In Vienna yesterday, OPEC announced that it would be rolling over the landmark supply freeze that began in January 2017 by another nine months. Joining them will be the key non-OPEC members – principally Russia, but other major Central Asian producers – extending the 1.8 mmb/d cuts (1.2 mmb/d for OPEC and 600 kb/d for non-OPEC) through to March 2018. Ordinarily this would be cause for cheer. But instead, the markets reacted in dismay. Brent and WTI plunged by almost 5%, erasing all gains from the last week.
It is an overreaction, certainly, but also evident that the market was expecting a more drastic cut from OPEC to help bolster prices. The extension of the freeze is good, but had already been telegraphed weeks ago by rumblings out of Russia and Saudi Arabia. So that has already been factored into the price – one of the reasons why crude rose over the past week – and traders were looking for a little bit more good news, deeper cuts. When that did not materialise, the sell-off happened.
What’s going on? It took no rocket scientist to predict back in January that the OPEC freeze effect would be blunted by rising production elsewhere. Despite record compliance within the OPEC block – even Iran and Iraq toed the line – once the supply cuts took place, crude from elsewhere rushed to take its place. We saw crude from Alaska shipped to China for the first time, while Japan and South Korea offset Saudi Arabia’s cuts to their supply with crude from West Africa. Buoyed by price signals, American production from onshore shale deposits surged. Two weeks, the American oil rig count blasted past 700 active rigs, the highest in almost two years and is now marching towards 800. This rise in American production is estimated to have offset at least two-thirds of the lost OPEC output. And at current trends, it is estimated that some additional 900 kb/d of oil from the US will be added to global production. Nelson Martinez, Venezuela's oil minister said "In terms of the threat, we still don't know how much (U.S. shale) will be producing in the near future” after the recent OPEC talks. The Energy Minister if UAE, Suhail bin Mohammed al-Mazroui commented that he personally did not believe U.S. oil production would rise by 1 million bpd by next year. Representatives from US Shale who attended the Vienna meeting did not provide any specific guidance or projections either, keeping plans close to their chest.
So analysts were hoping that OPEC would match that with another cut. But getting OPEC to agree on additional cuts is like herding cats. The original November 2016 was landmark, and the high compliance another rare occurrence. But despite this, global inventories and supplies remain high. Part of this is artificial; in the six weeks between announcement and implementation, OPEC members pumped record volumes of crude, stockpiling them to sell during the freeze period. This is evident when you look at OPEC export statistics; they have fallen, but not nearly by as much as production. Extending the freeze may do the trick, to account for this lag. Saudi Arabia certainly seems to agree, pointing out that US crude supplies may have risen over the early period of the freeze, but had fallen for the past seven weeks, which helped convince some OPEC members of the delayed impact. The second half of the year is also a more strategic time to see the impact of the cuts, when the Middle East nations hoard crude to burn for summer power requirements and American/European drivers go out for summer, driving gasoline demand.
But still, there are issues. Libya and Nigeria were exempt for the original OPEC freeze. Their production has been rising following quelling of insurgent activity, while OPEC welcomed its 14th members, Equatorial Guinea, which replaces Indonesia that left last year. The wording of the OPEC announcement suggest that all three will not be expected to produce within the existing quotas, potentially blunting the impact further. Gone are the days when an OPEC freeze was a standalone solution.
Now is this merely a band-aid, kicking the ball further down the road to March 2018 where OPEC will once again have to ask themselves or do we need more cuts earlier? OPEC meets again in November to reconsider output its policy. Reuters reports that “while most in the group now appear to believe that shale has to be accommodated, there are still those in OPEC who think another fight is around the corner". Nigerian Oil Minister Emmanuel Kachikwu commented that “If we get to a point where we feel frustrated by a deliberate action of shale producers to just sabotage the market, OPEC will sit down again and look at what process it is we need to do”.
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In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.
Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.
Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.
This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.
But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.
In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.
But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.
Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.
Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.
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