Another weekly plunge in US crude inventories produced an uptick in crude prices midweek,but the momentum fizzled out soon after. OPEC as well as the International Energy Agency reported a drop in commercial oil inventories in the OECD countries in June, but failed to revive crude’s rally. And yet, the spread between front- and second-month ICE Brent futures flipped into backwardation this week, typically the sign of a tight market. WTI remained firmly in contango. We believe Brent’s backwardation stems from transient factors propping up the North Sea market rather than being a signal of an imminent rebalancing of global supply and demand. Is OPEC giving up? Not only was its July compliance with the production cut agreement the worst so far, but prominently, Saudi Arabia, which had been reducing output beyond its commitment, also over-produced, for the first time ever.
Crude’s rally since late July, which rescued it from seven-month lows and propped Brent comfortably back above $50/barrel, lost steam this week. That was not from any particularly bearish news, as much as the absence of support aside from a surprisingly large US weekly crude draw of 6.45 million barrels reported by the Energy Information Administration.
The latest monthly market reports from OPEC and the International Energy Agency this week both pointed to a decline in OECD oil inventories in June. They were also close on the size of the drop, pegged at 22 million barrels by OPEC and 19.3 million barrels by the IEA, but the data failed to lift market sentiment.
OECD crude and product inventories may have finally started to ease after six months of hefty OPEC/non-OPEC output cuts, but remained 252 million barrels above their five-year average according to OPEC, and 219 million barrels above as per the IEA.
A decline in oil inventories is what OPEC has been targeting with its production cuts in collaboration with non-OPEC and what the market has been anxiously waiting to see, but the June dip was too little too late. It came on the back of a seasonal spike in consumption, and may have seen a repeat in July, going by the IEA’s preliminary estimates. But the question is, will it sustain through the third quarter, traditionally a period of slow demand between the summer and winter peaks?
OPEC and the IEA also revised up their estimates for 2017 global oil demand growth this week — to 1.37 million b/d and 1.5 million b/d year-on-year respectively — extrapolating from a stronger second quarter in the OECD and counting on higher global economic growth this year.
But the oil market has been left contemplating the dichotomy between forecasts of robust demand growth, which may or may not come to pass, and burgeoning supply from OPEC and the US, which is undeniably evident. The market rebalancing narrative is still weak, putting crude in no-man’s-land: not quite ready to be claimed by either the bulls or the bears.
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According to the Nigeria National Petroleum Corporation (NNPC), Nigeria has the world’s 9th largest natural gas reserves (192 TCF of gas reserves). As at 2018, Nigeria exported over 1tcf of gas as Liquefied Natural Gas (LNG) to several countries. However domestically, we produce less than 4,000MW of power for over 180million people.
Think about this – imagine every Nigerian holding a 20W light bulb, that’s how much power we generate in Nigeria. In comparison, South Africa generates 42,000MW of power for a population of 57 million. We have the capacity to produce over 2 million Metric Tonnes of fertilizer (primarily urea) per year but we still import fertilizer. The Federal Government’s initiative to rejuvenate the agriculture sector is definitely the right thing to do for our economy, but fertilizer must be readily available to support the industry. Why do we import fertilizer when we have so much gas?
I could go on and on with these statistics, but you can see where I’m going with this so I won’t belabor the point. I will leave you with this mental image: imagine a man that lives with his family on the banks of a river that has fresh, clean water. Rather than collect and use this water directly from the river, he treks over 20km each day to buy bottled water from a company that collects the same water, bottles it and sells to him at a profit. This is the tragedy on Nigeria and it should make us all very sad.
Several indigenous companies like Nestoil were born and grown by the opportunities created by the local and international oil majors – NNPC and its subsidiaries – NGC, NAPIMS, Shell, Mobil, Agip, NDPHC. Nestoil’s main focus is the Engineering Procurement Construction and Commissioning of oil and gas pipelines and flowstations, essentially, infrastructure that supports upstream companies to produce and transport oil and natural gas, as well as and downstream companies to store and move their product. In our 28 years of doing business, we have built over 300km of pipelines of various sizes through the harshest terrain, ranging from dry land to seasonal swamp, to pure swamps, as well as some of the toughest and most volatile and hostile communities in Nigeria. I would be remiss if I do not use this opportunity to say a big thank you to those companies that gave us the opportunity to serve you. The over 2,000 direct staff and over 50,000 indirect staff we employ thank you. We are very grateful for the past opportunities given to us, and look forward to future opportunities that we can get.
Headline crude prices for the week beginning 15 July 2019 – Brent: US$66/b; WTI: US$59/b
Headlines of the week
Unplanned crude oil production outages for the Organization of the Petroleum Exporting Countries (OPEC) averaged 2.5 million barrels per day (b/d) in the first half of 2019, the highest six-month average since the end of 2015. EIA estimates that in June, Iran alone accounted for more than 60% (1.7 million b/d) of all OPEC unplanned outages.
EIA differentiates among declines in production resulting from unplanned production outages, permanent losses of production capacity, and voluntary production cutbacks for OPEC members. Only the first of those categories is included in the historical unplanned production outage estimates that EIA publishes in its monthly Short-Term Energy Outlook (STEO).
Unplanned production outages include, but are not limited to, sanctions, armed conflicts, political disputes, labor actions, natural disasters, and unplanned maintenance. Unplanned outages can be short-lived or last for a number of years, but as long as the production capacity is not lost, EIA tracks these disruptions as outages rather than lost capacity.
Loss of production capacity includes natural capacity declines and declines resulting from irreparable damage that are unlikely to return within one year. This lost capacity cannot contribute to global supply without significant investment and lead time.
Voluntary cutbacks are associated with OPEC production agreements and only apply to OPEC members. Voluntary cutbacks count toward the country’s spare capacity but are not counted as unplanned production outages.
EIA defines spare crude oil production capacity—which only applies to OPEC members adhering to OPEC production agreements—as potential oil production that could be brought online within 30 days and sustained for at least 90 days, consistent with sound business practices. EIA does not include unplanned crude oil production outages in its assessment of spare production capacity.
As an example, EIA considers Iranian production declines that result from U.S. sanctions to be unplanned production outages, making Iran a significant contributor to the total OPEC unplanned crude oil production outages. During the fourth quarter of 2015, before the Joint Comprehensive Plan of Action became effective in January 2016, EIA estimated that an average 800,000 b/d of Iranian production was disrupted. In the first quarter of 2019, the first full quarter since U.S. sanctions on Iran were re-imposed in November 2018, Iranian disruptions averaged 1.2 million b/d.
Another long-term contributor to EIA’s estimate of OPEC unplanned crude oil production outages is the Partitioned Neutral Zone (PNZ) between Kuwait and Saudi Arabia. Production halted there in 2014 because of a political dispute between the two countries. EIA attributes half of the PNZ’s estimated 500,000 b/d production capacity to each country.
In the July 2019 STEO, EIA only considered about 100,000 b/d of Venezuela’s 130,000 b/d production decline from January to February as an unplanned crude oil production outage. After a series of ongoing nationwide power outages in Venezuela that began on March 7 and cut electricity to the country's oil-producing areas, EIA estimates that PdVSA, Venezuela’s national oil company, could not restart the disrupted production because of deteriorating infrastructure, and the previously disrupted 100,000 b/d became lost capacity.