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Last Updated: August 10, 2016
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Business Trends

Oil Prices

Rumblings among OPEC members of restricting output rallied prices lifted oil prices slightly, but weak fundamentals particularly in demand outpacing supply kept prices in the low US$40/b level.


After reporting a net loss in Q2, Chevron is accelerating its plan to raise as much as US$10 billion by 2017 through the sale of Asia assets. The US giant is aiming to sell its stake in its offshore venture with CNOOC, which could raise as much as US$1 billion, as well as geothermal assets in Indonesia and natural gas assets in Thailand, which will be eyed by PTT.

India has poured cold water on recent reports that the government was planning to merge the 13 state energy firms into one giant conglomerate. The Petroleum Ministry has clarified that instead of a concrete idea, the proposal is only one of many that India is considering to streamline the complicated energy network in the country.

China is planning a cull of its petrochemical industry. Excess capacity in the petrochemical industry is a looming issue in the country, and the government is addressing it by identifying out-dated plants to be shut down and ordering consolidation among the big players to boost efficiency.

In a sign of the growing relationship between international traders and Chinese teapots, Trafigura has extended the credit period for crude purchases for two independent Chinese refiners – Shouguang Luqing Petrochemical and Huifeng Petrochemical Group. Under a third party processing agreement, the Chinese teapots will then provideTrafigura with refined products, mainly gasoline, that then enter its trading portfolio.

Indonesia’s Pertamina has shut down its RFCC unit at Cilacap for repairs for two weeks, with full production resuming only in mid-August. Gasoline imports into Indonesia will spike over this period, given that Indonesia is a net importer of the fuel. Pertamina had recently received a 200,000-barrel cargo of gasoline from Rosneft, the Russia firm’s first gasoline delivery to South-East Asia, part of a larger 1.2 million barrel deal signed in June.

Tokyo Gas is in talks with European companies to engage in LNG cargo swaps, sending the cargos it owns from Cove Point on the US East Coast to Europe instead of Asia, saving on shipping time and cost as it aims to introduce more flexibility into its LNG supply system.

A civil war is brewing in the normally sedate Japanese energy industry. The planned marriage of Idemitsu and Showa Shell is opposed by the founding family of Idemitsu, who have bought a stake Showa Shell in a bid to block to takeover, arguing that the two companies’ cultures are too different to successfully merge. The founding family now own 0.1% of Showa Shell, forcing Idemitsu to consider purchases less than its initial planned 33.24% stake in Showa Shell; the combined Idemitsu shareholding in that case would have exceeded a third of Showa Shell, which is barred under Japanese law.


The Iranian government is expected to ratify a new model oil contract this week, aiming to encourage foreign investment as the country returns to the international community after years of sanctions and decades of a unfavourable petroleum contract system that drove investors away.


More International Oil and Gas updates

More US oil rigs are coming back online – up by 7 last week – bringing the total number of operational oil and gas rigs in the US to 464, as five gas rigs (mainly in Marcellus shale) shut down. This is the sixth week of rises in the rig count, pumping out more volumes that places downward pressure on prices.

Canada’s Irving Oil has agreed to buy the only refinery in Ireland from Phillips66. The Whitegate refinery exchanges hands for ‘less than US$90 million’ reportedly. The Whitegate refinery near Cork will remain operational with no cuts; Phillips66 has been attempting to sell the refinery since 2013, but poor refining margins had hampered the sale.

South African refineries remain operational despite a strike by the 15,000 workers across the petrochemicals industry over poor wages. The strike enters its second week today, and while the refineries continue to operate, fuel distribution in the country has been affected.

The long-standing LPG trade between the US Gulf and Asia looks shaky at the moment, as collapsing prices have led to Asian buyers cancelling at least three LPG cargoes in the last month, incurring cancellation fees that still make it more economical to buy spot cargoes in Asia.

Italy’s Eni has reportedly wrapped up talks to sell its multi-billion stake in the planned Mozambique LNG development to ExxonMobil. The deal concerns Eni’s offshore gas reserves in Mozambique’s Area 4, which is aims to pipe to an LNG export plant to serve Asia; the scale of the project may be beyond Eni’s expertise, hence ExxonMobil being a natural fit, given its existing presence in Mozambique

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May, 20 2022
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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May, 09 2022