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Last Updated: June 22, 2016
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Business Trends

  1. Oil had a jittery week, with the dominant theme being fears of Brexit – the upcoming referendum in the UK on whether to remain or leave the European Union; fears over the economic impact if the UK was to vote ‘Leave’ sent crude prices down earlier in the week, then regaining to float just under US$50/b as ‘Remain’ gained momentum. The country goes to vote this Thursday.

  2. Ties between Asia and Iran continue to warm; China and Iran are reportedly developing an oil terminal project on Oeshm Island, a US$550 million project that will help ramp up Iranian crude exports, much of which will be destined for China as it attempts to diversify crude sources away from dependence of Russia and Saudi Arabia.

  3. As the race to satisfy Asian crude demand heats up with Iran upping the ante, traditional suppliers are looking to lock in with long-term customers; Abu Dhabi’s ADNOC visited the company’s client base in South Korea and Japan, aimed at securing and retaining the business of the NOC’s reliable clients in the East.

  4. Shell’s deepwater Malikai development in Sabah, Malaysia took one step closer to completion with the completion of the onshore fabrication and commissioning of the Malikai TLP. Operations are expected to commence in 2017 on schedule, with peak production of 60,000 b/d, opening up a new forefront of deepwater development in Malaysia.

  5. Vladimir Putin is reportedly weighing selling part of Rosneft and other government-owned oil ‘jewels’ to China and India as the Russian governments attempt to cover budget shortfalls triggered by falling oil prices and tensions with the EU and US over geopolitical interventions ahead of his re-election in two years.

  6. Gazprom has abandoned attempts to expand crude deliveries to India, due to ‘difficult’ logistics but left the door open if market conditions improve.

  7. In more Russia-Asian news, Vietnam’s PV Oil secured a long-term crude contract with Rosneft last week. PV Oil is the subsidiary of PetroVietnam that handles crude sourcing for Vietnam’s sole refinery Dung Quat, and also lifts refined products from the refinery.

  8. Indonesia is at it again; Pertamina has announced that it intends to build two new refineries of 300 kb/d each by 2023 to ease the country’s chronic oil product import issue. One of them will be the Tuban refinery, in partnership with Russia’s Rosneft, while Pertamina is still searching for a partner for its planned Bontang site. 

  9. As the world’s largest imported of natural gas, Japan is attempted to use the current supply glut as an opportunity to rewrite the rules of Asian natural gas pricing. Japan, which traditionally pays huge premiums for LNG, wants to move Asian LNG pricing away from the rigid, opaque market based on individual contract pricing towards embracing Japan as a trading hub where prices are set on the market. Part of this will include removing restrictions on reselling LNG cargoes; Tokyo Electric Power and Chubu Electric signed Japan’s first resale deal last month.

  10. India’s GAIL is looking at re-aligning the route of a proposed gas pipeline in the state of Tamil Nadu to run in parallel to motor highways. Debates over the course of the pipeline have hindered the start-up of the Petronet’s Kochi LNG terminal, which opened three years ago.

  11. The cost of falling oil prices has been tabulated: consulting firm Wood Mackenzie estimates that the upstream industry has responded by cancelling and deferring projects to the tune of some US$740 billion over 2015-2020 since crude prices first starting tumbling in Q42014

  12. The fires have been put out; after wildfires in Alberta sent Canadian oil sands production way down last month, producers have returned and the IEA expects Canadian production to return to normal by mid-July, removing a supply factor that has supported stronger prices recently.

  13. There was only a single attack by the Niger Delta Avengers in Nigeria last week – on June 16 at the NNPC Oruk Anam crude pipeline – as the military thwarted a planned sabotage at an Eni pipeline and arrested 19 suspects, fighting back against the sustained disruption that has made Nigeria the third most expensive country in which to produce oil.

  14. The US oil rig count rose up again last week, with nine more sites coming online, bringing the total number t o 337. All of the gains are coming from onshore projects – offshore rigs remain static at 21. The gas rig count rose by one to 86.

  15. Lukoil is reportedly looking into spinning off or selling its downstream assets in Western Europe, as improving crude prices is pushing the Russian giant to focus on expanding upstream at home and abroad. Lukoil has some refining assets in Italy and the Netherlands, as well as a retail network across east Europe.

  16. The trend back to upstream is echoed by other oil majors, with Chevron and Shell both putting some of their smaller refineries – Chevron’s Burnaby in Canada and Shell’s Martinez in California – up for sale, am attempt to rationalise their downstream portfolio.

  17. Russia’s Gazprom and Belgium’s Fluxys are in discussions to develop LNG facilities across western Europe, including LNG bunkering, as Europe’s appetite for LNG increases and more import facilities are required. 

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High Oil Prices and Indonesia’s Ban on Oil Palm Exports

Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.  

A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.

Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.

Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.

And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.

That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.

Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.

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Market Outlook:

  • Crude price trading range: Brent – US$110-1113/b, WTI – US$105-110/b
  • As the war in Ukraine becomes increasingly entrenched, the pressure on global crude prices as Russian energy exports remain curtailed; OPEC+ is offering little hope to consumers of displaced Russian crude, with no indication that it is ready to drastically increase supply beyond its current gentle approach
  • In the US, the so-called NOPEC bill is moving ahead, paving the way for the US to sue the OPEC+ group under antitrust rules for market manipulation, setting up a tense next few months as international geopolitics and trade relations are re-evaluated

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