It seems astonishing that a blockade could happen in this modern day and age. Yet it has. Earlier this week, Saudi Arabia and the UAE, along with Egypt, Bahrain and authorities in Yemen and Libya cut off diplomatic ties with the tiny Gulf state of Qatar. Accusing it of sponsoring terrorism, diplomats were recalled and Qataris nationals were expelled, with the UAE going as far as punishing any online sign of support for Qatar from its netizens. Airspace has been sealed off, while Qatari-flagged ships are being denied harbour. All that is left to Qatar in terms of navigation to the outside world is a narrow aerial and naval corridor leading the country that Saudi Arabia is cross with and cross with Qatar for being friendly with, Iran. With Eid celebrations around the corner, it couldn’t come at a worst time.
Tensions in the Middle East have always been simmering, but kept under boil by international diplomacy. However, in this post-Brexit, Trump world, the rules have changed. The Saudis cosying up to the American president were seen to have emboldened them into making this move. Indeed, Trump tweeted in support of the blockade, but later backtracked – possibly after being reminded that Qatar is home to America’s main Middle East military base, where some 10,000 soldiers are stationed. There were accusations of foreign meddling – from Russia, again. The straw that broke the camel’s back, for Saudi Arabia, was apparently a speech made by the Qatari emir in support of Iran. That is widely believed to have be faked, the product of ‘foreign hackers’ according to the FBI, which is investigating the tensions.
Demand for natural gas to produce electricity in the Gulf states have been increasing, and member states have been paying premium prices for access to LNG. With years of difficulty in developing their own gas wells, Qatar has instead achieved to extract gas at a very low cost. Qatar has also been engaged with Shiite Iran (to the anger of the Saudis) to secure the gas fields for future economic growth, especially the North Fields. Should Qatar offer its neighbours discounted gas rates and share its new found wealth? It is after all the up and coming cleaner energy source of the near future.
The geopolitical implications are threatening. Recent attacks in Tehran were blamed on the Saudis by Iran’s Revolutionary Guards, ratcheting up the tensions as Kuwait and the US furiously try to mediate. Military action on either side is a possibility. But as all sides move to avoid that, the more immediate question is what will happen to Qatar and its massive LNG exports.
LNG is still being loaded and shipped out of Qatar, heading out into international waters from Qatari shores. Originally, the UAE had banned all Qatar-bound and origin ships from entering its waters, but has since limited it to Qatari-flagged ships. This lessens the impact, as international ships could still bunker at Fujairah – the region’s hub – but Qatari ships have to find alternate bunker locations, the nearest being Oman, which has not taken sides yet. LNG prices have not budged much, betting that trade will continue, but may react if it prolongs. Petrochemical exports will also still continue, as a naval blockade has not happened yet.
The main risk will be in cooperation. Qatar is a member of OPEC. It may have the smallest crude oil production within OPEC – some 650 kb/d – but it is a member of an organisation that just recently agreed to extend supply cuts to March 2018. That agreement could now break, especially if Iran and Qatar band together. A move back to free-pumping of oil within OPEC would be disastrous for oil prices. Already, crude oil prices have fallen to levels below that when the OPEC freeze was first announced in November 2016, and will drop even further as American drilling continues. If OPEC is torn apart by this political spat, then the fragile recovery in energy prices will be shattered. Qatar’s energy minister sought to reassure investors over the weekend that his country remains committed to limiting its oil output under an agreement with other major oil producers, despite a widening diplomatic rift with countries such as Saudi Arabia, reports the Wall Street Journal’s Summer Said. “Circumstances in the region shall not prevent the state of Qatar from honoring its international commitment of cutting its oil production,” Mohammed al-Sada said in an emailed statement.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
Source: U.S. Energy Information Administration, based on Bloomberg L.P. data
Note: All prices except West Texas Intermediate (Cushing) are spot prices.
The New York Mercantile Exchange (NYMEX) front-month futures contract for West Texas Intermediate (WTI), the most heavily used crude oil price benchmark in North America, saw its largest and swiftest decline ever on April 20, 2020, dropping as low as -$40.32 per barrel (b) during intraday trading before closing at -$37.63/b. Prices have since recovered, and even though the market event proved short-lived, the incident is useful for highlighting the interconnectedness of the wider North American crude oil market.
Changes in the NYMEX WTI price can affect other price markers across North America because of physical market linkages such as pipelines—as with the WTI Midland price—or because a specific price is based on a formula—as with the Maya crude oil price. This interconnectedness led other North American crude oil spot price markers to also fall below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS), and Bakken Clearbrook. However, the usefulness of the NYMEX WTI to crude oil market participants as a reference price is limited by several factors.
Source: U.S. Energy Information Administration
First, NYMEX WTI is geographically specific because it is physically redeemed (or settled) at storage facilities located in Cushing, Oklahoma, and so it is influenced by events that may not reflect the wider market. The April 20 WTI price decline was driven in part by a local deficit of uncommitted crude oil storage capacity in Cushing. Similarly, while the price of the Bakken Guernsey marker declined to -$38.63/b, the price of Louisiana Light Sweet—a chemically comparable crude oil—decreased to $13.37/b.
Second, NYMEX WTI is chemically specific, meaning to be graded as WTI by NYMEX, a crude oil must fall within the acceptable ranges of 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI can therefore be unsuitable as a price for crude oils with characteristics outside these specific ranges.
Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1,000 barrels of crude oil within a specific month in the future (typically at least 10 days). The last day of trading for the May 2020 contract, for instance, was April 21, with physical delivery occurring between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a NYMEX WTI futures contract provides. Consequently, these market participants will instead turn to shorter-term spot price alternatives.
Taken together, these attributes help to explain the variety of prices used in the North American crude oil market. These markers price most of the crude oils commonly used by U.S. buyers and cover a wide geographic area.
Principal contributor: Jesse Barnett
A month ago, the world witnessed something never thought possible – negative oil prices. A perfect storm of events – the Covid-19 lockdowns, the resulting effect on demand, an ongoing oil supply glut, a worrying shortage of storage space and (crucially) the expiry of the NYMEX WTI benchmark contract for May, resulted in US crude oil prices falling as low as -US$37/b. Dragging other North American crude markers like Louisiana Light and Western Canadian Select along with it, the unique situation meant that crude sellers were paying buyers to take the crude off their hands before the May contract expired, or risk being stuck with crude and nowhere to store it. This was seen as an emblem of the dire circumstances the oil industry was in, and although prices did recover to a more normal US$10-15/b level after the benchmark contract switched over to June, there was immense worry that the situation would repeat itself.
Thankfully, it has not.
On May 19, trade in the NYMEX WTI contract for June delivery was retired and ticked over into a new benchmark for July delivery. Instead of a repeat of the meltdown, the WTI contract rose by US$1.53 to reach US$33.49/b, closing the gap with Brent that traded at US$35.75b. In the space of a month, US crude prices essentially swung up by US$70/b. What happened?
The first reason is that the market has learnt its lesson. The meltdown in April came because of an overleveraged market tempted by low crude oil prices in hope of selling those cargoes on later at a profit. That sort of strategic trading works fine in a normal situation, but against an abnormal situation of rapidly-shrinking storage space saw contract holders hold out until the last minute then frantically dumping their contracts to avoid having to take physical delivery. Bruised by this – and probably embarrassed as well – it seems the market has taken precautions to avoid a recurrence. Settling contracts early was one mechanism. Funds and institutions have also reduced their positions, diminishing the amount of contracts that need to be settled. The structural bottleneck that precipitated the crash was largely eliminated.
The second is that the US oil complex has adjusted itself quickly. Some 2 mmb/d of crude production has been (temporarily) idled, reducing supply. The gradual removal of lockdowns in some US states, despite medical advisories, has also recovered some demand. This week, crude draws in Cushing, Oklahoma rose for the second consecutive week, reaching a record figure of 5.6 million barrels. That increase in demand and the parallel easing of constrained storage space meant that last month’s panic was not repeated. The situation is also similar worldwide. With China now almost at full capacity again and lockdowns gradually removed in other parts of the world, the global crude marker Brent also rose to a 2-month high. The new OPEC+ supply deal seems to be working, especially with Saudi Arabia making an additional voluntary cut of 1 mmb/d. The oil world is now moving rapidly towards a new normal.
How long will this last? Assuming that the Covid-19 pandemic is contained by Q3 2020, then oil prices could conceivably return to their previous support level of US$50/b. That is a big assumption, however. The Covid-19 situation is still fragile, with major risks of additional waves. In China and South Korea, where the pandemic had largely been contained, recent detection of isolated new clusters prompted strict localised lockdowns. There is also worry that the US is jumping the gun in easing restrictions. In Russia and Brazil – countries where the advice to enforce strict lockdowns was ignored as early warning signs crept in – the number of cases and deaths is still rising rapidly. Brazil is a particular worry, as President Jair Bolosnaro is a Covid-19 skeptic and is still encouraging normal behaviour in spite of the accelerating health crisis there. On the flip side, crude output may not respond to the increase in demand as easily, as many clusters of Covid-19 outbreaks have been detected in key crude producing facilities worldwide. Despite this, some US shale producers have already restarted their rigs, spurred on by a need to service their high levels of debt. US pipeline giant Energy Transfer LP has already reported that many drillers in the Permian have resumed production, citing prices in the high-US$20/b level as sufficient to cover its costs.
The recovery is ongoing. But what is likely to happen is an erratic recovery, with intermittent bouts of mini-booms and mini-busts. Consultancy IHS Markit Energy Advisory envisions a choppy recovery with ‘stop-and-go rallies’ over 2020 – particularly in the winter flu season – heading towards a normalisation only in 2021. It predicts that the market will only recover to pre-Covid 19 levels in the second half of 2021, and a smooth path towards that only after a vaccine is developed and made available, which will be late 2020 at the earliest. The oil market has moved from certain doom to cautious optimism in the space of a month. But it will take far longer for the entire industry to regain its verve without any caveats.
In this time of COVID-19, we have had to relook at the way we approach workplace learning. We understand that businesses can’t afford to push the pause button on capability building, as employee safety comes in first and mistakes can be very costly. That’s why we have put together a series of Virtual Instructor Led Training or VILT to ensure that there is no disruption to your workplace learning and progression.
Find courses available for Virtual Instructor Led Training through latest video conferencing technology.