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Last Updated: December 7, 2017
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Market Watch

Headline crude prices for the week beginning 4 December 2017 – Brent: US$63/b; WTI: US$58/b

  • As expected, OPEC agreed to extend its oil supply freeze until the end of December 2018.
  • Nigeria and Libya are now part of the production deal, agreeing to limit output to their 2017 levels, roughly 2.8 mmb/d.
  • Compliance with the new supply extension is a worry, particularly Iraq within the OPEC fold and smaller African producers that form part of the Russia-led NOPEC group
  • However, OPEC members have agreed to revisit the deal in June 2018 with the option to rescind it if the market begins to overheat.
  • Recognising that further extensions of the deal is unlikely, Russia is pushing for a clear exit strategy to add clarity for the market.
  • Crude prices rose in the wake of the OPEC extension, but fell back on Monday as some profit-taking set in; the deal has been largely expected by the market and priced into the future curve.
  • Managed money continues to pour into the main crude benchmarks – Brent and WTI – providing a reasonable price floor at some US$60/b and US$55/b based on current fundamentals.
  • US crude output rose to 9.5 mmb/d in September, the highest monthly output levels since 2015 and near the absolute peak of 9.6 mmb/d recorded in 1970.
  • A report by the Massachusetts Institute of Technology suggests that the EIA’s assumptions of continued productivity increases at US shale wells are vastly overplaying the potential of America’s shale boom, potentially overstating output by some 10% through 2020.
  • US oil stockpiles increased last week when a stock drawdown was expected according to a Bloomberg industry survey, placing some downward pressure.
  • Active US rig count up by 6, with 2 new oil and 4 new gas sites. Gains mainly in Texas’ Haynesville and Permian basins.
  • Crude price outlook: Some profit-taking expected as oil trading starts to prepare for the winter break. OPEC deal extension is providing a strong floor, with American output driving trends. Prices to stay rangebound at US$62-63/b for Brent and US$56-57/b for WTI.  


Headlines of the week

Upstream

  • Total has sold its stake in Norway’s Martin Linge field (51%) and Garantiana field (40%) to Statoil for US$1.45 billion as part of a portfolio review following Total’s acquisition of Maersk Oil’s Norwegian assets.
  • Hoping to extend its winning streak in West Africa, ExxonMobil is on the verge of an oil and gas exploration deal offshore Mauritania, which would be in first venture into an area recently brimming with big discoveries.
  • Statoil has been awarded the Bajo del Toro Este light oil exploration licence in Argentina, holding 90% interest with GyP holding the rest.
  • PetroChina’s parent CNPC announced the discovery of a new oil field in Xinjiang’s Juggar basin, holding some 3.8 billion barrels in crude reserves.
  • Fellow Chinese upstream player CNOOC has also started up a new oil project - the Weizhou 12-2 Phase II project in the Beibu Gulf in the South China Sea. Peak output is expected to reach some 11.8 kb/d in 2018.
  • ExxonMobil’s Hebron project in eastern Canada has produced its first oil, on its way to an eventual peak production of some 150 kb/d.
  • Iraq is planning to boost output from its Rumaila oilfield to about 1.5 mmb/d in 2018 from a current output rate of 1.45 mmb/d.
  • The race for Iraq’s Majnoon oilfield is heating up, with Chevron, Total and PetroChina reportedly forming a consortium to take Shell’s stake.

Downstream

  • With squabbles over the use of the Kurdish crude export pipeline to Turkey continuing, Iraq is considering an alternative for Kirkuk crude – diverting volumes to the south for use in the Baghdad and Baiji refineries.  
  • Another first in US oil exports, as India’s MRPL made it first purchase of US crude, buying a cargo of high-sulphur Southern Green Canyon.
  • ExxonMobil’s new US$1 billion clean fuels delayed coker unit at the 320 kb/d Antwerp refinery will be ready for operation by June 2018.
  • Thai Oil is aiming for a 2022 completion of the US$4 billion upgrade of its Sriracha refinery, scrapping two old CDUs for a single new 200 kb/d one that will see the refinery only produce clean fuels and halt fuel oil output.
  • Total has completed the installation of a de-asphalting and hydrocracker unit at its Antwerp refinery, boosting clean fuels production capacity.
  • Indonesia’s Pertamina and Russia’s Rosneft have reported (finally) signed a deal to jointly built a new 300 kb/d refinery in Tuban, East Java.

Natural Gas/LNG

  • Austria’s OMW has bought a 24.99% share in the Western Siberian Yuzhno Russkoye natural gas field from Uniper SE for €1.719 billion.
  • Even as it becomes part of Total, Maersk Oil announced a plan to spend some US$3.3 billion to redevelop the Tyra gas field in Denmark, which would enable Tyra to continue production for at least 25 more years.
  • CNPC has completed the construction of the fourth Shaanxi-Beijing gas pipeline, with the 1,098km pipeline boosting supplies by some 70 mcm/d.
  • Inpex’s Ichthys LNG project in Australia has hit another snag, as a worker’s death has halted construction at an onshore site, adding more delays to the project’s timeline.

Corporate

  • ExxonMobil has reorganised its refining operations, part of CEO Darren Woods’ push to boost profits amid volatile oil and natural gas prices.
  • Vietnam’s state oil distribution firm PV Oil has scheduled its IPO for January 2018, offering 20% of shares for an estimated US$122 million. The government eventually plans to reduce its PV Oil stake to 35.1%.
  • As Venezuela and PDVSA face challenging times, President Nicolas Maduro has tapped Major General Manuel Quevado to take over the state oil firm. With no energy experience, though, Quevado’s challenge is steep.

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Natural gas inventories surpass five-year average for the first time in two years

Working natural gas inventories in the Lower 48 states totaled 3,519 billion cubic feet (Bcf) for the week ending October 11, 2019, according to the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report (WNGSR). This is the first week that Lower 48 states’ working gas inventories have exceeded the previous five-year average since September 22, 2017. Weekly injections in three of the past four weeks each surpassed 100 Bcf, or about 27% more than typical injections for that time of year.

Working natural gas capacity at underground storage facilities helps market participants balance the supply and consumption of natural gas. Inventories in each of the five regions are based on varying commercial, risk management, and reliability goals.

When determining whether natural gas inventories are relatively high or low, EIA uses the average inventories for that same week in each of the previous five years. Relatively low inventories heading into winter months can put upward pressure on natural gas prices. Conversely, relatively high inventories can put downward pressure on natural gas prices.

This week’s inventory level ends a 106-week streak of lower-than-normal natural gas inventories. Natural gas inventories in the Lower 48 states entered the winter of 2017–18 lower than the previous average. Episodes of relatively cold temperatures in the winter of 2017–18—including a bomb cyclone—resulted in record withdrawals from storage, increasing the deficit to the five-year average.

In the subsequent refill season (typically April through October), sustained warmer-than-normal temperatures increased electricity demand for natural gas. Increased demand slowed natural gas storage injection activity through the summer and fall of 2018. By November 30, 2018, the deficit to the five-year average had grown to 725 Bcf. Inventories in that week were 20% lower than the previous five-year average for that time of year. Throughout the 2019 refill season, record levels of U.S. natural gas production led to relatively high injections of natural gas into storage and reduced the deficit to the previous five-year average.

The deficit was also decreased as last year’s low inventory levels are rolled into the previous five-year average. For this week in 2019, the preceding five-year average is about 124 Bcf lower than it was for the same week last year. Consequently, the gap has closed in part based on a lower five-year average.

Lower 48 natural gas inventories, difference to five-year average

Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report

The level of working natural gas inventories relative to the previous five-year average tends to be inversely correlated with natural gas prices. Front-month futures prices at the Henry Hub, the main price benchmark for natural gas in the United States, were as low as $1.67 per million British thermal units (MMBtu) in early 2016. At about that same time, natural gas inventories were 874 Bcf more than the previous five-year average.

By the winter of 2018–19, natural gas front-month futures prices reached their highest level in several years. Natural gas inventories fell to 725 Bcf less than the previous five-year average on November 30, 2018. In recent weeks, increasing the Lower 48 states’ natural gas storage levels have contributed to lower natural gas futures prices.

Lower 48 natural gas inventories and Henry Hub futures prices

Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report and front-month futures prices from New York Mercantile Exchange (NYMEX)

October, 21 2019
Your Weekly Update: 14 - 18 October 2019

Market Watch  

Headline crude prices for the week beginning 14 October 2019 – Brent: US$59/b; WTI: US$53/b

  • Crude oil prices remain stubbornly stuck in their range, despite several key issues that could potentially move the market occurring over the week
  • The sudden thawing of the icy trade relations between the US and China last week – announcing a partial trade deal where new tariffs would be halted – was a positive for the waning health of the global economy; this, however, failed to send prices any higher as previous optimism has always been dashed
  • The trade spat has already caused fears of an economic recession and tumbling global oil demand, with the IEA projecting yet another drop in the demand that has neutralised another possible ‘geopolitical premium’ on prices
  • That geopolitical premium focuses on the fragile situation in the Middle East, with risk spiking up as Iran announced that one of its tankers in the Red Sea – far away from the Persian Gulf - had been struck by missiles; an initial accusation that Saudi Arabia was behind the attack was later withdrawn
  • Meanwhile, news emerged that Nigeria had been quietly handed an increased quota under the OPEC+ supply deal, from 1.685 mmb/d to 1.774 mmb/d, in July, which would help it meet compliance under the deal
  • After more than two months of continuous declines, the US active rig count increased for the first time, but not by much; two oil rigs were added, offset by the loss of a gas rig, but a net gain of 1 to a total of 856
  • We expect prices to remain entrenched as it displays resilience against political and economic factors, with Brent hovering in the US$58-60/b area and WTI at the US$52-54/b range


Headlines of the week

Upstream

  • The US Department of the Interior will be opening up 722,000 acres of federal land along California’s central coast near Fresno, San Benito and Monterey for oil and gas leasing – the first sale in the state since 2013
  • Alongside the lease sale in California, the US will also be opening up some 78 million acres in Gulf of Mexico federal waters for sale in 2020, covering all available unleased areas not subject to Congressional moratorium
  • Santos has confirmed oil flows at the Dorado-3 well in the Bedout Basin offshore Western Australia, with some 11,1000 b/d in place
  • After having exited Norway, ExxonMobil is now reportedly looking into selling its Malaysian offshore upstream assets as part of its divestiture programme, fetching up to US$3 billion for assets including the Tapis Blend operations
  • Equinor has won a new exploration permit – WA-542-P – in the offshore Western Australia Northern Carnarvon Basin, located new the Dorado well
  • Nigeria is looking to settle a US$62 billion income-sharing dispute with international oil firms such as ExxonMobil, Shell, Chevron, Total and Eni operating in the country, with hopes of reaching a settlement
  • Barbados is looking to emulate its nearby neighbour Guyana as it gears up for its third offshore bid round that will launch in early 2020
  • Petroecuador has been forced to declare force majeure on its crude exports, as widespread protests over the removal of fuel subsidies have led to the shutdown of some oilfields
  • Abu Dhabi is looking to create a new benchmark price for Middle Eastern crude based on its Murban grade that could compete with Brent and WTI

Midstream/Downstream

  • Aruba has ended its contract with Citgo – PDVSA’s US refining arm – to operate its 209,000 b/d refinery that is currently idled; a new operator is being sought, paralleling the situation over Curacao’s Isla refinery and PDVSA
  • Poland’s crude pipeline operator expects to only be able to clear its system of contaminated Russian oil from the Druzhba incident by July 2020
  • Gunvor’s Rotterdam refinery will only be able to produce low sulfur fuel oil by March 2020, part of a larger planned overhaul of the 88,000 b/d site

Natural Gas/LNG

  • After Total’s departure, it is now the turn of CNPC to quit the South Pars Phase 11 project in Iran, leaving Iran to go ahead alone its largest natural gas project ever as the threat of US sanctions bites down
  • CNPC has taken over operation of the Chuandongbei sour gas field in China’s Sichuan basin from Chevron, and will kick of Phase 2 development soon
  • Qatar has invited ExxonMobil, Shell, Total, ConocoPhillips and some other ‘big players’ to assist in the North Field expansion that will underpin its ambitions to boost gas output to 110 million tpa from a current 77 million tpa
  • The FID on the Rovuma LNG project in Mozambique has been pushed back by a year, with first production now expected by 2025 at the earliest
  • Pakistan has cancelled a ‘huge’ 10-year tender covering 240 LNG cargoes to its second LNG terminal, turning instead to spot cargoes due to inadequate demand
  • Inpex has formally received a 35-year extension for the PSC covering the Abadi LNG project in Indonesia, extending its operation of the Masela block to 2055
October, 18 2019
Ecuador Exits OPEC

Amid ongoing political unrest, Ecuador has chosen to withdraw from OPEC in January 2020. Citing a need to boost oil revenues by being ‘honest about its ability to endure further cuts’, Ecuador is prioritising crude production and welcoming new oil investment (free from production constraints) as President Lenin Moreno pursues more market-friendly economic policies. But his decisions have caused unrest; the removal of fuel subsidies – which effectively double domestic fuel prices – have triggered an ongoing widespread protests after 40 years of low prices. To balance its fiscal books, Ecuador’s priorities have changed.

The departure is symbolic. Ecuador’s production amounts to some 540,000 b/d of crude oil. It has historically exceeded its allocated quota within the wider OPEC supply deal, but given its smaller volumes, does not have a major impact on OPEC’s total output. The divorce is also not acrimonious, with Ecuador promising to continue supporting OPEC’s efforts to stabilise the oil market where it can. 

This isn’t the first time, or the last time, that a country will quit OPEC. Ecuador itself has already done so once, withdrawing in December 1992. Back then, Quito cited fiscal problems, balking at the high membership fee – US$2 million per year – and that it needed to prioritise increasing production over output discipline. Ecuador rejoined in October 2007. Similar circumstances over supply constraints also prompted Gabon to withdraw in January 1995, returning only in July 2016. The likelihood of Ecuador returning is high, given this history, but there are also two OPEC members that have departed seemingly permanently.

The first is Indonesia, which exited OPEC in 2008 after 46 years of membership. Chronic mismanagement of its upstream resources had led Indonesia to become a net importer of crude oil since the early 2000s and therefore unable to meet its production quota. Indonesia did rejoin OPEC briefly in January 2016 after managing to (slightly) improve its crude balance, but was forced to withdraw once again in December 2016 when OPEC began requesting more comprehensive production cuts to stabilise prices. But while Indonesia may return, Qatar is likely gone permanently. Officially, Qatar exited OPEC in January 2019 after 48 years of continuous membership to focus on natural gas production, which dwarfs its crude output. Unofficially, geopolitical tensions between Qatar and Saudi Arabia – which has resulted in an ongoing blockade and boycott – contributed to the split.

The exit of Ecuador will not make much material difference to OPEC’s current goal of controlling supply to stabilise prices. With Saudi production back at full capacity – and showing the willingness to turn its taps on or off to control the market – gains in Ecuador’s crude production can be offset elsewhere. What matters is optics. The exit leaves the impression that OPEC’s power is weakening, limiting its ability to influence the market by controlling supply. There are also ongoing tensions brewing within OPEC, specifically between Iran and Saudi Arabia. The continued implosion of the Venezuelan economy is also an issue. OPEC will survive the exit of Ecuador; but if Iran or Venezuela choose to go, then it will face a full-blown existential crisis. 

Current OPEC membership:

  • Middle East: Iran, Iraq, Kuwait, Saudi Arabia, UAE
  • Africa: Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, Republic of Congo
  • Latin America: Venezuela
  • Total: 13
  • Withdrawing: Ecuador (January 2020)
  • Membership under consideration: Sudan (October 2015)
October, 18 2019