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Last Updated: July 11, 2016
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Oil prices

  • Crude oil benchmarks had a poor week, dropping to two month lows to the mid-US$40s level, as traders fretted over a growing stockpile of oil globally, with the EIA reporting a smaller-than-expected decrease in US oil stockpiles. Not even falling US production could lift the market, as dips in US output were matched by increases in OPEC, mainly Iranian crude. 

Last week in Asian oil:

  • All eyes will be squarely on the South China Sea this week, as the United Nations Permanent Court of Arbitration rules on the legality of China’s claims – the so-called nine-dashed line that crosses over with territorial claims from Vietnam, Malaysia, Brunei and the Philippines, which initiated the arbitration. The ruling is expected to be unfavourable to China, with the country already pre-empting the decision by announcing it would ‘ignore the court’s judgement’. The ruling is expected July 12, and the quandary of oil rights in the resource-rich sea will drag on for longer.

  • Indian Oil’s refining chief, Sanjiy Singh, has warned that at the current rate of consumption growth, Indian may become a net importer of oil products in 15 years, even at the current planned rate of expansion. Strong growth will eat into the country’s current exports of products, unless Indian refiners push ahead with plans to increase capacity, such as the mammoth planned joint venture refinery between IOC, BPCL and HPCL. Indian Oil itself announced plans to spend US$6 billion over the next six years to boost refining capacity.

  • Indonesia’s Pertamina is aiming to build a strategic crude petroleum reserve of 25 million barrels within the next two years to ensure domestic energy security. Roughly 60% of the crude earmarked for the SPR will come from domestic production from private companies, and the remainder imported in. Expansions in oil product storage capacity are also planned, equivalent to 30 days of consumption.

  • BP finally signed off on its planned US8 billion expansion of the Tangguh LNG project in Indonesia, clearing the way for the third train to begin operations in 2020. The expansion will increase capacity at the West Papua site by 50%, to 11.4 million tons, all of which will be split between domestic power utility firm PLN and Japan’s Kansai Electric Power.

  • In a sign that Japan’s ambition to establish an LNG trading hub is gaining pace, the Jera Co joint venture between Tokyo Electric Power and Chubu Electric Power is reportedly on the verge of a second deal in as many months to resell LNG to a European client. Another deal, by Shizuoka Gas and Shell Eastern Trading, has been established to utilise the export capacity recently added to the Shimizu LNG terminal. 
  • Tokyo Gas is establishing a joint venture with PetroVietnam Gas to build an LNG plant and distribution pipelines to feed Vietnam’s rapidly growing appetite for natural gas-powered electricity.

  • Thailand’s PTTEP, the upstream arm of PTT, has signed an MoU with Oman Oil Company Exploration and Production (OOCEP) to collaborate on E&P projects in Oman, extending PTT’s presence in Omani upstream in line with its ambitions to expand overseas upstream production in lieu of declining Thai output.

Last week in the world oil:

  • ExxonMobil announced the discovery of a potentially giant oil field in Guyana, a new deepwater find in South America. The Liza-2 production test indicates a recoverable resource of between 800 million to 14 billion oil-equivalent barrels, in a reservoir structure similar to the already-operating Liza-1 field.

  • After a corruption scandal involving Petrobras’ monopoly over exploiting Brazil’s massive pre-salt oil deposits, a new bill advanced in Congress will potentially allow other companies to run projects in the pre-salt region, in hopes that it will revived stalled development in the region.

  • Chevron has given the go-ahead to a US$37 billion expansion of the Tengiz field in Kazakhstan, a giant field that currently represents 45% of total Kazakh production. The plan to expand output to 260 kb/d by 2022 is the industry’s largest investment since crude prices tumbled two years ago, a sign that oil giants are sensing that it is safe to start spending again.

  • The US oil rig count jumped again last week, rising by 10 to a total of 351, a proxy for increasing activity in the sector. All the increases last week, and over the last few months, have been from onshore rigs, with offshore rigs remaining static at 19. Gas rigs fell by one to 88.

  • The persistent glut of gasoline supplies in the US is having two effects on the wider market – first, driving crude prices lower and second, slashing American refining margins, which is likely to push oil majors further away from downstream into the recovering embrace of upstream.

  • Iran is exploring the possibility of opening an oil refinery in Bulgaria, as part of a plan to expand the country’s trade with the East European nation. If the project goes ahead, it would challenge Bulgaria’s sole refinery, Lukoil’s Neftochim Burgas site, currently the largest refining site in southeastern Europe.

  • ExxonMobil and Qatar Petroleum are teaming up to purchase energy assets in Mozambique, home to some of the largest natural gas discoveries in the last decade. On the target list for the collaborators are gas fields owned by Anadarko and Eni, in the bountiful Rovuma Basin.

  • Total named Philippe Sauquet, former head of its refining and chemicals division, as boss of its new gas, renewables and power unit, a sign that the French company is getting serious about expanding its ambitions in clean energy.

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OPEC And The Current State of Oil Fundamentals

It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.

And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.

That didn’t happen. In fact, OPEC+ Joint Technical Committee commented that suspension of Russia’s quota was not discussed at all and not on the table. Instead, the JTC reduced its global oil demand forecast for 2022 by 200,000 b/d, expecting global oil demand to grow by 3.4 mmb/d this year instead with the downside being volatility linked to ‘geopolitical situations and Covid developments.’ Ordinarily, that would be a sign for OPEC+ to hold to its usual supply easing schedule. After all, the group has been claiming that oil markets have ‘been in balance’ for much of the first five months of 2022. Instead, the group surprised traders by announcing an increase in its monthly oil supply hike for July and August, adding 648,000 b/d each month for a 50% rise from the previous baseline.

The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.

In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.

The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.

But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.

With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.

But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.

A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.

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June, 12 2022