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Last Updated: July 27, 2017
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Last week in the world oil:

Prices

  • While OPEC looks at ways to improve coordination among its members over the supply freeze, Saudi Arabia has pledged to cut its exports further in August to help reduce the global glut. Crude prices rose in response to this, hitting US$48/b for Brent and US$46/b for WTI, and increasing further as the UAE pledged further output cuts in September and Russia pushes for a 100% compliance with the current global deal.

Upstream & Midstream

  • Deregulation appears to be paying off for Mexico, as Eni announced that its Amoca field contains as much as a billion barrels of oil, joining the massive Zama field discovered last week. The giant new finds confirms that the ‘Mexican side of the Gulf is very prolific’ according to its oil regulator, prompting it to delay its new offshore round by a month to January 2018 to give international bidders more time to evaluate the newly announced assets. The round will also include the first areas from the Cordilleras Mexicanas basin, potentially sparking off a new oil rush.
  • Brazil’s oil regulator is mulling allowing more flexible local content rules to existing E&P contracts in a bid to revive crude projects put on ice in Brazil over low oil prices and tough local content rules, which may restart some key projects, including the subsalt region of the Santos basin.
  • The UK is hoping to capitalise on the recent spurt of activity in its continental shelf, launching an offshore licensing round that focuses on mature areas. Some 813 blocks over a combined area of 114,426 square kilometres in the Southern, Central and Northern North Sea, the West of Shetland and East Irish Sea are open for bidding until November, including some acreage that has not been available since 1965.
  • The US active rig count appears to be reaching saturation point at current price levels, losing two rigs overall last week as drillers held back on activity in an increasingly glutted market.

Downstream

  • Independent US refiner Tesoro, which will become Andeavor in August, has reached a new agreement with Pemex to enter Mexico’s terminal and transportation services sector, enabling access to Pemex’s pipelines and storage terminals in an attempt to break into the retail sector.
  • BP is reportedly considering spinning off some of its US pipeline assets in the Gulf and Midwest in an IPO, structuring them in a Master-Limited Partnership common to American pipeline companies. It is a revival of a plan first considered five years ago, shelved after oil prices crashed. If it goes through, BP will join other refiners like Valero and Marathon, who have created MLPs for their pipeline assets.

Natural Gas and LNG

  • Egypt expects its natural gas output to double by 2020, as the Zohr, North Alexandria and Nooros projects ramp up to ease the country’s current energy deficiency and move it to gas self-sufficiency. Early phases of Nooros and North Alexandria are already in production, increasing output to 5.1 bcf in 2017 from 4.4. bcf in 2016. So much natural gas is expected to come onstream that Egypt is now in talks with its LNG contractors to defer shipments.

Last week in Asian oil

Upstream

  • In an interesting thaw of relations, China’s foreign minister has said that he supports the idea of joint energy ventures with the Philippines in the disputed areas of the South China Sea claimed by both countries. With President Rodrigo Duterte aiming to develop oil fields in the Reed Bank, the overture by China seems to be aimed at diffusing a potential standoff. It could work out to China’s advantage though; if the Philippines agrees to cooperate with China on joint development, it would make future maritime border claims difficult when brought to the International Tribunal for the Law of the Sea.

Downstream

  • As the startup of Nghi Son, Vietnam’s second refinery, approaches – the refinery recently bought its first crude cargo, from Kuwait – the country is looking forward to plans to establish a strategic oil product reserve. It would follow the IEA guidelines to have at least 90 days worth of net imports, aiming to having the storage in place by 2020. Vietnam currently requires its refineries to have 15 days of their processing capacity in crude stockpiles and 10 days in oil products – equivalent to 30-35 days of its current level of net imports. The advent of Nghi Son may bump that up to 60-70 days by the end of the year, with the third refinery still far away.
  • South Korea is looking at easing blending restriction and rules at the country’s large oil storage terminals in the southern ports of Ulsan and Yeosu, as it aims to become a trading hub in Northeast Asia, and potentially challenging Singapore as Asia’s oil trading centre. Easing the blending rules will allow trading companies the leeway to meet client specifications, a key requirement to establishing a trading hub. South Korea’s proximity to China and Japan could definitely support the idea, but there is still a long way to go for Korea to create the necessary physical and financial infrastructure to displace Singapore.

Natural Gas & LNG

  • After what seems like decades of procrastination the Philippines is on the verge on signing on a partner for its US$2 billion LNG receiving and distribution facility. PNOC has shortlisted six countries for six potential partners – China, Japan, South Korea, Singapore, Indonesia and the UAE – which will help construct the facility by 2020, in time to replace the country’s dwindling supplies from the once prolific Malampaya gas field. The facility will likely be in Batangas, as will include new power plant facilities aimed at improving the country’s inconsistent electricity supply.
  • Petronas has delivered its first LNG cargo to Thailand, the first under a 15 year contract that will see the Malaysian state oil firm send up to 1.2 mtpa per year. Running short of natural gas from the domestic sources as well as piped natural gas from Myanmar, Thailand’s PTT has increasingly turned to LNG to meet the country’s growing demand for gas.

Corporate

  • India’s grand ambitions to merge its numerous state oil companies into a giant entity took one step forward with the sale of the state’s 51.1% stake  in HPCL to state upstream company ONGC for US$4.6 billion. This will create the first major India state vertically-integrated company, bringing together the upstream activities of ONGC and the refining and retail network of HPCL, exploiting synergies between the two.

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June, 12 2022
OPEC And The Current State of Oil Fundamentals

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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June, 12 2022