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Last Updated: May 11, 2017
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Last week in world oil:


  • With Saudi Arabia and Russia seemingly in agreement that the OPEC and non-OPEC supply cuts must be extended into 2018 to support crude prices, oil has traded upwards over the past week. Levels, however, are still weak, as Libyan production returns to the market, with Brent trading just below US$50/b and WTI at US$46/b.

Upstream & Midstream

  • Suncor’s Syncrude oil sand project in Canada has restarted crude shipments from its Mildred Lake upgrader. Production had been halted as a result of a fire in mid-March, leaving Syncrude orders empty over April. Output at Mildred Lake – which upgrades mined oil sands bitumen into refinery-ready synthetic crude – will stay at 140 kb/d as maintenance is completed, ramping up to full capacity of 350 kb/d only in June.
  • American oil rigs numbered above 700 for the first time since April 2015, as the country gained another six oil and gas rigs to hit 877 in total.


  • Petrobras’ drive to reduce debt through a vast asset sale has been expanded to include its refineries. Thus far, the Petrobras divestiture program has been confined to oil fields, pipeline and peripheral downstream interests, but CEO Pedro Parente has now expanded the circle to include refineries as part of 40 assets to be offered through 2018 that the company hopes will fetch some US$42 billion.
  • Total has begun shutting down its 117 kb/d Feyzin refinery in France as workers downed tools on a strike over bonuses and compensation. With no clear end to the end, Total has opted to shut the refining and petrochemical platform completely, supplying clients from other sites.
  • The US will continue to probe the alleged dumping and unfair subsidies of biofuels from Argentina and Indonesia, potentially paving the way for punitive import duties, bringing a possible benefit to US producers.

Natural Gas and LNG

  • BP and Kosmos Energy announced a major gas discovery offshore Senegal, adding to a list of exploration successes made by BP, Total and smaller players in recent years. The Yakaar-1 find, while not yet quantified, has players sufficiently excited that it could support another LNG export project using Senegalese and Mauritanian natural gas.
  • Russia has suspended LPG exports to Ukraine for the second time in a month, citing that Russia’s regulator had not given clearance for the shipments. Ukraine is typically the second-largest market for Russian propane and butane, with volumes of 800,000 tons last year, but Russia has turned off the tracks (LPG is exported by train), saying it fears the fuel would be used for military purposes. It highlights the fragile relationship Russia has with its former vassal state since the annexation of the Crimean peninsula in 2014, yet still commercially dependent on Ukraine to absorb Russian exports and allow Russian gas through to Europe.
  • As it announced strong earnings results, Total has sanctioned its first project since 2014. FID was made on the US$500 million Aguada Pichana Este in Argentina’s Vaca Muerta, increasing its stake from 27% to 41% as well. It is the first of 10 major FIDs Total expects to make this year.

Last week in Asian oil

Upstream & Midstream

  • PetroVietnam is attempting to restart its joint venture with Venezuela’s PDVSA for the extra-heavy PetroMacareo project. Muscled out of more conventional projects by other state players, PetroVietnam’s first major upstream asset was meant to be the start of the state firm’s upstream ambitions; instead, plummeting oil prices and severe economic conditions in Venezuela halted the costly project. Although it initially considered selling its 40% stake in the project, it has instead retained its shares. And now, with oil prices moving up and Vietnam’s second refinery impending, PetroVietnam is revisiting the project, which could eventually produce 200 kb/d of crude at peak production.
  • Indonesia is pressing forward with a lawsuit against Thailand’s PTT and PTTEP for US$2 billion over environmental damage from the Timor Sea oil spill in 2009. PTTEP Australasia’s Montara wellhead caught fire then, leaking crude oil across Western Australian and (Indonesia alleges) the East Nusa Tenggara province. Indonesia claims that the spill damaged mangroves, corals and seagrass fields in its regions exposed to the currents of the Timor Sea, with PTTEP refutes the allegations, stating that ‘no oil from Montara reached Indonesia.’


  • Iran declared that it was now self-sufficient in petrol supplies, as President Hassan Rouhani opened the Bandar Abbas refinery. Years of sanctions had left Iran floundering in terms of fuel production, but as the country comes in from the cold, it is now in a position not only achieve fuel self-sufficiency but also resume product exports, particularly with energy-hungry India next door.
  • Iraq has opened bids for a 300 kb/d refinery in Fao, near the country’s southern city of Basra. The refinery will be export-focused, aiming to boost Iraq’s exports, which have been curtailed since the Islamic State militants overran and damaged the country’s larger oil processing plant in Baiji, north of Baghdad, in 2014. Iraq is offering either build-own-operate or build-operate-transfer options for the refinery, with bidding closing by August 1.

Natural Gas & LNG

  • Reliance is India’s first major coal-bed methane gas producer and, curiously, now its own customer. Produced at the coal seams of the Sohagpur block in Madhya Pradesh, Reliance outbidded other contenders by agreeing to pay US$4.23/mmBtu for the gas. Earmarked for its petrochemical plants in Maharashtra and Gujarat, which are currently dependent largely on imported gas, Reliance outbid fertiliser maker Deepak Fertilisers & Petrochemicals Corp and state utility GAIL.


  • PetroVietnam’s former chairman Dinh La Thang has been sacked from the country’s Politburo, the body that oversees all major political and policy decisions, over violations during his 2009-2011 tenure at the state oil player. Over 90% of the Central Committees members voted to remove him, a sign that the country’s top brass was taking allegations of corruption and leadership violations seriously.

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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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