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Last week in the world oil:

Prices

  • News that a group of non-OPEC producers would join OPEC in implementing a supply cut has jolted oil prices into optimism, rising to US$55/b, with producers hoping it will test the US$60 barrier soon. Mexico, Azerbaijan, Kazakhstan and Oman have joined Russia to agree to implement a 600 kb/d cut, with Russia contributing half of the total.

Upstream & Midstream

  • The rise in oil prices has revived interest in Canadian oil sands, moribund since the price slump. Cenovus Energy and Canadian Natural Resources have announced a go-ahead with their expansion projects, adding 50 kb/d to Christina Lake and 40 kb/d to Kirby North in capacity, respectively.
  • Despite a Brazilian court ordering Petrobras to halt the sale of its fuel distribution subsidiary over labour concerns, the Brazilian state giant says it is pushing ahead with its ambitious divestment program that includes inking some US$4 billion in asset sales this month. The apparent speed at which the deals are taking place has triggered legal concerns that rigging and bribery may have been part of the divestment negotiations.
  • It was to be expected. With prices rising, American producers are capitalising on the expectation of higher prices by restarting rigs. The US rig count jumped by 27 last week, with 21 of those being oil rigs. Last minute drilling to maintain leases may have also contributed to the spike, with the market largely shrugging off the increase.

Downstream

  • Saudi Arabia has begun telling its customers that they will receive reduced crude shipments beginning January, affecting refineries that have long-term contracts with the Kingdom. The curbs are focused on Europe and North America, with Asian refineries largely spared the cull, where Saudi Arabia is battling Iran and Russia for market share.
  • The EUs biofuels push is evolving to reduce dependence on crop-based feeds, aiming to reduce plant-based biofuels from 7% in 2021 to 3.8% in 2030 to assuage concerns of deforestation. Instead, the EU wants to focus on advanced biofuels, involving agriculture and forestry waste.
  • Once a major player in both upstream and downstream, Venezuelas PDVSA is facing trying times. Chronic underinvestment and low oil prices have slashed operating rates at its giant Paraguana, Amuay and Cardon refineries to some 40-45%, while it appears to have been elbowed out of its toll-refining arrangements in Curacao and possibly Aruba. Meanwhile, PDVSA is asking a US court for some US$600 million in compensation from a bribery scheme of two businessmen that bribed PDVSA officials over US$1 billion in supply contracts.

Natural Gas & LNG

  • Anadarko and Eni will now be allowed to sell the Mozambique governments share of gas from their projects in the Rovuma Basin. The countrys government has approved an amendment to its LNG contracts to relinquish its rights to natural gas quotas and gas production tax in an attempt to boost the viability of the projects in the coming era of LNG oversupply. The contracts involved are Anadarkos Dolphin Tuna and Enis South Coral sites, both due for FID next year.

Last week in Asian oil:

Upstream & Midstream

  • Japans state-run JOGMEC has extended its contract with Saudi Aramco to allow the latter to store up to 6.3 million barrels of crude oil in Okinawa for the next three years. Japan allows Saudi Aramco (as well as Abu Dhabis ADNOC) to store crude in Okinawa as a distribution hub for East Asia, in exchange for priority claims on the stock during emergencies.
  • Australias Origin Energy is spinning off its upstream oil and gas unit in an IPO worth at least US$1 billion. The new company, NewCo, has a upstream assets in Australia and the gas market in New Zealand, but will remain smaller than Santos and Woodside, triggering speculation that it could be acquired by an Asian producer, with an eye towards Origins stake in the APLNG plant as it returns to being a gas/power retailer.

Downstream & Shipping

  • Chinas independent teapot refineries are confident that Beijing will keep their 2017 import quotas steady at 2016 level or possibly just a little higher. The teapots were one of the brighter spots in Asia refining this year, sucking up large amounts of crude in the first year they were allowed to directly import crude, and are looking to import more in 2017, a move that would help ease the crude supply glut but contribute to the refined products oversupply in Asia.

Gas & LNG

  • As Papua New Guinea tries to figure out its LNG export strategy, the countrys Prime Minister is now leaning to a single export site, which would require Totals Papua LNG project to export its gas through ExxonMobils existing PNG LNG facility. The merits of having two or a single site have been debated extensively, but concerns over cost are pushing the stakeholders towards having a single large site.
  • The Thai energy policy committee has given its consent to a PTT proposal to acquire LNG from Malaysias Petronas over a 15 year period, beginning with 1 mtpa in 2017 and 2018, then rising to 1.2 mtpa from 2019. Thailand is highly dependent on natural gas for its power infrastructure, and declining domestic production is forcing it to turn to imports.
  • Indonesia has ordered natural gas contractors to cut prices in the fertiliser, steel and petrochemicals sectors beginning January, replacing oil with the more plentiful natural gas to boost economic growth.
  • Malaysias Petronas has inked a deal with Japans Hokuriku Electric Power to supply up to six cargoes of LNG per year to the power provider in northwestern Honshu. The contract will begin March 2018. Petronas is aiming to boost its LNG business, with its PFLNG Satu the first floating LNG unit in the world producing its first cargo last week.

Corporate

  • As part of Beijings attempt to reform the oil and gas industry in China to boost competitiveness, Sinopec has sold a 50% stake in its Sichuan-East China gas pipeline to China Life Insurance and SDIC for some US$6.6 billion. Sinopec will retain a stake in the pipeline, aiming to use proceeds from the sale to expand its other gas pipeline and storage infrastructure. Gas pipeline are increasing in importance in China, with CNPC recently starting up the eastern portion of its third East-West cross-country pipeline, eventually connecting to CNOOCs network in Fujian.

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June, 12 2022
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