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Last Updated: October 20, 2017
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Last week in World oil:

Prices

  • Crude prices remain stuck in their range – Brent at US$57/b and WTI at US$51/b – as swings in US inventories outweigh Middle Eastern geopolitical concerns, with little on to horizon to move the market. 

Upstream

  • Chinese major Sinopec is planning to exit Argentina, after losses and labour woes prompted it to put its oil assets on sale. Acquired in 2010 from Occidental Petroleum for US$2.45 billion, the acquisition was part of Sinopec’s drive to establish a portfolio of international upstream assets. However, a shaky political and economic situation in Argentina caused losses, and the oil and gas assets – mainly in the southern province of Santa Cruz – now have a price estimate of US$750 million-1 billion.
  • Uganda is quickly becoming a potential new African upstream bright spot, with Nigeria’s Oranto Petroleum recently signing two PSCs to explore around the Lake Albert basin. The Ngassa Shallow Play and Ngassa Deep Play are located within the Albertine rift basin where Uganda first struck oil in 2006; Uganda’s first domestic oil is expected in 2020.
  • Cote d’Ivoire has concluded four PSCs with Tullow Oil in a bid to jumpstart its fledgling upstream industry. Producing a mere 8 kb/d of oil and 200 mcf/d of gas, Cote d’Ivoire lags behind Senegal and Ghana, but is hoping that recent big finds in its neighbours hint at potential within its waters. State oil firm Petroci will hold 10% of each PSC.
  • US drillers cut active rig counts for the fourth time in five weeks, as price realities impact production plans. Eight rigs were removed from service last week – five oil and three gas – leaving the total active count at 928.

Downstream & Midstream

  • Another international joins the queue to exploit Mexico’s recently deregulated fuel retail industry, joining Shell, BP, ExxonMobil and Glencore. France’s Total is expanding its downstream presence in Mexico from specialty products to a full service station network, rebranding some 250 Mexico City-area GASORED group sites to the Total brand. The first site will be opened in late 2017, rolling out over 2018 and 2019. 

Natural Gas and LNG

  • More LNG this way comes. A week after Chevron began operations at Wheatstone, Russia’s Yamal LNG project in the Arctic confirmed that it will ship its first LNG cargo in November. Operated by Russia’s Novatek with France’s Total, China’s CNPC and the Silk Road Fund, Yamal will begin with two shipments in November, four in December, then ramp up to ten in 2018. The first cargoes were reportedly sold on the spot market.

Corporate

  • Indications are the Saudi Aramco’s planned IPO has hit some snags. Recent reports indicate that some delays are expected, with a two-stage IPO likely – floating in Riyadh by the end of 2018 and delaying the planned international portion until 2019. Some chatter on the market even suggests that Aramco may scrap the international portion altogether, replacing with a private share sale to select world sovereign funds and institutional investors.

Last week in Asian oil

Upstream

  • Malaysia’s Petronas has outlined its plans for the Bukit Tua field in Indonesia. Phase one of Bukit Tua came on stream in May 2015; phase two is currently underway and Petronas wants to expand into a phase three that will exploit the field’s Kujung horizon. Expansions will continue through July 2022, lifting production from its current peak rate of 20 kb/d of oil and 50 mmscf/d of gas. Petronas holds 80% of the PSC, with the remainder held by Pertamina.

Downstream & Midstream

  • CNOOC’s 200 kb/d refinery in Huizhou is ready for commissioning. Crude trial runs have been completed at the site in Guangdong, which is part of CNOOC’s Huizhou refining and petrochemical complex that represents the firm’s move downstream to compete with Sinopec and PetroChina. The focus of the complex is for both fuels and chemicals, with a 1.2 mtpa ethylene plant (a joint venture with Shell) due to be completed in Q12018.
  • From a loose and scrappy group, China’s independent refiners – the teapots – are increasing becoming more structured and united, as they face increasing criticism from Sinopec and PetroChina. After forming a crude buying alliance last year, six influential teapots – including Dongming, the country’s largest independent refiner – set up the Shandong Refining & Chemical Group last month, and has now bolstered it with a CNY33 billion (US$5 billion) fund. The joint fund will go to joint production, operation and investment plans, as well as lobbying efforts, to support the group’s refining capacity of 660 kb/d.
  • Once dismissed as a pipe dream, the private Pulau Muara Besar refinery planned by Hengyi Petrochemical in Brunei actually appears to be progressing to reality. The Chinese group has started up a trading office in Singapore, which will buy crude and trade fuel products produced at the 175 kb/d, US$3.4 billion project. Primarily a petrochemical play to support Hengyi’s fabric and industrial arms, the refinery will also produce a significant amount of gasoline, gasoil and jet fuel, which Hengyi has no internal use for. The company has also announced a US$12 billion second phase that will include expanding capacity to 280 kb/d and secondary units to produce some 1.5 mtpa of ethylene and 2 mtpa of PX.

Natural Gas & LNG

  • Bangladesh is striving ahead in its LNG ambitions, signing up for a third floating LNG project with Malaysia’s Petronas and China’s Hong Kong Manjala Power. Planned to be located at Kutubdia in Cox’s Bazaar, the 3.5 mtpa import terminal is planned for a 2019 start, just in time to replace Bangladesh’s dwindling natural gas production. The country’s first FSRU – a 3.75 mtpa facility off Moheshkhali in the Bay of Bengal – is expected to start up in 2018.
  • CNPC has started up its third natural gas pipeline servicing Shanghai, aiming to meet the growing demand for clean power generation fuel in the city. The new 88km pipeline connects the Rudong LNG receiving terminal in Jiangshu with Shanghai’s Chongming island, with a capacity of some 1.84 billion cbm per year.

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Pricing-in The Covid 19 Vaccine

In a few days, the bi-annual OPEC meeting will take place on November 30, leading into a wider OPEC+ meeting on December 30. This is what all the political jostling and negotiations currently taking place is leading up to, as the coalition of major oil producers under the OPEC+ banner decide on the next step of its historic and ambitious supply control plan. Designed to prop up global oil prices by managing supply, a postponement of the next phase in the supply deal is widely expected. But there are many cracks appearing beneath the headline.

A quick recap. After Saudi Arabia and Russia triggered a price war in March 2020 that led to a collapse in oil prices (with US crude prices briefly falling into negative territory due to the technical quirk), OPEC and its non-OPEC allies (known collectively as OPEC+) agreed to a massive supply quota deal that would throttle their production for 2 years. The initial figure was 10 mmb/d, until Mexico’s reticence brought that down to 9.7 mmb/d. This was due to fall to 7.7 mmb/d by July 2020, but soft demand forced a delay, while Saudi Arabia led the charge to ensure full compliance from laggards, which included Iraq, Nigeria and (unusually) the UAE. The next tranche will bring the supply control ceiling down to 5.7 mmb/d. But given that Covid-19 is still raging globally (despite promising vaccine results), this might be too much too soon. Yes, prices have recovered, but at US$40/b crude, this is still not sufficient to cover the oil-dependent budgets of many OPEC+ nations. So a delay is very likely.

But for how long? The OPEC+ Joint Technical Committee panel has suggested that the next step of the plan (which will effectively boost global supply by 2 mmb/d) be postponed by 3-6 months. This move, if adopted, will have been presaged by several public statements by OPEC+ leaders, including a pointed comment from OPEC Secretary General Mohammad Barkindo that producers must be ready to respond to ‘shifts in market fundamentals’.

On the surface, this is a necessary move. Crude prices have rallied recently – to as high as US$45/b – on positive news of Covid-19 vaccines. Treatments from Pfizer, Moderna and the Oxford University/AstraZeneca have touted 90%+ effectiveness in various forms, with countries such as the US, Germany and the UK ordering billions of doses and setting the stage for mass vaccinations beginning December. Life returning to a semblance of normality would lift demand, particularly in key products such as gasoline (as driving rates increase) and jet fuel (allowing a crippled aviation sector to return to life). Underpinning the rally is the understanding that OPEC+ will always act in the market’s favour, carefully supporting the price recovery. But there are already grouses among OPEC members that they are doing ‘too much’. Led by Saudi Arabia, the draconian dictates of meeting full compliance to previous quotas have ruffled feathers, although most members have reluctantly attempt to abide by them. But there is a wider existential issue that OPEC+ is merely allowing its rivals to resuscitate and leapfrog them once again; the US active oil rig count by Baker Hughes has reversed a chronic decline trend, as WTI prices are at levels above breakeven for US shale.

Complaints from Iran, Iraq and Nigeria are to be expected, as is from Libya as it seeks continued exemption from quotas due to the legacy of civil war even though it has recently returned to almost full production following a truce. But grievance is also coming from an unexpected quarter: the UAE. A major supporter in the Saudi Arabia faction of OPEC, reports suggest that the UAE (led by the largest emirate, Abu Dhabi) are privately questioning the benefit of remaining in OPEC. Beset by shrivelling oil revenue, the Emiratis have been grumbling about the fairness of their allocated quota as they seek to rebuild their trade-dependent economy. There has been suggestion that the Emiratis could even leave OPEC if decisions led to a net negative outcome for them. Unlike the Qatar exit, this will not just be a blow to OPEC as a whole, questioning its market relevance but to Saudi Arabia’s lead position, as it loses one of its main allies, reducing its negotiation power. And if the UAE leaves, Kuwait could follow, which would leave the Saudis even more isolated.

This could be a tactic to increase the volume of the UAE’s voice in OPEC+, which has been dominated by Saudi Arabia and Russia. But it could also be a genuine policy shift. Either way, it throws even more conundrums onto a delicate situation that could undermine an already fragile market. Despite the positive market news led by Covid-19 vaccines and demand recovery in Asia, American crude oil inventories in Cushing are now approaching similar high levels last seen in April (just before the WTI crash) while OPEC itself has lowered its global demand forecast for 2020 by 300,000 b/d. That’s dangerous territory to be treading in, especially if members of the OPEC+ club are threatening to exit and undermine the pack. A postponement of the plan seems inevitable on December 1 at this point, but it is what lies beyond the immediate horizon that is the true threat to OPEC+.

Market Outlook:

  • Crude price trading range: Brent – US$44-46/b, WTI – US$42-44/b
  • More positive news on Covid-19 vaccines have underpinned a crude price rally despite worrying signs of continued soft demand and inventory build-ups
  • Pfizer’s application for emergency approval of its vaccine is paving the way for mass vaccinations to begin soon, with some experts predicting that the global economy could return to normality in Q2 2021
  • Market observers are predicting a delay in the OPEC+ supply quota schedule, but the longer timeline for the club’s plan – which is set to last until April 2022 – may have to be brought forward to appease current dissent in the group

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November, 25 2020
EIA expects U.S. crude oil production to remain relatively flat through 2021

In the U.S. Energy Information Administration’s (EIA) November Short-Term Energy Outlook (STEO), EIA forecasts that U.S. crude oil production will remain near its current level through the end of 2021.

A record 12.9 million barrels per day (b/d) of crude oil was produced in the United States in November 2019 and was at 12.7 million b/d in March 2020, when the President declared a national emergency concerning the COVID-19 outbreak. Crude oil production then fell to 10.0 million b/d in May 2020, the lowest level since January 2018.

By August, the latest monthly data available in EIA’s series, production of crude oil had risen to 10.6 million b/d in the United States, and the U.S. benchmark price of West Texas Intermediate (WTI) crude oil had increased from a monthly average of $17 per barrel (b) in April to $42/b in August. EIA forecasts that the WTI price will average $43/b in the first half of 2021, up from our forecast of $40/b during the second half of 2020.

The U.S. crude oil production forecast reflects EIA’s expectations that annual global petroleum demand will not recover to pre-pandemic levels (101.5 million b/d in 2019) through at least 2021. EIA forecasts that global consumption of petroleum will average 92.9 million b/d in 2020 and 98.8 million b/d in 2021.

The gradual recovery in global demand for petroleum contributes to EIA’s forecast of higher crude oil prices in 2021. EIA expects that the Brent crude oil price will increase from its 2020 average of $41/b to $47/b in 2021.

EIA’s crude oil price forecast depends on many factors, especially changes in global production of crude oil. As of early November, members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) were considering plans to keep production at current levels, which could result in higher crude oil prices. OPEC+ had previously planned to ease production cuts in January 2021.

Other factors could result in lower-than-forecast prices, especially a slower recovery in global petroleum demand. As COVID-19 cases continue to increase, some parts of the United States are adding restrictions such as curfews and limitations on gatherings and some European countries are re-instituting lockdown measures.

EIA recently published a more detailed discussion of U.S. crude oil production in This Week in Petroleum.

November, 19 2020
OPEC members' net oil export revenue in 2020 expected to drop to lowest level since 2002

The U.S. Energy Information Administration (EIA) forecasts that members of the Organization of the Petroleum Exporting Countries (OPEC) will earn about $323 billion in net oil export revenues in 2020. If realized, this forecast revenue would be the lowest in 18 years. Lower crude oil prices and lower export volumes drive this expected decrease in export revenues.

Crude oil prices have fallen as a result of lower global demand for petroleum products because of responses to COVID-19. Export volumes have also decreased under OPEC agreements limiting crude oil output that were made in response to low crude oil prices and record-high production disruptions in Libya, Iran, and to a lesser extent, Venezuela.

OPEC earned an estimated $595 billion in net oil export revenues in 2019, less than half of the estimated record high of $1.2 trillion, which was earned in 2012. Continued declines in revenue in 2020 could be detrimental to member countries’ fiscal budgets, which rely heavily on revenues from oil sales to import goods, fund social programs, and support public services. EIA expects a decline in net oil export revenue for OPEC in 2020 because of continued voluntary curtailments and low crude oil prices.

The benchmark Brent crude oil spot price fell from an annual average of $71 per barrel (b) in 2018 to $64/b in 2019. EIA expects Brent to average $41/b in 2020, based on forecasts in EIA’s October 2020 Short-Term Energy Outlook (STEO). OPEC petroleum production averaged 36.6 million barrels per day (b/d) in 2018 and fell to 34.5 million b/d in 2019; EIA expects OPEC production to decline a further 3.9 million b/d to average 30.7 million b/d in 2020.

EIA based its OPEC revenues estimate on forecast petroleum liquids production—including crude oil, condensate, and natural gas plant liquids—and forecast values of OPEC petroleum consumption and crude oil prices.

EIA recently published a more detailed discussion of OPEC revenue in This Week in Petroleum.

November, 16 2020