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Last Updated: December 21, 2016
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Last week in the world oil:

Prices

-Although trading is thin ahead of Christmas, oil prices have maintained their gains last week, opening the week at the US$52/b levels, as the market anticipate tighter supplies next year, which should end the year on a positive note after a prolonged weakness in prices. 

Upstream & Midstream

-The UAE, Kuwait and Oman have joined Saudi Arabia is implementing the planned OPEC cuts, warning some clients on long-term contracts that they would receive reduced supplies of crude from January. Saudi Aramco is also telling a few Asian clients that the cuts would impact them as well. 

-Libya’s Sharara and El Feel oil field pipelines have been re-opened, after protestors blocking the assets agreed to halt their action. The oil guards have restarted the long blockaded pipeline, which could restore up to 400 kb/d of output to Libya’s production. Libya’s crude output is one of the two (Nigeria is the other) exempt from the new OPEC supply quotas. 

-While other companies are restarted their oil sands projects, Norway’s Statoil is planning a complete exit. It has agreed to sell its Leismer and Corner sites, along with associated midstream assets, to Canada’s Athabasca Oil for C$832 million, which would leave Statoil with no oil sands assets, figuring that the segment will be remain too challenging.

-The US rig count jumped again last week, up by 13, with 12 of those being oil rigs as US producer dilute the OPEC deal by ramping up production.

Downstream 

-Shell will likely sell its 38.5% stake in the 220 kb/d Schwedt refinery in Germany to Varo Energy (a joint venture between Vitol and the private equity Carlyle Group). This deal is part of Shell’s drive to dispose of US$30 billion in assets to pay for its acquisition of the BG Group. 

-Petrobras will sell its minority 49% stake in sugar/ethanol company Nova Fronteira Bioenergia to its existing joint venture partner São Martinho for US$133 million in a shares-only payment. The move would hasten Petrobras’ exit from domestic biofuels, but it has indicated that it plans a re-entry once it completes its debt reduction plans. In other Petrobras news, the company has signed a US$5 billion, 10-year financing deal with China Development Bank Corp, as well as agreeing an oil supply accord with China National United Oil, China Zhenhua Oil and Chemchina Petrochemical as its seeks a secure stream of revenue and funding. 

Natural Gas & LNG

-Italy’s Eni has sold a 30% stake in its giant Egyptian offshore Zohr gas field to Russia’s Rosneft for US$1.575 billion, after selling a 10% to BP for the same price. Zohr is the largest natural gas find in the Mediterranean thus far, and while Eni is typically good at discovering fields, it lacks the financial clout to pursue its discoveries on its own. 

Corporate

-With CEO Tex Tillerson heading into the US government as Donald Trump’s Secretary of State, ExxonMobil has named heir apparent Darren Woods as the company’s next chairman and CEO. The boss of ExxonMobil’s refining arm since 2012, Woods’ challenge will be to bring his ability to whip refineries into shape to the company’s larger portfolio, including its challenged upstream business.


Last week in Asian oil:

Upstream & Midstream

-Malaysia’s Petronas is finalising the next round of its PanMalaysia transportation and installation contract, which should provide a boon to offshore contractors hurting for business in Asia. The contracts awarded by Petronas cover domestic upstream oil and gas T&I activities for three years, with the previous round in 2014. The bulk of the contracts this time are said to be in the state of Sarawak, as Petronas aims to bulk up its deepwater activities in East Malaysia.   

Downstream & Shipping

-China has dealt a blow to its teapot refineries, refusing to renew their fuel export quotas for 2017. This means that any fuel produced by the independent refiners have to be sold within China. This would transform assumptions of the Chinese oil market in 2017, as the teapots were expected to import sizeable amounts of crude. But with outlets now limited to the domestic market and consumption slowing down, this move upends that and we very well see teapot production decline. On the plus side, it may remove the glut of refined products sloshing around Asia, allowing cracks and prices to rise. 

-CNOOC’s 200 kb/d Huizhou refinery will start up in May or June 2017, with Saudi Arabia named at the mainly supplier for the plant. CNOOC has traditionally been a more offshore upstream player, but has moved downstream as the traditional lines delineating China’s Big Three energy groups have blurred. 

-Indonesia has officially assigned Pertamina to build and operate a planned refinery at Bontang in East Kalimantan. The 300 kb/d project always had to involve Pertamina – it is the state energy company, after all – but this does not mean the project will see fruition; Pertamina does not have the means to undertake a refinery project this big on its own and has faced considerable problems in moving ahead with joint venture partners. Indonesia will also import 500,000 tons of LPG from Iran next year, aimed at plugging a domestic shortage. 

-Shell continues its withdrawal from what it considerable peripheral downstream markets, selling its aviation fuel business in Australia to Viva Energy for US$250 million. 

Gas & LNG

-Russia’s Novatek, its second biggest gas producer, has signed individual agreements with Japan’s Mitsui, Mitsubishi and Marubeni for co-operation in LNG and energy. The deals will see the companies co-operate in upstream natural gas projects in Russia, including the Arctic LNG-2 project, with Japan hungry to secure LNG supplies while Russia wants to boost its global LNG market share. 

Corporate

-Qatar will merge its two state-owned LNG producers, consolidating Qatargas and RasGas under QatarGas. The move is a reaction to the prolonged slump in oil prices, which has affected LNG given its oil-linked pricing, cutting costs in the town state-run behemoths. Qatargas and RasGas were originally created as separate companies to focus on the Eastern and Western markets, as well as to encourage competition 


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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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