Andreas Economou

Senior Research Fellow

Andreas Economou joined the Institute in July 2015. His research interests lie on the natural resource and energy economics with particular focus on the empirical analysis of crude oil markets, the dynamics of oil prices and OPEC behaviour. The central topic of his research focuses largely on the causes and consequences of oil price shocks using advanced econometric techniques in modelling the world oil market. Other aspects of his research focus on OPEC’s behaviour and pricing power in the oil market, the relationship between oil prices and the global economy, as well as the real-time analysis of oil price risks using forecast scenarios. Previously he was an OIES-Saudi Aramco Fellow. Andreas is currently completing his PhD in Energy Economics at UCL Energy Institute. He holds an MSc (Hons) in Oil and Gas Enterprise Management from the University of Aberdeen with specialisation in petroleum economics and the international fiscal systems analysis and a BSc in Business Administration from the University of Macedonia, Greece.

Areas of Expertise  

Crude oil markets; causes and consequences of oil price shocks; oil price risks using forecast scenarios; OPEC behaviour and pricing power; oil supply and oil demand issues; applied econometrics.

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                    [post_date] => 2019-11-04 11:27:30
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                    [post_content] => OPEC is faced with a wide range of uncertainties, which are perhaps best reflected in the gulf in narratives between the bulls and the bears. For the bulls, OPEC is in a strong position: the declines in non-OPEC supply are structural while the slowdown in global economic growth is temporary. Based on this view, a mini super-cycle is just around the corner: as demand rebounds, OPEC would be operating close to its maximum sustainable capacity at times when the geopolitical backdrop may reduce spare capacity further—a perfect combination for a sustained rise in oil price. Paradoxically, many of the bulls are the ones calling for deeper OPEC cuts. For the bears, it is the other way around: non-OPEC (US shale) supply would rebound strongly in response to higher oil prices and deeper OPEC cuts and the slowdown in the global economy could persist for longer as there is no end in sight for the US-China trade war. Also, according to this view, there is enough supply held off the market and thus concerns about spare capacity are exaggerated.

The reality is likely to lie between these polar views and OPEC should resist being pushed into a corner. If either of these views does eventually materialize, the costs associated with maintaining and extending the current cuts into 2020 are low, with the potentially upside benefit that some of the views about the end of US shale growth could be put to the test. OPEC should leave part of the rebalancing to market mechanisms and resist reacting to noisy daily signals. OPEC+ is in a good position to do so especially its dominant players Saudi Arabia and Russia have succeeded in managing market expectations so far and have not infused the view that they would pursue deeper cuts and that they would do whatever it takes, at any cost, to support the oil price (interestingly, signals that the Kingdom would rebalance the market at any cost have emerged from other OPEC members, that have not been complying with their quotas, and are determined to defend prices by cutting Saudi barrels). For the first time in several years, Saudi Arabia is, so far, approaching the December meeting by not reacting to immediate market pressures and by not over-promising and hyping market expectations, which may give it the chance to over-deliver in 2020.

 

 
                    [post_title] => The Dilemma Continues: OPEC choices amid high uncertainty
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                    [post_content] => In a series of recent speeches and interviews, a consistent message coming from Saudi Aramco is that ‘future profit growth will be more from diversification into integrated oil refining and petrochemicals, besides natural gas production and supply for both the domestic and international markets’. But what about opportunities in the upstream oil sector and the potential expansion of oil productive capacity? How does upstream oil fit within the future portfolio of Aramco and the Kingdom’s role as the ‘central bank of oil’ as some describe it? These are key questions, which don’t only have implications for Saudi Aramco’s capex budget and how the budget is allocated across the various business segments and the company’s future sources of profitability growth, but also on oil market dynamics and the future of the Kingdom’s revenue paths.

Much of the recent discourse has focused on the upside potential of Saudi Arabia’s oil productive capacity and every time Saudi Aramco announces plans to expand an existing field or develop a new field, there is much speculation whether this would represent a net capacity addition. Also, at times when expectations about global oil demand peaking soon are rife, many have argued that this would induce a shift in the output strategies of large resource owners. Those who recommend a fast monetization strategy however fail to appreciate the constraints that Saudi Arabia faces in pursuing such a strategy given the heavy reliance of the government’s income on oil revenues. For Saudi Arabia to pursue a strategy of fast monetization, it needs to diversify its sources of income away from oil exports, for instance by heavily taxing its businesses and individuals, without jeopardizing political and social stability. This requires deep economic and political structural transformations, which will take a long time to implement with no guarantee of success.

Rather than pursing an aggressive monetization strategy, the question perhaps should be posed differently. In the current context of wide uncertainties about global oil demand and the speed of the energy transition and the limited diversification of government’s income, is there a case for Saudi Arabia to reduce its capacity to lower levels and/or let its spare capacity erode? It is argued that the strategy to manage a reduction of its output capacity could maximise revenues over the medium-term especially given that the capital costs are low in implementing such a strategy. However, there are adverse consequences for the Kingdom as a result of this strategy. For instance, Saudi Arabia would become a price taker; it would end up with a lower market share; it would undermine the Kingdom’s geopolitical status; and it would lose an important discipline mechanism. These are all significant costs. It may also require coordination with other low cost producers that would be eager to increase capacity. Such coordination is extremely difficult if not impossible. But it is important to make a few points. The alternative strategy of fast monetization of reserves is also associated with a high cost in terms of lower revenues. Also, Saudi Arabia cannot afford to be reactive in the event that the impacts of energy transition fully materialize, as the costs of absorbing such a shock are too high, not only in absolute terms, but also relative to other options.
                    [post_title] => Saudi Arabia's Oil Productive Capacity - The Trade-Offs
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                    [post_content] => The sharp decline in the Brent price to below $60/barrel and the weakening of the oil demand outlook due to the US-China trade war has brought to the fore the issue of Saudi Arabia’s next move. There have been multiple media reports indicating that Saudi Arabia would not tolerate the latest price slide and that the Kingdom has approached other OPEC members to discuss possible steps to arrest the decline in the oil price. To most analysts and investors, this signals that Saudi Arabia is willing to cut its output further to try to maintain a floor under the oil price regardless of the nature of shocks hitting the market.

Given that demand shocks are more persistent and that the trade war could take a long time to resolve with resulting repercussions being felt for many years, the required cuts may have to be deeper and maintained for longer. Saudi Arabia also faces the challenge of convincing other OPEC+ members to implement deeper cuts, especially given that the pool of those countries that can cut is small. Cutting unilaterally risks distorting other OPEC+ members’ incentives, shifting the entire burden of rebalancing to Saudi Arabia. But even if Saudi Arabia does cut output unilaterally, the oil price response may be muted in which case the Kingdom may end up with lower revenues.

But if cutting output may not necessarily lead to higher revenues in the current context, could a policy of increasing output result in higher revenues in the medium term? In other words, could the revenue calculus facing the Kingdom change in the face of a negative demand shock? If the numerous reports that US shale is on its last legs and ‘the time for US shale is up’ are correct, and given that most of the growth in non-OPEC supply originates from the US, then it is straightforward to construct a scenario in which higher Saudi output would accelerate the slowdown in US shale and Saudi Arabia’s medium term revenues would rise as the Kingdom could increase its market share without negatively impacting the price. The reality however is that the US shale response is not yet understood and as recent history has shown, its performance can’t be predicted with any accuracy and it could be that many of the reports highlighting the extent of the current weaknesses and the decline in productivity of US shale are exaggerated. As such, the costs of undertaking such a strategy could be high while the benefits are highly uncertain.

Given the risks and costs associated with each of the above options and the wide uncertainty regarding the size of the shocks and their persistence, the most likely scenario is for Saudi Arabia will not to deepen its cut further nor seek a new OPEC+ agreement for deeper cuts, in the hope that slower US shale growth and geopolitical outages will outweigh demand weakness and stocks will fall in the second half of the year. Looking at current market fundamentals alone, there is no urgent need to shift gears for now: the overall compliance within OPEC+ is robust, supply outages remain high, and US shale production growth has been showing signs of deceleration. Thus, on the supply side, almost everything is going in the Kingdom’s favour. The problem lies elsewhere and supply measures alone can’t counter the broad macro factors. Sometimes the best course of action is to do nothing.

However, looking ahead into next year, the challenge of balancing the market gets more difficult if demand weakens further and Saudi Arabia may need to reconsider its policy. If expectations of a sharp fall in demand growth do materialise, it should consider all options as the trade-offs and the revenue calculus could change. However, until the divergence in expectations narrows and the macro sentiment stabilises, OPEC may find that its best option is to ‘stay on the sidelines’ but prepare for the increasing possibility of harder times ahead.
                    [post_title] => Saudi Arabia's Next Oil Move
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                    [post_content] => Nowadays, oil market observers often start their analysis by pointing to two sets of factors pushing the oil price in opposite directions. On the one hand, supply outages from Iran and Venezuela and the rising geopolitical risks in the Middle East as US-Iran tensions escalate are keeping an upward pressure on the oil price. On the other hand, the US-China trade war and a general deterioration in global macroeconomic indicators are preventing prices from moving higher. In the background, the usual factors, such as whether OPEC will extend its cuts to the end of 2019, or even beyond, and the performance of US shale, will continue to shape market expectations and price outcomes.

While it is relatively easy to construct ‘bullish’ scenarios in which oil market balances remain constructive and OECD stocks fall in the second half of 2019 - with the impact (in barrel terms) of supply outages from Iran and Venezuela and potentially Libya more than offsetting the impact of lower oil demand growth due to a weaker global economy, this type of analysis is too simplistic given that the shocks that hit the oil market are not alike. There is plenty of evidence to suggest that the nature of the shock matters and that demand shocks and supply shocks do not have the same impact on oil prices, with demand shocks being more persistent and having a bigger impact on oil price movements. In a similar vein, not all supply shocks are alike and historically the impact of exogenous supply shocks due to geopolitical outages has been shown to be short-lived, while demand shocks in the face of capacity constraints can have a persistent impact. Thus, building a case for a sustained rise in oil prices based on geopolitical outages and the ‘war risk’ premium on their own is not realistic in the current context of weaker demand prospects and when key OPEC members are cutting output to levels below their agreed quotas. In contrast, any deterioration in global oil demand prospects remains the biggest drag on oil prices. In fact, one could argue that in so far as geopolitical tensions act as a dampener on global growth by undermining investors’ confidence and pushing oil prices higher, as demand for precautionary purposes rises and the ‘war risk’ premium becomes more important, the recent rise in geopolitical tensions are not necessarily supportive of oil prices in the medium term. In this presentation, we provide evidence on the importance of identifying the nature of shocks when analysing oil market dynamics and oil prices and what these shocks imply for OPEC’s next move.

Executive Summary 
                    [post_title] => Demand Shocks, Supply Shocks and Oil Prices: Implications for OPEC
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                    [post_content] => The recent movements in the oil price complex indicate some deep dislocations between the physical and futures markets and in market expectations about current and future oil market fundamentals. Despite the various supply shocks hitting the oil market, the general deterioration in the geopolitical backdrop and the rise in US-Iran tensions, the Brent price has continued to trade within a very narrow price range since early April 2019. In contrast, time spreads are pointing towards very tight market conditions. In fact, the oil market finds itself in an almost opposite position to the same time last year when futures prices rose sharply in the expectation that market fundamentals would tighten, while the time spreads and physical differentials were pointing towards a well-supplied market. The divergence was eventually resolved in 2018 H2 by flat prices falling sharply.

Looking ahead into 2019 H2, the oil market faces the key issue of how this divergence in expectations and the mixed signals from the physical and futures markets will eventually be resolved and, as ever, Saudi Arabia's output decision will play a key role in shaping market outcomes. In this respect, Saudi Arabia finds itself in a very similar position to last year where it has to make some hard choices and play a balancing act to try to achieve multiple objectives: Not risk pushing the market out of balance causing oil prices to fall, while at the same time preventing prices from getting too high and harming consuming countries and oil demand. Pressures from Russia to ease the supply curb and from the US to keep prices lower are not very different from last year’s, perhaps with one major difference, President Trump may be willing to live with slightly higher oil prices, recognizing that in a low oil price environment, US shale production growth would stall and that his key allies in the Middle East need a higher oil price to maintain government spending. Saudi Arabia would also be sensitive to the dynamics within OPEC+, aiming towards maintaining the deal that it has engineered and reinforcing the message that Saudi Arabia’s oil policy is driven purely by market fundamentals. Saudi Arabia’s deep cuts since December 2018, with current output at levels below its agreed quota, gives the Kingdom some flexibility to increase output without exiting the deal.  But, as in 2018, this balancing act is hard to maintain given the wide uncertainties engulfing the market.
                    [post_title] => Has Saudi Arabia's Balancing Act Gotten Any Easier?
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                    [post_content] => Before the recent announcement on Iran sanction waivers, the base case for most analysts was that the US would renew the waivers allowing a few buyers to continue importing limited quantities of Iranian oil. The logic behind this thinking was very simple: the Trump administration would not risk an oil price spike that could endanger US growth prospects and hurt motorists by tightening sanctions on Iran and disrupting oil exports further. Thus, President Trump’s latest decision not to reissue waivers caught the market off guard and caused a mini rally in the oil price with Brent prices reaching a six month high of near $75/b. Trump has been keen to emphasize that the US secured offset commitments from Saudi Arabia and the UAE, and that these countries ‘along with other friends and allies, have committed to ensure that global oil markets remain adequately supplied ... and that global demand is met as all Iranian oil is removed from the market’.

This latest decision comes on the back of a quarter which saw market fundamentals tighten due to deep output cuts from Saudi Arabia, which exceeded the pledged target, the sharp deterioration of Venezuelan output, and demand remaining relatively healthy despite widespread pessimism about global growth prospects. As the Brent price consolidated at above $70/b in early-April, market focus quickly shifted to whether OPEC+ will relax its output cuts or even exit the deal altogether in June. The US campaign of ‘maximum pressure’ on Iran has added another layer of uncertainty to an already complex web of events; Saudi Arabia’s response, the future of the OPEC+ agreement, the success of the US in driving Iran exports to ‘zero’, as well as demand prospects on both the upside and the downside. This comment assesses these risks and discusses the market outcomes under the different choices facing OPEC and Saudi Arabia.
                    [post_title] => Iranian Sanctions 2.0: Oil Market Risks and Price Stakes
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                    [post_date] => 2019-04-02 12:11:48
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                    [post_content] => In the second half of 2018, the oil market exhibited high volatility not only in terms of price levels but also time spreads and quality spreads. After reaching highs of $81/b and $71/b in October, monthly Brent and WTI prices ended the year in December at $57/b and $49/b respectively. At the same time, time spreads switched from backwardation to contango, as inventories rose above their 5-year average and the prospects for global demand worsened amid supplies increasing. The spreads between light sweet-medium sour crude also exhibited wide volatility, with the Brent-Dubai and WTI-Dubai spreads collapsing signalling a shortage of heavier sour crude globally.

Brent and WTI prices have gained significantly since December 2018, ending-March 2019 near $67/b and $60/b respectively (about $10/b higher), and time spreads are once again in backwardation. That said, while the Brent price in the front of the curve has increased sharply since the last quarter, the back end of the forward curve remains relatively sticky at around $60/b, suggestive of the fact that the dominant narrative remains relatively bearish. This presentation provides an overview of the oil market and price dynamics in early 2019, discussing the key challenges in the year ahead and examining possible outcomes.

Executive Summary 
                    [post_title] => An Overview of the Crude Oil Market in 2019
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                    [post_date] => 2019-03-13 16:06:03
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                    [post_content] => 

President Trump’s tweet on February 25 urging OPEC to ‘relax’ and to take it ‘easy’ with their cuts, and that a ‘fragile’ global economy can’t tolerate a higher oil price, did have an immediate price impact, with the Brent price declining by 4 per cent on the day, from nearly $67/b down to $64/b. But the ‘Trump tweet’ impact faded fairly quickly with oil prices gaining again towards the end of the same week. A clear signal from the Saudi energy minister Mr. Khalid Al-Falih in which he confirmed that OPEC and its partners would continue with their output cuts with the objective of achieving a more balanced market was a key factor behind the fast recovery. Extrapolating Saudi Arabia’s behavior in 2018 into 2019 is risky and the assumption that Saudi policy will reverse its current strategy under Trump’s pressure does not reflect the shift in Saudi thinking and the current uncertainties and weaknesses engulfing the oil market. This Energy Comment sheds some light on the current market uncertainties pertaining to the drivers and prospects of global demand growth in 2019, the clearing of the stocks overhang and the dilemma that OPEC and its partners currently face.

[post_title] => OPEC Policy in the Age of Trump [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => opec-policy-age-trump [to_ping] => [pinged] => [post_modified] => 2019-03-13 16:06:03 [post_modified_gmt] => 2019-03-13 16:06:03 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=31468 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [8] => WP_Post Object ( [ID] => 31455 [post_author] => 111 [post_date] => 2019-03-06 11:03:06 [post_date_gmt] => 2019-03-06 11:03:06 [post_content] => The current sweet-sour crude oil imbalance is creating challenges for producers and refineries alike. While OPEC+ is striving to balance the market by the first half of 2019, unplanned outages from countries such as Venezuela, Iran and Canada and OPEC+ cuts have contributed to a large deficit in medium/heavy sour crudes. This is having a big impact on key market outcomes including trade flows, the dynamics of crude price differentials, and refining margins. The crude imbalance is also complicating planning and risk management decisions, especially at times when the International Maritime Organization (IMO) will enforce a new 0.5% global sulphur cap on bunker fuel from the 1st of January 2020. This Energy Comment examines the dynamics of the sweet-sour crude price differentials, represented by the Brent-Dubai (BD) price spread and assesses how supply factors can impact the crude quality imbalance between light/heavy oil and sweet/sour crude and hence the crude price spreads in 2019. The results show that the current supply outages and OPEC+ cuts do not only impact price levels, but also the price differentials between the key sweet-sour benchmarks. Since most of the recent supply losses are concentrated in the medium/heavy sour category, while most of the supply gains are concentrated in the light sweet category in big part due to the strong growth in US shale, the light sweet-medium sour crude spread has collapsed and at certain instances was trading at negative values. Looking ahead, our paper predicts that, other things being equal, the downward pressure on light sweet - medium sour crude spreads will persist throughout this year as losses from countries like Iran and Venezuela due to sanctions may accelerate and as Saudi Arabia and its partners are expected to maintain the cuts until the end of 2019. This may have come as a surprise to some market analysts. A few months ago, the conventional wisdom was that the Brent-Dubai spread would widen as IMO rules start taking effect and the shipping industry shifts towards consuming cleaner fuels including Marine Gasoil (MGO) and compliant low sulphur fuel oils. This should have the impact of increasing demand for light sweet crudes while lowering demand for sour crudes. What our results show is that the IMO is only one of the many factors impacting spreads and supply factors are as important (if not more important) in determining movements in price differentials. In other words, the widening of the sweet-sour spreads may still occur, but this is far from a forgone conclusion. Our results also show that the current sweet-sour imbalance presents a challenge for OPEC+ and may complicate its efforts to balance the market. On the one hand, OPEC+ cuts are contributing to balancing the market in terms of volumes; on the other hand, the surplus in light sweet crude persists. By cutting output, OPEC+ is tightening an already very tight medium/heavy sour market with potential implications on refining margins and eventually on global oil demand if complex refining margins weaken significantly. The key question facing OPEC+ producers is whether they should or can take any measures to resolve this quality imbalance or should they just leave it to the market mechanisms to resolve it. [post_title] => The Light Sweet-Medium Sour Crude Imbalance and the Dynamics of Price Differentials [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => light-sweet-medium-sour-crude-imbalance-dynamics-price-differentials [to_ping] => [pinged] => [post_modified] => 2019-03-06 15:09:23 [post_modified_gmt] => 2019-03-06 15:09:23 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=31455 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [9] => WP_Post Object ( [ID] => 31409 [post_author] => 111 [post_date] => 2019-02-13 12:03:30 [post_date_gmt] => 2019-02-13 12:03:30 [post_content] => After a sharp fall towards the end of 2018, oil prices in 2019 started on a positive note recovering some of their losses. From the low point of $50/b reached on 28 December, the daily Brent price has increased to above $60/b with many analysts now expecting another year of sustained price volatility driven by a wide uncertainty pertaining to global supply and demand trends. But unlike 2017 and 2018, the woes engulfing the oil market in 2019 have extended to the demand-side. The prospects of the global economy and its potential impact on global oil demand, as well as the ability of OPEC+ producers to successfully enforce the agreed or even implement future deeper cuts (if necessary) to rebalance the market in the face of negative demand shocks are at the core of the current debate. Also, the unfolding geopolitical developments in Iran and Venezuela are expected to play a pivotal role in shaping oil market outcomes in 2019. In this Energy Insight, we revisit the main factors that shaped oil market dynamics in 2018 and analyse how the oil price path could evolve in 2019 by evaluating the prevailing risks underlying the world oil market using real-time forecast scenarios of the Brent price. Executive Summary

 

[post_title] => Oil Price Paths in 2019: Navigating Volatile Markets [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => oil-price-paths-2019-navigating-volatile-markets [to_ping] => [pinged] => [post_modified] => 2019-02-14 15:56:40 [post_modified_gmt] => 2019-02-14 15:56:40 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=31409 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [10] => WP_Post Object ( [ID] => 31282 [post_author] => 111 [post_date] => 2018-11-28 12:19:41 [post_date_gmt] => 2018-11-28 12:19:41 [post_content] => Oil market sentiment has turned very bearish over the last few weeks. The Brent price has fallen from highs of above $80/barrel in October to currently trading close to $60/barrel, global economic prospects have become highly uncertain, Saudi Arabia’s production is at record level of above 11.1 mb/d in November, Russia and other OPEC+ members that could increase production are producing at or close to maximum capacity, the range of estimates of Iranian losses remain very wide, OECD liquids stocks have returned to above their 5-year average, net-length financial positioning has fallen sharply, US shale output keeps surprising on the upside, and President Trump’s tweets about OPEC and oil prices have become a regular occurrence. Thus, when OPEC+ members meet next in December, they find themselves in a very different environment than the June 2018 meeting when the market’s main concern at the time was whether Saudi Arabia has enough spare capacity to put a cap on the oil price. In contrast, in the forthcoming OPEC meeting, the market concern is whether OPEC and its partners will implement deep enough cuts to reverse the recent decline in the oil price. This short presentation assesses the various choices that OPEC and its key player Saudi Arabia face. Executive Summary [post_title] => OPEC Choices are Getting Harder and Harder [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => opec-choices-getting-harder-harder [to_ping] => [pinged] => [post_modified] => 2018-11-28 12:19:41 [post_modified_gmt] => 2018-11-28 12:19:41 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=31282 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [11] => WP_Post Object ( [ID] => 31199 [post_author] => 111 [post_date] => 2018-09-21 11:12:02 [post_date_gmt] => 2018-09-21 10:12:02 [post_content] =>

As OPEC’s Declaration of Cooperation with non-OPEC producers draws to a close (ending-2018), the future of this historic joint effort of 24 (now 25) OPEC and non-OPEC oil-producing countries has moved to the top of the producers’ agenda. The next Joint Ministerial Monitoring Committee’s meeting on September 23rd in Algiers, could provide some hints regarding the future of the cooperative framework between the producers. Although OPEC and non-OPEC producers have collaborated in the past, albeit on a smaller scale, the Declaration of Cooperation has been a landmark agreement due to its success in meeting the many challenges faced in its planning, coordination and monitoring – at least in the short-term. Assessing its effectiveness beyond compliance levels and evaluating the dynamics underlying the success of the Agreement’s current framework as well as its members’ need for institutionalising a long-term cooperative framework, is of paramount importance for understanding what lies ahead and why oil policy will continue to matter in years to come. This Energy Comment discusses 5+1 key facts about the Declaration of Cooperation that shed light on the prospects and challenges in OPEC/NOPEC producers’ pursuit of cooperation.

[post_title] => 5+1 Key Facts about the OPEC Declaration of Cooperation [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => 51-key-facts-opec-declaration-cooperation [to_ping] => [pinged] => [post_modified] => 2018-09-21 11:12:02 [post_modified_gmt] => 2018-09-21 10:12:02 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=31199 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [12] => WP_Post Object ( [ID] => 31174 [post_author] => 111 [post_date] => 2018-09-04 11:08:41 [post_date_gmt] => 2018-09-04 10:08:41 [post_content] => This presentation discusses the oil market outlook for 2018 and 2019. It outlines the main factors behind the rebalancing of the oil market, including stronger than expected global oil demand growth and strong OPEC cohesion (caused in part due to involuntary cuts). The presentation then analyses the main trends shaping oil price outcomes in the short-term, including  prospects for the global economy amidst growing concerns about escalating trade tensions and the health of emerging economies, US shale supply dynamics in the face of infrastructure constraints, OPEC behaviour, the recent shifts in crude oil trade flows and geopolitical disruptions. The presentation concludes with an analysis of the balance of risks facing the oil market and how the disconnections between short-term and long-term expectations are clouding the oil price outlook. [post_title] => The Crude Oil Market in 2018 & 2019 - How Did We Get Here & What Next? [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => crude-oil-market-2018-2019-get-next [to_ping] => [pinged] => [post_modified] => 2018-09-04 11:08:41 [post_modified_gmt] => 2018-09-04 10:08:41 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=31174 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [13] => WP_Post Object ( [ID] => 31158 [post_author] => 111 [post_date] => 2018-08-21 12:21:05 [post_date_gmt] => 2018-08-21 11:21:05 [post_content] => After a sharp rise in April/May this year, which saw Brent trading at above $80/barrel for several days, the upward pressure on the oil price eased in July with the Brent structure flipping into contango. This may have come as a surprise to many analysts who were expecting oil prices to continue on their upward trajectory. Because, after all, with OECD stocks falling below the five-year average, spare capacity at very thin levels, oil demand still growing robustly, production in Venezuela continuing its decline, supply losses from Iran projected to exceed 1 million b/d, and general deterioration of the geopolitical backdrop, surely the Brent price should have broken the $80/barrel ceiling? Instead, the oil price has held in the $70-$75/barrel range for most of July and into August 2018. While fears of trade wars and growing concerns about the health of emerging markets have impacted sentiment, it is the recent shift in OPEC, and particularly its dominant player Saudi Arabia’s, output policy which has had the biggest impact on physical balances, prices and the term structure to date. This reflects in part changing market fundamentals and a more uncertain environment, but also changes in the weight attached to the various objectives pursued by the Kingdom. This comment examines the causes of the most recent shift in Saudi oil policy, its adjustment in output in July, and the implications of recent behaviour on its signaling power.   [post_title] => What to Make of Saudi Arabia's Recent Shift in its Output Policy? [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => make-saudi-arabias-recent-shift-output-policy [to_ping] => [pinged] => [post_modified] => 2018-08-21 12:27:43 [post_modified_gmt] => 2018-08-21 11:27:43 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=31158 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [14] => WP_Post Object ( [ID] => 31087 [post_author] => 111 [post_date] => 2018-06-18 11:24:55 [post_date_gmt] => 2018-06-18 10:24:55 [post_content] => As the OPEC oil ministers prepare to meet for their bi-annual Ordinary Meeting on 22 June, they are faced with some difficult choices. On the one hand, by extending the output cutbacks amidst a higher risk of output disruptions, OPEC risks overtightening the oil market and pushing oil prices higher, leading to an inevitable demand response. Moreover, involuntary cuts originating mainly from Venezuela, Angola, and Mexico mean that the oil market is tightening more quickly than anticipated. On the other hand, by exiting the agreement too early OPEC runs the risk of prices falling if such a decision is not supported by favourable market conditions, especially as ‘the clouds over the global economy are getting darker by the day’, and risks dismantling a historic coalition of OPEC/NOPEC producers which took massive diplomatic efforts to put together and the coordination of which proved critical for the rebalancing effort. In this Energy Insight, we consider the hard realities of oil market and price dynamics for 2018 and 2019 to derive, analyse, and assess, oil output policy scenarios that are likely to drive discussions during the upcoming OPEC Ministerial Meeting, through the lens of a structural VAR model of the global oil market. The decision for OPEC members that have the capacity to increase production is not only whether or not to increase output, but also by how much to increase production and whether to do it incrementally. Our results call for a cautious approach in which OPEC increases output gradually and reassess its options in November as this will help keep a solid floor on the oil price, which remains a key objective for all producers. We also find that future oil demand growth (especially in 2019) hinges heavily on the outcome of the upcoming OPEC+ meeting, just as the success of its oil output policy hinges heavily on the prospects of global oil demand remaining healthy. Finally, how OPEC decides to implement the output increase also matters. If the decision is to increase output, then it is in the best interest of OPEC+ to reach a collective decision, however this may not be feasible in the current context as the producers who don’t have the capacity to increase production and those who are subject to US sanctions are likely to refuse a recommendation to increase output. If it is not possible to reach a collective agreement on increasing output, the producers who have the capacity, and who could really influence market outcomes are then faced with three options: either to extend the current agreement of output cuts in order to maintain the cohesiveness of the coalition and risk the impact of higher oil prices on demand; exit the deal altogether and announce that they will increase their output regardless of the actions of other producers, bringing to an end the framework of cooperation; not dismantle the OPEC+ deal in the next meeting and postpone the difficult negotiations until November, while still going ahead and increasing output individually. While the last two options are not very different in terms of their impact on market balances, the choice of exit will affect sentiment and prices at least in the short-term. This shows the balancing role that OPEC has to play and the importance the key players should attach to retaining their flexibility. Executive Summary [post_title] => OPEC at the Crossroads [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => opec-at-the-crossroads [to_ping] => [pinged] => [post_modified] => 2018-06-18 11:24:55 [post_modified_gmt] => 2018-06-18 10:24:55 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=31087 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [15] => WP_Post Object ( [ID] => 31020 [post_author] => 111 [post_date] => 2018-05-02 11:17:42 [post_date_gmt] => 2018-05-02 10:17:42 [post_content] => In this presentation, Bassam Fattouh and Andreas Economou analyse the choices facing OPEC+ in light of OECD stocks falling, recent gains in oil prices, alongside concerns that OPEC may be over-tightening the market and with commentators warning that current high oil prices will have a negative impact on oil demand and suggesting that OPEC+ should release withheld barrels back into the market to put a cap on the oil price. While OPEC+ should always be wary about the potential supply/demand responses in a higher oil price environment and should show willingness to act both on the upside and the downside, we argue that indicators based on stocks should not be its only guide for output policy and that stock movements should be seen merely as symptoms of underlying oil supply and oil demand shocks hitting the market. The fact that the market, and the media, as well as producers themselves would prefer to rely on ‘simple’, ‘measurable’ and ‘observable’ indicators, and that indicators based on shocks are highly uncertain as well as difficult to measure, does not mean that OPEC+ should not consider alternative and more complex metrics in their decision making. We consider OPEC+ exit strategy under different scenarios with price outcomes ranging from $80/b year-end to an average price of $50/b. It is perhaps this wide range of price outcomes, which may explain OPEC+ reluctance to exit the deal, especially given the time taken and the difficulties faced in concluding the output cut agreement and what makes it even more difficult for OPEC+ is that their decisions are endogenous and how they decide to act now will, in turn, shape market outcomes adding another layer of uncertainty. Executive Summary [post_title] => Oil Price Signals: What Next for OPEC+? [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => oil-price-signals-next-opec [to_ping] => [pinged] => [post_modified] => 2018-05-02 12:01:11 [post_modified_gmt] => 2018-05-02 11:01:11 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=31020 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [16] => WP_Post Object ( [ID] => 30974 [post_author] => 111 [post_date] => 2018-04-06 11:06:01 [post_date_gmt] => 2018-04-06 10:06:01 [post_content] => OPEC exit strategy has been one of the key uncertainties engulfing the oil market. Most market focus has been on the level of inventories, as this is seen by many as a key indicator as to when OPEC may shift its current output policy. In this presentation, it is argued that the level of inventories, however measured, is a backward looking indicator, and hence is of little use for guiding OPEC’s next steps. Instead, through thorough analysis of the previous cycles we show that in the presence of a new source of supply, which is highly responsive to price signals, demand related shocks become much more important in shaping OPEC behaviour. The high output strategy adopted in 2015 was undermined by a negative demand shock. The current strategy of cutting output has succeeded in large part due to a strong positive demand shock, which caused inventories to continue to decline despite strong US shale response. Thus, the risks of potential ‘trade wars’ and the potential negative impact on the global economy and on oil demand if these risks do materialise should constitute a serious concern for OPEC. OPEC’s current strategy hinges heavily on the prospects of future demand growth. If demand continues to surprise on the upside (positive demand shock), then OPEC will most likely maintain its strategy and may decide to release some of the withheld crude back to the market. If demand surprises on the downside (negative demand shock), then OPEC’s choices become very stark: OPEC could either decide to cut output to support prices or shift toward a higher output strategy. Both choices carry hefty risks reflecting the delicate situation that OPEC finds itself in as a result of the shift in policy back in November 2016. Executive Summary [post_title] => Oil Supply Balances: The Four Cycles of the OPEC Oil Output Policy [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => oil-supply-balances-four-cycles-opec-oil-output-policy [to_ping] => [pinged] => [post_modified] => 2018-04-06 11:18:20 [post_modified_gmt] => 2018-04-06 10:18:20 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=30974 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [17] => WP_Post Object ( [ID] => 30863 [post_author] => 111 [post_date] => 2018-02-13 11:41:06 [post_date_gmt] => 2018-02-13 11:41:06 [post_content] => 2018 started on a positive note for oil markets with Brent prices breaking through $70 a barrel for a few days and all the key international crude oil benchmarks flipping into backwardation. Yet, there is still a wide uncertainty engulfing the oil market, with very divergent views among market observers about how the oil price path could evolve in 2018, with some revising upwards their forecasts to higher than $80/b while others are less convinced that the market fundamentals can sustainably support a price above $70/b, expecting a lower path in the mid $60/b. The key uncertainties behind these divergent views mainly pertain to different views about:
  • The OPEC/NOPEC exit strategy from the output cut agreement reached in November 2016;
  • US shale supply response to the recent oil price rise;
  • The potential impact of higher oil prices on global oil demand;
  • The extent of supply disruptions amid a fragile geopolitical environment.
In this Energy Insight, we analyse how the oil price path could evolve in 2018 by evaluating the aforementioned risks underlying the world oil market using a structural model of the oil market and considering various forecast scenarios. Forecast scenarios are not predictions of what will happen, but rather modelled projections of various oil price risks conditional on certain events that are known at the time of the forecast or some other hypothetical events. Our reference forecast scenario projects for Brent to trade within a narrow price range, with a price floor at above $60/b and a ceiling of below $75/b, with a 2018 average price of $67/b. The baseline forecast suggests that the momentum of stronger than expected oil demand and the OPEC/NOPEC output cuts have tightened the oil market in 2017 and even with no change in current market dynamics, the oil price will continue to be supported at around $65/b. Our results show that for 2018, US shale output growth will be the key factor putting a ceiling on the oil price, while supply disruptions could provide some support to the oil price, with a sharp fall in Venezuelan output constituting the biggest geopolitical risk that could push prices well above our baseline or reference forecasts. The results also show the paramount importance for the strong oil demand momentum experienced in 2017 to continue in 2018 for rebalancing the market and supporting the oil price. Finally, our results show that for OPEC/NOPEC to maintain the recent price gains, they have to extend their output cut until the end of 2018; releasing the withheld barrels under the current agreement would result in a sharp fall in oil prices, suggesting that OPEC/NOPEC should be very wary about unwinding the output cut agreement when they next meet in June 2018. [post_title] => Oil Price Paths in 2018: The Interplay between OPEC, US Shale and Supply Interruptions [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => oil-price-paths-2018-interplay-opec-us-shale-supply-interruptions [to_ping] => [pinged] => [post_modified] => 2018-02-13 11:41:06 [post_modified_gmt] => 2018-02-13 11:41:06 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=30863 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [18] => WP_Post Object ( [ID] => 30761 [post_author] => 111 [post_date] => 2017-12-07 09:50:22 [post_date_gmt] => 2017-12-07 09:50:22 [post_content] => Using novel measures that decompose oil supply shocks into its exogenous supply (driven by exogenous geopolitical events in OPEC countries) and endogenous supply (driven by investment dynamics within the oil sector) components, this paper offers a fresh perspective on the role of supply, flow demand and speculative demand shocks in explaining the changes in the real price of oil over the last three decades. We show that while exogenous supply shocks are non-negligible, endogenous supply shocks have generated larger and more persistent price responses than previously thought. Earlier studies have consistently shown that positive shifts in the flow demand for oil were responsible for most of the oil price surge between 2002-2008. But this paper shows that endogenous production capacity constraints, which restricted the ability of producers to ramp up production to meet the unexpected increase in demand, added at least $50/barrel to the real price of oil during that period. More recently, endogenous oil supply shocks alone accounted roughly for twice as much as any other supply or demand shock in explaining the 2014 oil price collapse. Specifically, of the $64 per barrel cumulative decline in the real price of oil from June 2014 to January 2015, our model estimates that $29 have been due to endogenous oil supply shocks, $13 have been due to exogenous oil supply shocks, and $12 have been due to flow demand shocks. The paper concludes by demonstrating that forecasting models that are able to distinguish between exogenous and endogenous supply shocks generate more realistic out-of-sample estimates of the sequences of the structural shocks, thus resulting in higher real-time predictive accuracy than forecasting models that use a collective measure of a flow supply shock. Full paper [post_title] => A Structural Model of the World Oil Market: The Role of Investment Dynamics and Capacity Constraints in Explaining the Evolution of the Real Price of Oil [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => structural-model-world-oil-market-role-investment-dynamics-capacity-constraints-explaining-evolution-real-price-oil [to_ping] => [pinged] => [post_modified] => 2017-12-07 09:55:31 [post_modified_gmt] => 2017-12-07 09:55:31 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=30761 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [19] => WP_Post Object ( [ID] => 30041 [post_author] => 111 [post_date] => 2017-01-24 10:25:18 [post_date_gmt] => 2017-01-24 10:25:18 [post_content] =>

This paper explores how the oil price path could evolve in 2017 by assessing the various oil price risks under alternative forecast scenarios pertaining to future market conditions. It is shown that even without the OPEC-non-OPEC output cut agreement in November 2016, the three-year long price fall would eventually have come to a halt and stabilized at close to $41/b in 2017 based solely on market forces. The agreement, however, helped accelerate the price recovery by stabilising the oil price near $50/b. That said, the current price at above $50/b already incorporates the bulk of the expected gains from the full enforcement of the production cuts and reflects the positive shift of market sentiment that has been building-up in anticipation of the implementation of the output cut agreement. Thus, for the next year, the oil price path is more sensitive to downside risks depending on the discipline of OPEC and non-OPEC oil producers. In fact, for the price recovery to be sustained in 2017, OPEC efforts must be met by favourable market conditions in the form of an unexpected surge in global oil demand amid a moderate expansion of US shale supply. On the contrary, a deterioration of global economic activity, or an aggressive expansion of US shale supply, or both, could reverse the current momentum. Moreover, a return of oil production from conflict inflicted countries Libya and Nigeria could undermine the OPEC agreement from within. Eventually, whatever scenario plays out, OPEC will continue to assess the market conditions and in the second half of 2017, it can decide on whether to extend the agreement to offset any losses to the anticipated oil price recovery that may arise from changes in oil market conditions or to drop the agreement all together. But regardless which way the decision goes, the latest output cut agreement is critical to resolving fundamental uncertainties about the shock hitting the oil market and OPEC behaviour in a more uncertain world.

[post_title] => Oil Price Paths in 2017: Is a Sustained Recovery of the Oil Price Looming? [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => oil-price-paths-2017-sustained-recovery-oil-price-looming [to_ping] => [pinged] => [post_modified] => 2017-01-24 10:25:18 [post_modified_gmt] => 2017-01-24 10:25:18 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=30041 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [20] => WP_Post Object ( [ID] => 29442 [post_author] => 111 [post_date] => 2016-08-31 10:34:13 [post_date_gmt] => 2016-08-31 09:34:13 [post_content] => Analysis of oil price shocks using fundamental measures has for years puzzled researchers. Recent theoretical and empirical work has made considerable improvements on how to model the global oil market. Yet, many studies document a decrease in the explanatory ability of the supply side of the market, as there appears little evidence that oil supply shocks have historically been a key determinant of the oil price. This comment focuses on the underlying specifications of the supply determinant and predicts that the most important channel by which oil supply affects the price of oil is through shocks to the available operable capacity in crude oil production, relative to demand, as a consequence of the normal functioning of the global oil market. The full OIES paper that accompanies this comment can be found here. [post_title] => Not all oil supply shocks are alike either - Disentangling the supply determinant [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => not-oil-shocks-alike-either-disentangling-supply-determinant [to_ping] => [pinged] => [post_modified] => 2017-11-16 14:16:55 [post_modified_gmt] => 2017-11-16 14:16:55 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=29442 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) ) [post_count] => 21 [current_post] => -1 [in_the_loop] => [post] => WP_Post Object ( [ID] => 32655 [post_author] => 111 [post_date] => 2019-11-04 11:27:30 [post_date_gmt] => 2019-11-04 11:27:30 [post_content] => OPEC is faced with a wide range of uncertainties, which are perhaps best reflected in the gulf in narratives between the bulls and the bears. For the bulls, OPEC is in a strong position: the declines in non-OPEC supply are structural while the slowdown in global economic growth is temporary. Based on this view, a mini super-cycle is just around the corner: as demand rebounds, OPEC would be operating close to its maximum sustainable capacity at times when the geopolitical backdrop may reduce spare capacity further—a perfect combination for a sustained rise in oil price. Paradoxically, many of the bulls are the ones calling for deeper OPEC cuts. For the bears, it is the other way around: non-OPEC (US shale) supply would rebound strongly in response to higher oil prices and deeper OPEC cuts and the slowdown in the global economy could persist for longer as there is no end in sight for the US-China trade war. Also, according to this view, there is enough supply held off the market and thus concerns about spare capacity are exaggerated. The reality is likely to lie between these polar views and OPEC should resist being pushed into a corner. If either of these views does eventually materialize, the costs associated with maintaining and extending the current cuts into 2020 are low, with the potentially upside benefit that some of the views about the end of US shale growth could be put to the test. OPEC should leave part of the rebalancing to market mechanisms and resist reacting to noisy daily signals. OPEC+ is in a good position to do so especially its dominant players Saudi Arabia and Russia have succeeded in managing market expectations so far and have not infused the view that they would pursue deeper cuts and that they would do whatever it takes, at any cost, to support the oil price (interestingly, signals that the Kingdom would rebalance the market at any cost have emerged from other OPEC members, that have not been complying with their quotas, and are determined to defend prices by cutting Saudi barrels). For the first time in several years, Saudi Arabia is, so far, approaching the December meeting by not reacting to immediate market pressures and by not over-promising and hyping market expectations, which may give it the chance to over-deliver in 2020.     [post_title] => The Dilemma Continues: OPEC choices amid high uncertainty [post_excerpt] => [post_status] => publish [comment_status] => closed [ping_status] => closed [post_password] => [post_name] => the-dilemma-continues-opec-choices-amid-high-uncertainty [to_ping] => [pinged] => [post_modified] => 2019-11-04 11:31:58 [post_modified_gmt] => 2019-11-04 11:31:58 [post_content_filtered] => [post_parent] => 0 [guid] => https://www.oxfordenergy.org/?post_type=publications&p=32655 [menu_order] => 0 [post_type] => publications [post_mime_type] => [comment_count] => 0 [filter] => raw ) [comment_count] => 0 [current_comment] => -1 [found_posts] => 21 [max_num_pages] => 0 [max_num_comment_pages] => 0 [is_single] => [is_preview] => [is_page] => [is_archive] => 1 [is_date] => [is_year] => [is_month] => [is_day] => [is_time] => [is_author] => [is_category] => [is_tag] => [is_tax] => [is_search] => [is_feed] => [is_comment_feed] => [is_trackback] => [is_home] => [is_privacy_policy] => [is_404] => [is_embed] => [is_paged] => [is_admin] => [is_attachment] => [is_singular] => [is_robots] => [is_posts_page] => [is_post_type_archive] => 1 [query_vars_hash:WP_Query:private] => 8eb4e404dd281665b2a9551690663b95 [query_vars_changed:WP_Query:private] => [thumbnails_cached] => [stopwords:WP_Query:private] => [compat_fields:WP_Query:private] => Array ( [0] => query_vars_hash [1] => query_vars_changed ) [compat_methods:WP_Query:private] => Array ( [0] => init_query_flags [1] => parse_tax_query ) )

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