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Last Updated: February 15, 2017
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Last Week in World Oil:

Prices

  • Oil traders appear to have moved on from the OPEC production cut, despite its reported effectiveness, to focus on a strengthening US dollar, rising US crude output and Asian buyers sourcing crude from non-OPEC sources. This has sent oil prices back to their previous levels, a holding pattern that hovers around US$53/b for WTI and US$55/b for Brent.

Upstream & Midstream

  • OPEC compliance with its output cut has been reported at 92%, an optimistic figure given the organisation’s history of breaking quotas. More encouragingly, the 11 non-OPEC producers that elected to join the global deal have also lived up to their promise, with a constructive 40% compliance rate of the overall reduction in January as Russia implements the cuts in phases. 
  • Long seen as comfortable within its own borders, state giant Qatar Petroleum (QP) is now exploring overseas options. The largest LNG producer in the world will also be trimming domestic costs by merging Qatargas and RasGas, while pursuing upstream assets in Morocco and Cyprus, where it recently won a bid for 40% of an exploration plot.
  • The active US oil and gas rig count is now 80% higher than its recent lowest point in May 2016, with eight new oil rigs joining four gas rigs to bring the total count to 591 for oil rigs and 741 for the overall count.

Downstream

  • London-listed Irish conglomerate DCC has agreed to purchase ExxonMobil’s fuel retail network in Norway for a reported NKR2.43 billion (US$294 million). It is the latest pullout by a supermajor from the mature European fuel retail market, with the 142 company-operated Norwegian sites now joining DCC’s European fuel retail network.

Natural Gas and LNG

  • Petrobras’ attempt sale of a natural gas distribution unit to Brookfield Asset Managament for US$5.2 billion has hit a snag, the latest legal snafu to set back the Brazilian oil giant’s attempt to restore financial health through asset sales. A federal judge in Brazil has blocked the sale of Nova Transportadora do Sudesteon on the grounds that the sale was not sufficiently publicised, raising concerns that the asset sales was being rushed through without fostering competitive bids. A separate regional court has also suspended Petrobras’ planned divestment of two offshore gas fields to Karoon Gas Australia.

Corporate

  • France’s Total has outperformed most other supermajors in 2016, announcing adjusted net profit of US$8.2 billion, above Shell (US$7.2 billion), BP (US$2.6 billion) and Chevron (US$1.8 billion), behind only ExxonMobil (US$8.9 billion). Its 4Q16 net profit beat analyst expectations at US$2.4 billion, and Total is planning to buck the supermajor trend by hunting for upstream and downstream assets put on sale by its rivals.


Last Week in Asian Oil:

Upstream & Midstream

  • Crude is coming into Asia and into China from all over the world now, from places that do not normally send crude here. Husky Energy just recorded the first sale of its Atlantic Canada crude to China last week, sending a million barrels from the White Rose field to China, instead of its usual destinations in the US and Europe. The trade became possible because of the OPEC supply cut, that led to cuts in deliveries to Asian buyers, but also because of the unusually low shipping rates that are now opening up uncommon trades and shipping routes as beleaguered shippers clamour for business.

Downstream & Shipping

  • Saudi Aramco has inked an agreement with Chinese oil refiner North Huajin Chemical Industries Group to supply crude to its 150 kb/d refinery. Primarily aimed at producing naphtha for petrochemical production, the steady flow of Arab Extra Light is Saudi Aramco’s attempt to regain its status as the top crude supplier to China, after coming in second to Russia in 2016. Huajin is a unit of China’s military group NORINCO and while it is not an independent Chinese teapot, it is a new customer for Saudi Aramco as the latter makes its push to seek new Chinese buyers by offering spot cargoes and competitive credit terms.

Natural Gas & LNG

  • The Singapore Exchange (SGX) and broker Tullett Prebon are developing a new LNG spot pricing index, joining its existing Singapore and Northeast LNG Sling indexes. The new Sling Index focuses on west Asia, known as the Dubai-Kuwait-India (DKI) Sling that will be published every Monday and Thursday covering spot prices between the Middle East and India. The new index should launch in the second quarter of 2017, standardising LNG pricing in Asia and positioning Singapore as the region’s trading hub.
  • Indonesia is facing a glut of LNG this year, with a reported 63 uncommitted cargoes of the fuel between the Tangguh and Bontang projects, according to the Director General of Oil and Gas. At current bookings, Bontang will have 32 uncommitted LNG cargoes and Tangguh 31, and there may be more in 2018 with the expansion of Tangguh being sanctioned. LNG cargoes are generally locked up in long-term contracts, with uncommitted cargoes sold on the prompt market at spot prices.
  • South Korea’s Kogas has expressed interest in buying into US shale gas projects, aiming for supply security, as US-South Korean trade relations head for rockier times under the Trump administration. Kogas is the world’s second largest buyer of LNG, receiving its first US LNG cargo from Cheniere this year. But rather than be a mere buyer, Kogas is following the example of Japanese gas companies by becoming asset owners as well, hedging against rockier political times.

Corporate

  • A surprise shakeup has happened at Pertamina. CEO Dwi Soetjipto and Deputy CEO Ahmad Bambang have been removed from their positions by the Pertamina Board of Commissioners and the Ministry of State-owned entreprises. With Yenni Andayani (the former new and renewable energy director) as acting CEO, the changes are reportedly to ‘refresh’ the company structure as the ‘complex recruitment and management structure has obstructed cooperation.’ Pertamina chairman Tanri Abeng denied that the removals were linked a corruption case. The company aims to introduce a new streamlined corporate structure and new CEO by the beginning of March.

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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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