Last week in world oil:
-Traders appear to have cold feet over the prospect of an OPEC supply freeze, causing a choppy pattern in prices. Oil started the week at some US$47/b. An announcement by OPEC on 30 November will swing prices up or down depending on the context, with Saudi Arabia declined to appear at meeting between OPEC and non-OPEC producers this week.
Upstream & Midstream
-BP has snapped up two new oil interests in the North Sea, acquiring a 25% interest in two Statoil licences in Shetland (including the Jock Scott prospect) and 40% in Nexen’s prospect, which include Craster. Exploration wells are expected to be drilled mid 2017, seen as a sign of BP reaffirming its support for the North Sea.
-And the US rig count is up again. Three new oil rigs and two new gas rigs were added last week, bringing the total up to 474 and 118, respectively, as US oil players continued to see improvement in the market.
-The US Environmental Protection Agency has mandated a record amount of biofuel to be mixed into American gasoline and diesel in 2017. Benefitting farmers and placing presence on oil companies, the program will require refiners to mix some 19.28 billion gallons of renewable fuel into American fuel next year, with 15 billion coming from corn. It will be one of the last orders of the Obama administration, with question marks over Donald Trump’s future policies, which could either favour the oil lobby or Midwest farmers that helped deliver his presidency.
-Uganda plans to select the partner for its first oil refinery in February 2017, with Sinopec among the leading contenders. Uganda had first partnered with Russia’s RT Global Resources, but then moved on the South Korea’s SK Engineering with talks falling through both times. The refinery, if it goes ahead, has also attracted the attention of neighbouring Tanzania and Kenya, while upstream operators Total, CNOOC and the UK’s Tullow Oil have all also expressed interest in the refinery.
Natural Gas & LNG
-Israel’s Leviathan gas field has secured another customer. Paz Gas, the largest distributor of refined products in Israel has secured a deal to purchase 3.12 bcm of natural gas for 15 years, which will be channelled to the Paz Oil refinery in Ashdod.
-France’s Total has established a consortium to build a LNG import terminal in the Ivory Coast. Meant to feed the country’s growing electricity consumption, the other partners are Azerbaijan’s SOCAR (26%), Royal Dutch Shell (13%), Ivorian state oil company Petroci (11%) with Golar and Endeavour Energy holding minority stakes. The Cote d'Ivoire-GNL terminal is expected to be completed in mid-2018, with Total supplying LNG from its global portfolio.
-Denmark’s state-owned Dong Energy and shipping giant Maersk are mulling a merger as they battle the persistent low oil price environment. Both companies have a larger presence in North Sea oil, with Maersk also highly affected by the parallel slump in shipping.
Last week in Asian oil:
Upstream & Midstream
-With the downturn in Singapore’s upstream offshore and marine industry worsening, the city state’s government has stepped in to prop it up. Among the measures introduced will be boosting the government International Enterprise Singapore finance scheme and bringing back government-backed bridging loans.
Downstream & Shipping
-India Oil is planning a US$5.5 billion plan to upgrade its Nagapattinam plant, owned by subsidiary Chennai Petroleum Crop and Iran’s Nafitran Intertrade. The refinery is currently the smallest in India Oil’s portfolio, with capacity rising to 300 kb/d if and when the upgrade plan goes ahead.
-A second Vietnam refining project has been cancelled this year. After Thailand’s PTT scrapped its project in July, the Can Tho refinery led by Vien Dong Investment has been cancelled. The small US$538 million project had a capacity of 40 kb/d. PetroVietnam’s second refinery in Nghi Son is also facing delays, casting doubt on its completion by July 2017.
-With Singapore having banned floating storage and ship-to-ship (STS) transfers, competition to the Asian hub for oil products is heating up. The Malaysian state of Malacca is planning to spend nearly US$3 billion to build a port that it hopes will siphon off tanker, refuelling, repair and storage traffic away from Singapore. The project is led by T.A.G Marine and Linggi Base, backed by Chinese investors, which is part of the larger US$12.5 billion Kuala Linggi International Port project.
Natural Gas & LNG
-Energy policy makers in Thailand are aiming to increase its imports of LNG to meet rising power demand, after the construction of new coal-fired plants have hit repeated delays. The Energy Ministry upped its target for LNG imports to 17.4 million tons in 2022 and 34 million tons by 2036. The previous target for 2036 was 23 million tons. Declining natural gas production in the Gulf of Thailand means that Thailand will have to look overseas to procure the LNG it requires for electricity generation.
-The Japan Fair Trade Commission is probing the sales destination clauses of the country’s numerous LNG contracts. The clauses, long-time features of LNG sales contracts, restrict buyers from re-selling cargoes to third parties, which Japanese buyers have long disliked. With LNG moving into a buyer’s market, Japan is taking advantage of the supply overhang to re-dictate terms for its LNG contracts.
-Once rivals, Singapore and Japan now appear to be joining forces to create a benchmark for the LNG market in Asia. The Singapore Exchange (SGX) and Japan’s Tokyo Commodity Exchange (TOCOM) have signed a memorandum of understanding to ‘jointly develop Asia’s LNG market’, a sign that instead of being rivals, the two countries could be friends in creating the first Asian LNG hub. Singapore, which already has the Singapore Sling and North Asia Sling LNG assessments, is the established hub for oil in Asia but lacks significant volumes. Japan, on the other hand, has huge volumes but is seen as too domestic-focused. Meanwhile, China has launched its first gas derivatives exchange in Shanghai last week.
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Headline crude prices for the week beginning 23 March 2020 – Brent: US$27/b; WTI: US$23/b
Headlines of the week
Crude oil prices have fallen significantly since the beginning of 2020, largely driven by the economic contraction caused by the 2019 novel coronavirus disease (COVID19) and a sudden increase in crude oil supply following the suspension of agreed production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. With falling demand and increasing supply, the front-month price of the U.S. benchmark crude oil West Texas Intermediate (WTI) fell from a year-to-date high closing price of $63.27 per barrel (b) on January 6 to a year-to-date low of $20.37/b on March 18 (Figure 1), the lowest nominal crude oil price since February 2002.
WTI crude oil prices have also fallen significantly along the futures curve, which charts monthly price settlements for WTI crude oil delivery over the next several years. For example, the WTI price for December 2020 delivery declined from $56.90/b on January 2, 2020, to $32.21/b as of March 24. In addition to the sharp price decline, the shape of the futures curve has shifted from backwardation—when near-term futures prices are higher than longer-dated ones—to contango, when near-term futures prices are lower than longer-dated ones. The WTI 1st-13th spread (the difference between the WTI price in the nearest month and the price for WTI 13 months away) settled at -$10.34/b on March 18, the lowest since February 2016, exhibiting high contango. The shift from backwardation to contango reflects the significant increase in petroleum inventories. In its March 2020 Short-Term Energy Outlook (STEO), released on March 11, 2020, the U.S. Energy Information Administration (EIA) forecast that Organization for Economic Cooperation and Development (OECD) commercial petroleum inventories will rise to 2.9 billion barrels in March, an increase of 20 million barrels over the previous month and 68 million barrels over March 2019 (Figure 2). Since the release of the March STEO, changes in various oil market and macroeconomic indicators suggest that inventory builds are likely to be even greater than EIA’s March forecast.
Significant price volatility has accompanied both price declines and price increases. Since 1999, 69% of the time, daily WTI crude oil prices increased or decreased by less than 2% relative to the previous trading day. Daily oil price changes during March 2020 have exceeded 2% 13 times (76% of the month’s traded days) as of March 24. For example, the 10.1% decline on March 6 after the OPEC meeting was larger than 99.8% of the daily percentage price decreases since 1999. The 24.6% decline on March 9 and the 24.4% decline on March 18 were the largest and second largest percent declines, respectively, since at least 1999 (Figure 3).
On March 10, a series of government announcements indicated that emergency fiscal and monetary policy were likely to be forthcoming in various countries, which contributed to a 10.4% increase in the WTI price, the 12th-largest daily increase since 1999. During other highly volatile time periods, such as the 2008 financial crisis, both large price increases and decreases occurred in quick succession. During the 2008 financial crisis, the largest single-day increase—a 17.8% rise on September 22, 2008—was followed the next day by the largest single-day decrease, a 12.0% fall on September 23, 2008.
Market price volatility during the first quarter of 2020 has not been limited to oil markets (Figure 4). The recent volatility in oil markets has also coincided with increased volatility in equity markets because the products refined from crude oil are used in many parts of the economy and because the COVID-19-related economic slowdown affects a broad array of economic activities. This can be measured through implied volatility—an estimate of a security’s expected range of near-term price changes—which can be calculated using price movements of financial options and measured by the VIX index for the Standard and Poor’s (S&P) 500 index and the OVX index for WTI prices. Implied volatility for both the S&P 500 index and WTI are higher than the levels seen during the 2008 financial crisis, which peaked on November 20, 2008, at 80.9 and on December 11, 2008, at 100.4, respectively, compared with 61.7 for the VIX and 170.9 for the OVX as of March 24.
Comparing implied volatility for the S&P 500 index with WTI’s suggests that although recent volatility is not limited to oil markets, oil markets are likely more volatile than equity markets at this point. The oil market’s relative volatility is not, however, in and of itself unusual. Oil markets are almost always more volatile than equity markets because crude oil demand is price inelastic—whereby price changes have relatively little effect on the quantity of crude oil demanded—and because of the relative diversity of the companies constituting the S&P 500 index. But recent oil market volatility is still historically high, even in comparison to the volatility of the larger equity market. As denoted by the red line in the bottom of Figure 4, the difference between the OVX and VIX reached an all-time high of 124.1 on March 23, compared with an average difference of 16.8 between May 2007 (the date the OVX was launched) and March 24, 2020.
Markets currently appear to expect continued and increasing market volatility, and, by extension, increasing uncertainty in the pricing of crude oil. Oil’s current level of implied volatility—a forward-looking measure for the next 30 days—is also high relative to its historical, or realized, volatility. Historical volatility can influence the market’s expectations for future price uncertainty, which contributes to higher implied volatility. Some of this difference is a structural part of the market, and implied volatility typically exceeds historical volatility as sellers of options demand a volatility risk premium to compensate them for the risk of holding a volatile security. But as the yellow line in Figure 4 shows, the current implied volatility of WTI prices is still higher than normal. The difference between implied and historical volatility reached an all-time high of 44.7 on March 20, compared with an average difference of 2.3 between 2007 and March 2020. This trend could suggest that options (prices for which increase with volatility) are relatively expensive and, by extension, that demand for financial instruments to limit oil price exposure are relatively elevated.
Increased price correlation among several asset classes also suggests that similar economic factors are driving prices in a variety of markets. For example, both the correlation between changes in the price of WTI and changes in the S&P 500 and the correlation between WTI and other non-energy commodities (as measured by the S&P Commodity Index (GSCI)) increased significantly in March. Typically, when correlations between WTI and other asset classes increase, it suggests that expectations of future economic growth—rather than issues specific to crude oil markets— tend to be the primary drivers of price formation. In this case, price declines for oil, equities, and non-energy commodities all indicate that concerns over global economic growth are likely the primary force driving price formation (Figure 5).
U.S. average regular gasoline and diesel prices fall
The U.S. average regular gasoline retail price fell nearly 13 cents from the previous week to $2.12 per gallon on March 23, 50 cents lower than a year ago. The Midwest price fell more than 16 cents to $1.87 per gallon, the West Coast price fell nearly 15 cents to $2.88 per gallon, the East Coast and Gulf Coast prices each fell nearly 11 cents to $2.08 per gallon and $1.86 per gallon, respectively, and the Rocky Mountain price declined more than 8 cents to $2.24 per gallon.
The U.S. average diesel fuel price fell more than 7 cents from the previous week to $2.66 per gallon on March 23, 42 cents lower than a year ago. The Midwest price fell more than 9 cents to $2.50 per gallon, the West Coast price fell more than 7 cents to $3.25 per gallon, the East Coast and Gulf Coast prices each fell nearly 7 cents to $2.72 per gallon and $2.44 per gallon, respectively, and the Rocky Mountain price fell more than 6 cents to $2.68 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 1.8 million barrels last week to 64.9 million barrels as of March 20, 2020, 15.5 million barrels (31.3%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories decreased by 1.3 million barrels, East Coast inventories decreased by 0.3 million barrels, and Rocky Mountain/West Coast inventories decrease by 0.2 million barrels. Midwest inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 8.5% of total propane/propylene inventories.
Residential heating fuel prices decrease
As of March 23, 2020, residential heating oil prices averaged $2.45 per gallon, almost 15 cents per gallon below last week’s price and nearly 77 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged more than $1.11 per gallon, almost 14 cents per gallon below last week’s price and 98 cents per gallon lower than a year ago.
Residential propane prices averaged more than $1.91 per gallon, nearly 2 cents per gallon below last week’s price and almost 49 cents per gallon below last year’s price. Wholesale propane prices averaged more than $0.42 per gallon, more than 7 cents per gallon lower than last week’s price and almost 36 cents per gallon below last year’s price.
Headline crude prices for the week beginning 16 March 2020 – Brent: US$30/b; WTI: US$28/b
Headlines of the week