oil market. The decision came in a unanimous vote, Energy Minister Suhail al-Mazrouei of the United Arab Emirates wrote on Twitter. He called it “a courageous decision.” But it is only a one-month extension of a production cut that was deep enough “to keep prices from going so low that it creates global financial risk but not enough to make prices very high, which would be a burden to consumers in a recessionary time,” said Amy Myers Jaffe, senior fellow at the Council for Foreign Relations. “There is so much uncertainty that I think they took a conservative approach,” she said. “You don’t know how much production is going to come back on. You don’t know what’s going to happen with demand. You don’t know if there’s going to be a second (pandemic) wave.” Jaffe said improved oil demand in China and Asia and a gradual stabilization of demand in the United States and to some extent Europe, where there’s some cautious economic reopening, were encouraging for producers. OPEC has 13 member states and is largely dominated by oil-rich Saudi Arabia. The additional countries involved part in the so-called OPEC Plus accord have been led by Russia, with Mexico under President Andrés Manuel López Obrador playing a considerable role at the last minute in the initial agreement. Crude oil prices have been gaining in recent days, in part on hopes OPEC would continue the cut. International benchmark Brent crude traded Saturday at over $42 a barrel. Brent had crashed below $20 per barrel in April. Earlier this year, when demand was down, Saudi Arabia was flooding the market with crude oil, helping to send prices down to record lows. That prompted the U.S. government in April to take the unusual step of getting involved in OPEC’s negotiations, pressuring members of the cartel to agree to cuts to help end the oil price free-fall. At the time, President Donald Trump said the U.S. would help take on some of the cuts that Mexico was unwilling to make. And perhaps more importantly, a group of U.S. senators upset over the impact on U.S. shale production said at the time that they had drafted legislation which would remove American forces, including Patriot Missile batteries, from Saudi Arabia. Under a deal reached in April, OPEC and allied countries were to cut nearly 10 million barrels per day until July, then 8 million barrels per day through the end of the year, and 6 million per day for 16 months beginning in 2021. In a Rose Garden speech on June 5, Trump took credit for the April deal. “People said that wasn’t possible but we got Saudi Arabia, Russia and others to cut back substantially,” he said. “We appreciate that very much.” U.S. Energy Secretary Dan Brouillette tweeted his applause June 6 for the extension, which he said comes “at a pivotal time as oil demand continues to recover and economies reopen around the world.” However, some countries have been producing beyond quotas set by the deal. One was Iraq, which remains decimated after a years-long war against the Islamic State group. Iraq Oil Ministry spokesman Assem Jihad said in a statement that Baghdad had “renewed its full commitment” to the OPEC Plus deal. Analysts had expected only a one-month extension given the still fluctuating level of demand. “If the demand is great, countries like Russia will want to produce more oil, so they probably won’t want to get locked into a longer-term deal that may not help them,” said Jacques Rousseau, managing director at Clearview Energy Partners. In a research note, Clearview also said Saturday that the producers group “appears to be going to great lengths to keep the deal together despite unequal compliance” — trying to avoid public fights on the issue. “That solution might work today, but not repeatedly,” it said, citing reports of rising Libyan output and the end of production cuts from Mexico that will heighten the need for compliance. Major production cuts are simply untenable for countries such as Iraq, Oman and Ecuador, whose economies depend nearly exclusively on petroleum income, as they could face debt default. Bajak reported from Boston. Associated Press writer Cathy Bussewitz in New York contributed to this report.

US sanctions on Huawei bite, but who gets hurt?

The Trump administration sanctions against Huawei have begun to bite even though their dimensions remain unclear. U.S. companies that supply the Chinese tech powerhouse with computer chips face a drop in sales, and Huawei’s smartphone sales could get decimated with the anticipated loss of Google’spopular software and services. The U.S. move escalates trade-war tensions with Beijing, but also risks making China more self-sufficient over time. Here’s a look at what’s behind the dispute and what it means. What’s this about? Last week, the U.S. Commerce Department placed Huawei on its so-called Entity List, effectively barring U.S. firms from selling it technology without government approval. Google said it would continue to support existing Huawei smartphones but future devices won’t have its flagship apps and services, including maps, Gmail and search. Only basic services would be available, making Huawei phones less desirable. Separately, Huawei is the world’s leading provider of networking equipment, but it relies on U.S. components including computer chips. About a third of Huawei’s suppliers are American. Why punish Huawei? The U.S. defense and intelligence communities have long accused Huawei of being an untrustworthy agent of Beijing’s repressive rulers — though without providing evidence. The U.S. government’s sanctions are widely seen as a means of pressuring reluctant allies in Europe to exclude Huawei equipment from their next-generation wireless networks. Washington says it’s a question of national security and punishment of Huawei for skirting sanctions against Iran, but the backdrop is a struggle for economic and technological dominance. The politics of President Donald Trump’s escalating tit-for-tat trade war have co-opted a longstanding policy goal of stemming state-backed Chinese cyber theft of trade and military secrets. Commerce Secretary Wilbur Ross said last week that the sanctions on Huawei have nothing to do with the trade war and could be revoked if Huawei’s behavior were to change. The sanctions’ bite Analysts predict consumers will abandon Huawei for other smartphone makers if Huawei can only use a stripped-down version of Android. Huawei, now the No. 2 smartphone supplier, could fall behind Apple to third place. Google could seek exemptions, but would not comment on whether it planned to do so. Who uses Huawei anyway? While most consumers in the U.S. don’t even know how to pronounce Huawei (it’s “HWA-way”), its brand is well known in most of the rest of the world, where people have been buying its smartphones in droves. Huawei stealthily became an industry star by plowing into new markets, developing a lineup of phones that offer affordable options for low-income households and luxury models that are siphoning upper-crust sales from Apple and Samsung in China and Europe. About 13% of its phones are now sold in Europe, Gartner analyst Annette Zimmermann estimates. That formula helped Huawei establish itself as the world’s second-largest seller of smartphones during the first three months of this year, according to the research firm IDC. Huawei shipped 59 million smartphones in the January-March period, nearly 23 million more than Apple. Ripple effects The U.S. sanctions could have unwelcome ripple effects in the U.S., given how much technology Huawei buys from U.S. companies, especially from makers of the microprocessors that go into smartphones, computers, internet networking gear and other gadgetry. The list of chip companies expected to be hit hardest includes Micron Technologies, Qualcomm, Qorvo and Skyworks Solutions, which all have listed Huawei as a major customer. Others likely to suffer are Xilinx, Broadcom and Texas Instruments, according to industry analysts. Being cut off from Huawei will also compound the pain the chip sector is already experiencing from the Trump administration’s rising China tariffs. As expected, the Commerce Department on Monday announced a grace period of 90 days that applies to existing Huawei smartphones and networking equipment. The grace period allows U.S. providers to alert Huawei to security vulnerabilities and engage the Chinese company in research on standards for next-generation 5G wireless networks. It also gives operators of U.S. rural broadband networks that use Huawei routers time to switch them out. The Commerce Department could extend the temporary license to continue to ease the blow on smartphone owners and network operators with installed Huawei gear. Whether that happens could depend on whether countries including France, Germany, the U.K. and the Netherlands continue to refuse to completely exclude Huawei equipment from their wireless networks. Still in place are requirements that government licenses be obtained for any U.S. sales to Huawei unrelated to existing equipment. Could this backfire? Huawei is already the biggest global supplier of networking equipment and is now likely to move toward making all components domestically. China already has a policy seeking technological independence by 2025. U.S. tech companies, facing a drop in sales, could respond with layoffs. More than 52,000 technology jobs in the U.S. are directly tied to China exports, according to the Computing Technology Industry Association, a trade group also known as CompTIA. What about harm to Google? Google may lose some licensing fees and opportunities to show ads on Huawei phones, but it still will probably be a financial hiccup for Google and its corporate parent, Alphabet Inc., which is expected to generate $160 billion in revenue this year. The Apple Effect In theory, Huawei’s losses could translate into gains for both Samsung and Apple at a time both of those companies are trying to reverse a sharp decline in smartphone sales. But Apple also stands to be hurt if China decides to target it in retaliation. Apple is particularly vulnerable because most iPhones are assembled in China. The Chinese government, for example could block crucial shipments to the factories assembling iPhones or take other measures that disrupt the supply chain. Any retaliatory move from China could come on top of a looming increase on tariffs by the U.S. that would hit the iPhone, forcing Apple to raise prices or reduce profits. What’s more, the escalating trade war may trigger a backlash among Chinese consumers against U.S. products, including the iPhone. “Beijing could stoke nationalist sentiment over the treatment of Huawei, which could result in protests against major U.S. technology brands,” CompTIA warned.
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