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GEOJE, South Korea (Reuters) - Geoje Island, off the southeastern tip of the Korean peninsula, appears as prosperous as ever: foreign cars cruise the streets, young mothers pushing strollers converge on coffee shops, and workers on motorcycles pour into bustling shipyards.

It is what comes next that worries people in Geoje, the world's largest producer of ships by tonnage.

South Korean shipbuilders are facing their biggest ever crisis, with mass layoffs expected later this year as finished vessels leave the shipyards and few new orders come in.

"We've never had a serious downturn - ever," Kim Hyeon-gyu, director of Geoje's main industrial park, said on the sidelines of a public hearing to discuss looming layoffs.    

Because it takes about two years to build a ship, Geoje's docks are still busy. But without a major uptick in orders by September, which looks unlikely, 20,000 shipbuilding jobs in Geoje will be lost by March, city officials say.

Some 70 percent of Geoje residents rely for a living on shipbuilding, an industry that for four decades was a key engine of South Korea's export-driven growth and still employs about 200,000 across the country.

Now, a global slump in trade and commodities, plus rising competition from China, is forcing Geoje to find ways to ease its dependence on the shipyards.

"Past strong shipbuilding growth made us lax in finding ways for the tourists to spend money here instead of driving through," said Kwon Min-ho, the mayor of Geoje, which is building a 424-room resort as part of a plan to expand its tourist infrastructure.


But the shift is painful.

Subcontractors at the massive Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries Co Ltd yards in Geoje and at Hyundai Heavy Industries Co Ltd in nearby Ulsan are especially hard-hit.

"The number of subcontractors going out of business has exploded this year," said Kim Dong-sung, an official with a lobby group representing them. "Unpaid wages and bonuses plus 20-30 percent pay cuts are now seen as the norm."

In the first quarter of this year, South Korea's total shipbuilding industry landed just eight orders totalling 171,188 CGT (compensated gross tonnage).

That compares with 68 ships totalling 2,886,589 CGT in the same period last year and roughly 100 per quarter during a 2003-2008 industry boom that saw massive capacity expansion.

The legacy of those boom days is still apparent, even as activity slows.

Geoje's gross regional domestic product exceeded $50,000 (£34,504) per person in 2013, nearly double the $27,214 national average in 2015, according to the Bank of Korea.

A short drive from traditional fishing villages and the massive shipyards stand smart apartment blocks resembling those of Seoul's well-to-do suburbs. The island's 270,000 residents include 14,800 foreigners mainly working in the shipyards as shipowner representatives or workers, giving Geoje's city centre a cosmopolitan feel.

"Business is alright near tourist spots, but it has slowed down in downtown stores," said Lee Mi-eun, owner of a large beef rib soup restaurant near one of Samsung's shipyards. "People ask for lower-priced menus, come in smaller groups."

Shipbuilding here was largely spared the state-driven restructuring many other South Korean industries went through during the 1997-98 Asian financial crisis as it earned valuable dollars and had years of orders in place.

While in the aftermath, some shipbuilders were bankrupted or sold, and Daewoo Shipbuilding was bailed out by a state-run bank, industry heavyweights built a dominant position against European and Japanese rivals.

More recently, as orders for traditional ships dried up or moved to China, Daewoo, Samsung and Hyundai - the world's three largest shipbuilders - bid aggressively to build complex, expensive offshore oil and gas facilities.

That kept the yards humming but cost overruns and delays led to combined net losses of $4.9 billion for the three giants in 2015.

Under prodding by Seoul, shipbuilders have been shedding assets and cutting staff and wages in hopes of riding out the downturn.

Clarksons Research previously said it expects global commercial ship orders to begin resuming some time around late 2017, with a full recovery only emerging in 2020.

Seen as "too-big-to-fail", the government is looking for ways to shore up the solvency of state-run creditor banks in the event that they need to step in to save one of the giant shipbuilders before then.

Cho Hyun-woo, planning manager at the Daewoo Shipbuilding workers' union, said restructuring should not cut so deeply that the industry loses expertise it has developed for high-end structures, which it should bid on once demand returns.

"If you kill the technology that can make these ships when they are ordered en masse starting 2018, it's painfully obvious the technology will go to China or Japan," he said.

By Joyce Lee

(Editing by Tony Munroe and Lincoln Feast)

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North American crude oil prices are closely, but not perfectly, connected

selected North American crude oil prices

Source: U.S. Energy Information Administration, based on Bloomberg L.P. data
Note: All prices except West Texas Intermediate (Cushing) are spot prices.

The New York Mercantile Exchange (NYMEX) front-month futures contract for West Texas Intermediate (WTI), the most heavily used crude oil price benchmark in North America, saw its largest and swiftest decline ever on April 20, 2020, dropping as low as -$40.32 per barrel (b) during intraday trading before closing at -$37.63/b. Prices have since recovered, and even though the market event proved short-lived, the incident is useful for highlighting the interconnectedness of the wider North American crude oil market.

Changes in the NYMEX WTI price can affect other price markers across North America because of physical market linkages such as pipelines—as with the WTI Midland price—or because a specific price is based on a formula—as with the Maya crude oil price. This interconnectedness led other North American crude oil spot price markers to also fall below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS), and Bakken Clearbrook. However, the usefulness of the NYMEX WTI to crude oil market participants as a reference price is limited by several factors.

pricing locations of selected North American crudes

Source: U.S. Energy Information Administration

First, NYMEX WTI is geographically specific because it is physically redeemed (or settled) at storage facilities located in Cushing, Oklahoma, and so it is influenced by events that may not reflect the wider market. The April 20 WTI price decline was driven in part by a local deficit of uncommitted crude oil storage capacity in Cushing. Similarly, while the price of the Bakken Guernsey marker declined to -$38.63/b, the price of Louisiana Light Sweet—a chemically comparable crude oil—decreased to $13.37/b.

Second, NYMEX WTI is chemically specific, meaning to be graded as WTI by NYMEX, a crude oil must fall within the acceptable ranges of 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI can therefore be unsuitable as a price for crude oils with characteristics outside these specific ranges.

Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1,000 barrels of crude oil within a specific month in the future (typically at least 10 days). The last day of trading for the May 2020 contract, for instance, was April 21, with physical delivery occurring between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a NYMEX WTI futures contract provides. Consequently, these market participants will instead turn to shorter-term spot price alternatives.

Taken together, these attributes help to explain the variety of prices used in the North American crude oil market. These markers price most of the crude oils commonly used by U.S. buyers and cover a wide geographic area.

Principal contributor: Jesse Barnett

May, 28 2020
Financial Review: 2019

Key findings

  • Brent crude oil daily average prices were $64.16 per barrel in 2019—11% lower than 2018 levels
  • The 102 companies analyzed in this study increased their combined liquids and natural gas production 2% from 2018 to 2019
  • Proved reserves additions in 2019 were about the same as the 2010–18 annual average
  • Finding plus lifting costs increased 13% from 2018 to 2019
  • Occidental Petroleum’s acquisition of Anadarko Petroleum contributed to the largest reserve acquisition costs incurred for the group of companies since 2016
  • Refiners’ earnings per barrel declined slightly from 2018 to 2019

See entire annual review

May, 26 2020
From Certain Doom To Cautious Optimism

A month ago, the world witnessed something never thought possible – negative oil prices. A perfect storm of events – the Covid-19 lockdowns, the resulting effect on demand, an ongoing oil supply glut, a worrying shortage of storage space and (crucially) the expiry of the NYMEX WTI benchmark contract for May, resulted in US crude oil prices falling as low as -US$37/b. Dragging other North American crude markers like Louisiana Light and Western Canadian Select along with it, the unique situation meant that crude sellers were paying buyers to take the crude off their hands before the May contract expired, or risk being stuck with crude and nowhere to store it. This was seen as an emblem of the dire circumstances the oil industry was in, and although prices did recover to a more normal US$10-15/b level after the benchmark contract switched over to June, there was immense worry that the situation would repeat itself.

Thankfully, it has not.

On May 19, trade in the NYMEX WTI contract for June delivery was retired and ticked over into a new benchmark for July delivery. Instead of a repeat of the meltdown, the WTI contract rose by US$1.53 to reach US$33.49/b, closing the gap with Brent that traded at US$35.75b. In the space of a month, US crude prices essentially swung up by US$70/b. What happened?

The first reason is that the market has learnt its lesson. The meltdown in April came because of an overleveraged market tempted by low crude oil prices in hope of selling those cargoes on later at a profit. That sort of strategic trading works fine in a normal situation, but against an abnormal situation of rapidly-shrinking storage space saw contract holders hold out until the last minute then frantically dumping their contracts to avoid having to take physical delivery. Bruised by this – and probably embarrassed as well – it seems the market has taken precautions to avoid a recurrence. Settling contracts early was one mechanism. Funds and institutions have also reduced their positions, diminishing the amount of contracts that need to be settled. The structural bottleneck that precipitated the crash was largely eliminated.

The second is that the US oil complex has adjusted itself quickly. Some 2 mmb/d of crude production has been (temporarily) idled, reducing supply. The gradual removal of lockdowns in some US states, despite medical advisories, has also recovered some demand. This week, crude draws in Cushing, Oklahoma rose for the second consecutive week, reaching a record figure of 5.6 million barrels. That increase in demand and the parallel easing of constrained storage space meant that last month’s panic was not repeated. The situation is also similar worldwide. With China now almost at full capacity again and lockdowns gradually removed in other parts of the world, the global crude marker Brent also rose to a 2-month high. The new OPEC+ supply deal seems to be working, especially with Saudi Arabia making an additional voluntary cut of 1 mmb/d. The oil world is now moving rapidly towards a new normal.

How long will this last? Assuming that the Covid-19 pandemic is contained by Q3 2020, then oil prices could conceivably return to their previous support level of US$50/b. That is a big assumption, however. The Covid-19 situation is still fragile, with major risks of additional waves. In China and South Korea, where the pandemic had largely been contained, recent detection of isolated new clusters prompted strict localised lockdowns. There is also worry that the US is jumping the gun in easing restrictions. In Russia and Brazil – countries where the advice to enforce strict lockdowns was ignored as early warning signs crept in – the number of cases and deaths is still rising rapidly. Brazil is a particular worry, as President Jair Bolosnaro is a Covid-19 skeptic and is still encouraging normal behaviour in spite of the accelerating health crisis there. On the flip side, crude output may not respond to the increase in demand as easily, as many clusters of Covid-19 outbreaks have been detected in key crude producing facilities worldwide. Despite this, some US shale producers have already restarted their rigs, spurred on by a need to service their high levels of debt. US pipeline giant Energy Transfer LP has already reported that many drillers in the Permian have resumed production, citing prices in the high-US$20/b level as sufficient to cover its costs.

The recovery is ongoing. But what is likely to happen is an erratic recovery, with intermittent bouts of mini-booms and mini-busts. Consultancy IHS Markit Energy Advisory envisions a choppy recovery with ‘stop-and-go rallies’ over 2020 – particularly in the winter flu season – heading towards a normalisation only in 2021. It predicts that the market will only recover to pre-Covid 19 levels in the second half of 2021, and a smooth path towards that only after a vaccine is developed and made available, which will be late 2020 at the earliest. The oil market has moved from certain doom to cautious optimism in the space of a month. But it will take far longer for the entire industry to regain its verve without any caveats.

Market Outlook:

  • Crude price trading range: Brent – US$33-37/b, WTI – US$30-33/b
  • Demand recovery has underpinned a rally in oil prices, on hopes that the worst of the demand destruction is over
  • Chinese oil demand is back to the 13 mmb/d level, almost on par year-on-year
  • News that development of potential Covid-19 vaccines are reaching testing phase also cheered the market
  • The US active oil and gas rig count lost another 35 rigs to 339, down 648 sites y-o-y


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May, 23 2020