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Last Updated: June 27, 2016
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  1. Global crude oil prices fell over Thursday and Friday, spilling into this week, as the UK’s Brexit decision to leave the European Union rocked financial and commodity markets worldwide; with the UK now dealing with more uncertainty over how or even if to proceed with the divorce, expect a bumpy road ahead.

  2. Saudi Arabia’s oil minister, Khalid Al-Falih, declared that ‘the oil glut is over’, with most interpreting the statement as the end to the kingdom’s attempt to wipe up US shale producers by raising production to keep prices low. Some 81 North American oil companies have gone bankrupt since the start of 2015, but Saudi Arabia has also taken a monetary hit. If this statement is followed by a scaling back of oil production, expect the oil markets to cheer and begin to beat a path to US$60/b.

  3. India has big ambitions for its eastern state of Assam, planning to raise oil and gas production there to 9.4 million metric tons of oil equivalent. All that oil will have to go somewhere, and India’s roadmap is to create a 5,000 km mega petroleum pipeline grid that would not only serve its north-eastern states, but also Bhutan, Bangladesh, Nepal, Myanmar and possibly even South-East Asia.

  4. Indonesia’s Pertamina is preparing to spend up to US$100 billion by 2030 to reach its target of 943 kb/d output target. Much of the focus is domestic – eyeing blocks of a production capacity of 35 kb/d and above held by private companies – but foreign investment is also being considered, particularly in Iran.

  5. The Kurdistan Regional Government, a semi-autonomous area of Iraq, is in talks with Iran on a pipeline deal that would transport Kurdish crude (and natural gas) across the border from Sulaimaniya and Kirkuk fields. Reports suggest that the volumes being look at are about 250 kb/d.

  6. The end of the April/May maintenance season in China has led to a boost in Chinese crude runs in June, with healthy refining margins also playing a factor. Sinopec, PetroChina and CNPC are all planning run rates of 80%, up from 75% in May, even as domestic petroleum demand appears to be slowing down.

  7. More Iranian deals ahead, this time in Central Asia. Iran and Kazakhstan are in talks to develop a joint oil refinery in Kazakhstan, using Kazakh crude. Offtake is earmarked to head to Iran, as the country attempts to balance its new-found popularity as a crude exporter with its own fuel hungry population.

  8. A fire broke out at the Petron oil refinery in Port Dickson, temporarily disrupting operations. Put out within hours, Petron is investigating the cause of the fire and has assured customers that there would be no supply disruptions.

  9. Growing demand for condensate in Asia, which yields the naphtha for petrochemicals production, is a boon for new condensate projects in Australia as Qatar and Iran both aim to scale back condensate exports in favour of domestic splitters. Australia’s Inchtys comes online next year, with 100 kb/d of output, with Gorgon and Angel already operational.

  10. Oil and gas exploration is one of the sectors earmarked to be opened to private investment in China, as part of the country’s bid to halt a worrying slide in investment growth. China will also attempt to encourage private investors by improving and providing more transparency in financing and market access, along with creating a more dynamic competitive environment.

  11. China’s CITIC and Japan’s Itochu are joining together to invest in oil and gas prices, aiming to capitalise on rising oil prices. The Chinese oilfield operator will collaborate with Itochu on identifying, acquiring and investing in E&P assets and projects worldwide.

  12. TransCanada is officially suing the United States government over the controversial Keystone XL oil pipeline, first supported in the US then cancelled by Barack Obama’s administration over environmental concerns. Keystone XL was to carry crude from Canada’s tar sands oil fields across to continental US to refineries in the Gulf of Mexico, with TransCanada seeking US$15 billion in compensation.

  13. While no new attacks in Nigeria occurred last week, with the country’s military ramping up operations, the Niger Delta Avengers have issued their over-arching demand – a referendum on Nigeria’s unity, aiming to break up the federation into as many as five separate countries; the separatist movement has been gaining in Nigeria, over complaints that the Niger Delta and south do not receive enough share of oil wealth.

  14. The US oil rig count dropped by 6 last week to 331, as worries over volatile oil prices snapped a three-week rise in the rig count. Gas rigs rose by 4, bringing the total operational rig count to 421.

  15. Plans to launch Nigeria’s first private oil refinery have been unveiled by Aliko Dangote, Africa’s richest man. The planned refinery has an optimistic start date of 2019, with capacity of 650kb/d and costing US$12 billion. It should help ease Nigeria’s chronic fuel shortages and expand the market in West Africa, with the idea of being the Africa equivalent of India’s Jamnagar refinery a long-term goal.

  16. Industrial action in France and high existing inventories have trimmed refinery appetite in Europe, with crude cargoes finding few buyers there; peak refinery utilisation comes in summer, but refiners are preferring to draw down stockpiles instead of importing fresh cargoes.

  17. International gas prices bucked the Brexit trend as the UK National Balancing Point prices rose in the wake of the referendum; being denominated in sterling, the sharp fall in the pound will have made natural gas cheaper for foreign buyers. The UK natural gas price is used as the reference mark for many gas traders, including in Asia. 

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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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