Last week in world oil:
Oil prices steadied this week, with a weaker dollar supporting prices amid signs that OPEC’s output cut might hold despite some niggles. Brent crude edged above US$55/b, while WTI was at US$52/b. The focus this week is on the dollar, with Donald Trump being inaugurated as President.
Upstream & Midstream
True to their word, Saudi Arabia has slashed its output to less than 10 million barrels, the lowest level in two years as it prepares to lead OPEC’s efforts to enforce a supply cut. Under the OPEC agreement, Saudi Arabia was to cut 486 kb/d off production to 10.058 mmb/d, but has gone even further to offset inertia in other OPEC members like Iraq. Saudi Energy Minister Khalid Al-Falih has stated that he will consider renewing the supply freeze in six months when the next OPEC meeting is scheduled. Fellow OPEC member Algeria has also pledged to reduce its output by more than its quota.
Halliburton and Petrobras have announced a technology cooperation partnership that will focus on complex reservoirs. The multi-year pact is aimed at assisting Petrobras in its deepwater presalt and mature fields over the long-term. The project portfolio will have three main objectives: reducing well construction investment, long-term reservoir monitoring and increasing well productivity.
Unusually, the US oil rig count fell last week, shedding seven sites to finish at 522. Offsetting a single gain in gas rigs, the total operating rig count in the US is now 659, perhaps a sign that producers are pausing in their zeal to monitor the oil price situation and OPEC’s commitment to it.
Kinder Morgan’s attempt to expand an oil pipeline in western Canada has cleared its final regulatory hurdle, with the British Columbia province giving environmental approval for part of the project’s profit. Some 37 conditions were attached to the approval of the Trans Mountain project, with Kinder Morgan agreeing to pay B.C as much as C$1 billion over 20 years in revenue sharing that will go towards environmental protection.
Russia’s Rosneft has agreed to supply up to 55 million tons of crude over a five year period to QHG Trading, a trading company linked to commodities giant Rosneft and Qatar. The deal follows the acquisition of a 19.5% stake in Rosneft by Qatar Investment Authority and Glencore last month for US$11.8 billion, with both companies now getting crude in return. Glencore, specifically, will receive an additional 220 kb/d to trade.
Natural Gas & LNG
A bitter, freezing winter is sweeping across Europe, boosting LNG demand and triggering the highest spot LNG prices in France’s southern gas hub since December 2013. The cold winter has boosted Europe’s requirements of natural gas, which has benefitted Russia’s Gazprom, recording its highest ever piped gas volumes to Western Europe on January 6, at some 615.5 million cubic metres.
Last week in Asian oil:
Upstream & Midstream
Thailand national upstream company PTTEP, part of the PTT empire, has slashed its capex spending this year. Plans for 2017 will involve investment of US$2.903 billion, more than 50% than envisioned two years ago, as its acknowledges the difficulties of securing overseas upstream assets. The primary focus going forward will be on natural gas, and the company has also slashed its production forecasts, leaving Thailand increasingly reliant on imports for its crude requirements.
In a rare bright spot, Chinese upstream giant CNOOC has started production at its Penglai 19-9 field. Located in the Bohai Bay, the new field is small, with peak production of some 13 kb/d expected in 2019. The joint venture between CNOOC and ConocoPhillips China will not be enough to halt the steady decline in Chinese crude production, but will help meet the country’s new objective of stabilising output.
Downstream & Shipping
Indian fuel demand grew by its fastest pace in 16 years in 2016, as a low price environment kicked off growth in passenger car and flights, supporting gasoline and aviation fuels. Total fuel consumption grew by 10.7%, but the demonetisation drive impacted demand in December and will hold growth back in 2017, as consumers defer large purchases. State giant Indian Oil Corp (IOC) intends to support the demand growth by purchasing upstream assets, with the aim of ensuring that at least a tenth of its refining capacity be fed by crude from fields that it owns outright or has a partial state in, requiring a tenfold boost in crude production to 210 kb/d over the next eight year.
Natural Gas & LNG
Thailand’s PTT continues its march to secure natural gas supplies, choosing a Marubeni-Itochu joint venture to fed its Chavalit Punthong pipeline. The pipeline, PTT’s fifth, stretches 430km from coastal Rayong to Nonthaburi near Bangkok, supplying the Thai capital with natural gas for power generation.
Vietnam has moved a step closer to realising its Blue Whale natural gas project, with PetroVietnam signing an agreement with ExxonMobil to develop the project. With an estimated 150 billion cubic metres of reserves, Blue Whale is Vietnam’s largest natural gas project, with the volumes aimed at powering the country’s electricity grid. First gas is expected by 2023, contributing US$20 billion to the national budget.
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Anthony Rizzo Players Can't Sit On Bench According to a report from the Chicago Sun-Times, the world-famous Anthony Rizzo Phrase "Zombie Rizzo" has been told to never be used again. Of course, this is not the first time that the Zombified Chicago Cubs' first baseman has made headlines this year. A year ago, "Rosebud" was the catchphrase that he coined for himself. Also, there is Anthony Rizzo Shirts that come in his name. Now that the Cubs are World Series Champions, Anthony Rizzo is on his way to superstardom. He is leading the World Series in several categories, including hits, runs, home runs, RBI's, OBP, and SLG. Also, he's on track for a staggering year in hits, RBI's, and total bases, all while being second in home runs.
The Cubs Phenom
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The wood pellet mill, that goes by the name of a wood pellet machine, or wood pellet press, is popular in lots of countries around the world. With all the expansion of "biomass energy", there are now various production technologies utilized to convert biomass into useable electricity and heat. The wood pellet machines are one of the typical machines that complete this task.
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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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