Just over a month ago Nigerian, Mohammed Sanusi Barkindo, was named the acting Secretary General of the Organisation of the Petroleum Exporting Countries (OPEC), replacing Libya’s Abdalla El-Badri who had been in the post for 9 long years, since 2007. Barkindo’s new appointment as Secretary General commences on the 1st of August 2016.
Barkindo takes the top position at one of the most challenging times OPEC has ever faced. Sustained low oil prices, continued growth in US fracking operations shifting supply trends, and tension between OPEC members Saudi Arabia and Iran.
However, Barkindo is not new to these types of challenges. Prior to his appointment last month he was the managing director of the Nigeria National Petroleum Corporation (NNPC) between 2009 to 2010, was Nigeria's representative to OPEC's Economic Commission Board for fifteen years, and even served as acting Secretary-General of OPEC in 2006.
The 72 year old, who originally studied in the UK and Caribbean, was also a director of the National Engineering and Technical Company (1991–1993), chairman of Stirling Civil Engineering Nigeria Limited (1991–2003) and chairman of the Federal Radio Corporation of Nigeria (2003–2005).
Barkindo will hope his extensive experience will help him navigate the OPEC ship through the stormy years to come. He will be buoyed by this week’s 23 cent gain in Brent Crude futures to $50.58 per barrel (as of July 5th 9:30 GMT). U.S. Crude was not left behind either as the Clc1 held gains of 17 cents to $49.16 per barrel.
However, there is no denying the severe volatilities that crude oil experienced over the last six months, making it nearly impossible to predict whether the "black gold" was going up or down at any particular time. Nevertheless, the main trend remained in an upward movement this week as investors continued to redevelop confidence in the once reliable commodity.
We can give Barkindo some credit for the rally in oil prices this week, after recent comments made by the OPEC chief and Khalid al-Falih, Saudi's energy minister. Perhaps the two most powerful men in OPEC agreed that the global oil market is nearing a point of normalisation. The duo also noted that an uptrend in crude oil prices would confirm the return of balance to the crude oil markets.
Barkindo was in Saudi Arabia as a guest of King Salman bin Abdulaziz for the Ramadan meal of iftar, in the holy city of Mecca. He no doubt also took the opportunity to discuss the impact of Iran re-entering the global oil market free of sanctions, which have held them back for many years. However, the oil rich Persian nation has hostile relations with Saudi Arabia and is keen to finally increase production to make up for export revenue they have missed out on, potentially destabilising a precariously balanced and over-supplied sector.
Barkindo will need to address the Iran situation, and has also planned talks with Russia “to discuss global oil markets, not mutual actions on global markets”, said Roman Morshavin, from the Russian Energy Ministry. The recent combined effort of OPEC and Russia to freeze production failed, with Saudi Arabia refusing to take part in any proposal that did not include Iran.
Back in Barkindo’s native Nigeria a June ceasefire with the Niger Delta Avengers militant group allowed a boost of output from 90,000 bpd from May, to a total 1.53 million bpd. Unfortunately, the ceasefire seems to have been temporary, as the Avengers again made headlines on Sunday with fresh attacks on oil infrastructure in the Delta.
All of this turbulence, both internal and external,
has called OPECs very existence into question, with several key figures calling
for the dissolution of the oil cartel. If Barkindo thought his appointment to the
hot seat was difficult, he will be looking anxiously ahead.
Can he influence and steer the cartel to what it was designed to achieve, a common sense win-win amongst member states? The world will be closely watching (and hoping) this August.
What do you think should be his top priorities in office?
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Recent headlines on the oil industry have focused squarely on the upstream side: the amount of crude oil that is being produced and the resulting effect on oil prices, against a backdrop of the Covid-19 pandemic. But that is just one part of the supply chain. To be sold as final products, crude oil needs to be refined into its constituent fuels, each of which is facing its own crisis because of the overall demand destruction caused by the virus. And once the dust settles, the global refining industry will look very different.
Because even before the pandemic broke out, there was a surplus of refining capacity worldwide. According to the BP Statistical Review of World Energy 2019, global oil demand was some 99.85 mmb/d. However, this consumption figure includes substitute fuels – ethanol blended into US gasoline and biodiesel in Europe and parts of Asia – as well as chemical additives added on to fuels. While by no means an exact science, extrapolating oil demand to exclude this results in a global oil demand figure of some 95.44 mmb/d. In comparison, global refining capacity was just over 100 mmb/d. This overcapacity is intentional; since most refineries do not run at 100% utilisation all the time and many will shut down for scheduled maintenance periodically, global refining utilisation rates stand at about 85%.
Based on this, even accounting for differences in definitions and calculations, global oil demand and global oil refining supply is relatively evenly matched. However, demand is a fluid beast, while refineries are static. With the Covid-19 pandemic entering into its sixth month, the impact on fuels demand has been dramatic. Estimates suggest that global oil demand fell by as much as 20 mmb/d at its peak. In the early days of the crisis, refiners responded by slashing the production of jet fuel towards gasoline and diesel, as international air travel was one of the first victims of the virus. As national and sub-national lockdowns were introduced, demand destruction extended to transport fuels (gasoline, diesel, fuel oil), petrochemicals (naphtha, LPG) and power generation (gasoil, fuel oil). Just as shutting down an oil rig can take weeks to complete, shutting down an entire oil refinery can take a similar timeframe – while still producing fuels that there is no demand for.
Refineries responded by slashing utilisation rates, and prioritising certain fuel types. In China, state oil refiners moved from running their sites at 90% to 40-50% at the peak of the Chinese outbreak; similar moves were made by key refiners in South Korea and Japan. With the lockdowns easing across most of Asia, refining runs have now increased, stimulating demand for crude oil. In Europe, where the virus hit hard and fast, refinery utilisation rates dropped as low as 10% in some cases, with some countries (Portugal, Italy) halting refining activities altogether. In the USA, now the hardest-hit country in the world, several refineries have been shuttered, with no timeline on if and when production will resume. But with lockdowns easing, and the summer driving season up ahead, refinery production is gradually increasing.
But even if the end of the Covid-19 crisis is near, it still doesn’t change the fundamental issue facing the refining industry – there is still too much capacity. The supply/demand balance shows that most regions are quite even in terms of consumption and refining capacity, with the exception of overcapacity in Europe and the former Soviet Union bloc. The regional balances do hide some interesting stories; Chinese refining capacity exceeds its consumption by over 2 mmb/d, and with the addition of 3 new mega-refineries in 2019, that gap increases even further. The only reason why the balance in Asia looks relatively even is because of oil demand ‘sinks’ such as Indonesia, Vietnam and Pakistan. Even in the US, the wealth of refining capacity on the Gulf Coast makes smaller refineries on the East and West coasts increasingly redundant.
Given this, the aftermath of the Covid-19 crisis will be the inevitable hastening of the current trend in the refining industry, the closure of small, simpler refineries in favour of large, complex and more modern refineries. On the chopping block will be many of the sub-50 kb/d refineries in Europe; because why run a loss-making refinery when the product can be imported for cheaper, even accounting for shipping costs from the Middle East or Asia? Smaller US refineries are at risk as well, along with legacy sites in the Middle East and Russia. Based on current trends, Europe alone could lose some 2 mmb/d of refining capacity by 2025. Rising oil prices and improvements in refining margins could ensure the continued survival of some vulnerable refineries, but that will only be a temporary measure. The trend is clear; out with the small, in with the big. Covid-19 will only amplify that. It may be a painful process, but in the grand scheme of things, it is also a necessary one.
Infographic: Global oil consumption and refining capacity (BP Statistical Review of World Energy 2019)
|Region||Consumption (mmb/d)*||Refining Capacity (mmb/d)|
*Extrapolated to exclude additives and substitute fuels (ethanol, biodiesel)
End of Article
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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.
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