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Last Updated: January 4, 2018
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Market Watch

Headline crude prices for the week beginning 1 January 2017 – Brent: US$67/b; WTI: US$60/b

  • A combination of political unrest and strong demand pushed WTI past the US$60/b level for the first time since mid-2015.
  • Ongoing unrest in Iran, triggered by domestic grievances and anti-government sentiment that was responded to by an authoritarian crackdown, added to a bullish trend that began mid-December.
  • Repairs on the Forties Pipeline System has been fully completed, restoring supply in Europe and reducing some tightness in the market.
  • However, an outage at Libya’s pipeline to the Es Sider terminal - reportedly caused by insurgent activity – raised concerns of supply disruptions, with some reports suggesting Libya output had dropped by almost 1 mmb/d.
  • As 2018 begins, there are divergent opinions on how crude prices will develop. Moody’s Investors Services expects a range of US$40-60 on resurgent shale production, both others including JP Morgan and some bullish hedge funds believe prices could hit US$80/b.
  • Data from the US EIA showed American oil production declining to 9.75 mmb/d from 9.79 mmb/d, as output slowed over the Christmas break; production is expected to increase in the coming weeks, with many predicting output to top 10 mmb/d within Q118.
  • US commercial crude storage level dipped last week by 4.6 million barrels, down some 20% from historic highs hit in March 2017.
  • Active US rig sites fell by a net two to 777 last week; oil rig numbers were unchanged, with two gas rigs closing. Nonetheless, the US rig count was up by 222 sites y-o-y, from 525 over the last week of 2016.
  • Saudi Aramco is reportedly on the lookout to acquire natural gas assets and supplies internationally, while also developing local output, in a bid to reduce the amount of crude burnt for power over summer. This could unlock more supplies for export progressively over the next few years.
  • Crude price outlook: Optimism seems to be the flavour for the week. Supply disruption have abated, but there is geopolitical risk in Iran while oil demand seems healthy. Prices should stay in the US$66-67/b range for Brent, while WTI may dip back below US$60/b as US supply recovers after the Christmas/New Year break.


Headlines of the week

Upstream

  • The US has opened up the remote Arctic National Wildlife Refuge area in Alaska to oil and gas drilling as part of the recent Congress tax reform bill.
  • In the wake of this, Eni began drilling a new well near Alaska’s Oliktok Point in the Beaufort Sea – potentially yielding output of 20,000 b/d – which is the first well to be drilled in offshore north Alaska since 2015.
  • Indonesia has received bids - including from Repsol, Mubadala and KrisEnergy - for five oil and gas blocks it offered up in 2017, after two consecutive years of no interest. The 22 blocks previously offered over 2015 and 2016 will be put up for bids again this month.
  • Wintershall has started production at the Maria field in Norway a year ahead of schedule, with recoverable reserves of some 180 million boe.
  • Statoil has announced a NK19 billion (US$2.26 billion) plan to extend output at the Snorre field by some 200 million barrels, beginning 2021.
  • A new oil field came online in the UK in the last week of 2018, as Premier Oil’s Catcher field capped off a resurgent year for the North Sea. Catcher has an initial rate of 10 kb/d, rising to 60 kb/d by mid-2018.

Downstream

  • China has issued its first batch of crude import quotas for 2018. A total 121.32 million tons (2.43 mmb/d) has granted to 44 companies, with ChemChina having the largest share at 333 kb/d. Many independent teapot refiners saw substantial increases in their allocation.

Natural Gas/LNG

  • Algeria’s Sonatrach has inked a deal with BP and Statoil to produce an additional 11 bcm of natural gas from its Tiguentourine gas field, which has a current output of some 9 bcm/y since it started in 2006.
  • Rosneft has asked Russia’s competition watchdog to allow it to bid on natural gas fields in the Yamalo-Nenets region placed on sale by diamond mining firm Alrosa, pitting Rosneft against Novatek for the assets.
  • Qatargas and Austria’s OMV has agreed on a long-term LNG contract, delivering some 1.1 mtpa annually for five years, beginning January 2018.
  • China will launch a natural gas exchange in Chongqing in Q118, hoping to create an international price benchmark by combining pipeline imports from Central Asia/Russia and LNG imports. Chongqing will join Shanghai, Tokyo and Singapore in the race to create an Asian gas benchmark.
  • Gazprom has signed an MoU with Iran that will see it participate in the Iran LNG project, which has an initial plan for two trains of 5.25 mtpa each and a second stage that will double capacity.

Corporate

  • The public listing of ADNOC’s fuel distribution unit has been a major success. From an IPO price of DR2.50, trading opened at DR2.90 and remains above the launch price. The listing raised some US$851 million.

Rosneft has unveiled a five-year plan aimed at increase its crude oil output to 5 mmb/d and natural gas to 200 bcm by 2022.

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The Growing Divergence In Energy

Two acquisitions in the energy sector were announced in the last week that illustrate the growing divergence in approaching the future of oil and gas between Europe and the USA. In France, Total announced that it had bought Fonroche Biogaz, the market leader in the production of renewable gas in France. In North America, ConocoPhillips completed its acquisition of Concho Resources, deepening the upstream major’s foothold into the lucrative Permian Basin and its shale riches. One is heading towards renewables, and the other is doubling down on conventional oil and gas.

What does this say about the direction of the energy industry?

Total’s move is unsurprising. Like almost all of its European peers operating in the oil and gas sector, Total has announced ambitious targets to become carbon-neutral by 2050. It is an ambition supported by the European population and pushed for by European governments, so in that sense, Total is following the wishes of its investors and stakeholders – just like BP, Shell, Repsol, Eni and others are doing. Fonroche Biogaz is therefore a canny acquisition. The company designs, builds and operates anaerobic digestion units that convert organic waste such as farming manure into biomethane to serve a gas feedstock for power generation. Fonroche Biogaz already has close to 500 GWh of installed capacity through seven power generation units with four in the pipeline. This feeds into Total’s recent moves to expand its renewable power generation capacity, with the stated intention of increasing the group’s biomethane capacity to 1.5 terawatts per hour (TWh) by 2025. Through this, Total vaults into a leading position within the renewable gas market in Europe, which is already active through affiliates such as Méthanergy, PitPoint and Clean Energy.

In parallel to this move, Total also announced that it has decided not to renew its membership in the American Petroleum Institute for 2021. Citing that it is only ‘partially aligned’ with the API on climate change issues in the past, Total has now decided that those positions have now ‘diverged’ particularly on rolling back methane emission regulations, carbon pricing and decarbonising transport. The French supermajor is not alone in its stance. BP, which has ditched the supermajor moniker in favour of turning itself into a clean energy giant, has also expressed reservations over the API’s stance over climate issues, and may very well choose to resign from the trade group as well. Other European upstream players might follow suit.

However, the core of the API will remain American energy firms. And the stance among these companies remains pro-oil and gas, despite shareholder pressure to bring climate issues and clean energy to the forefront. While the likes of ExxonMobil and Chevron have balanced significant investments into prolific shale patches in North America with public overtures to embrace renewables, no major US firm has made a public commitment to a carbon-neutral future as their European counterparts have. And so ConocoPhillips acquisition of Concho Resources, which boosts its value to some US$60 billion is not an outlier, but a preview of the ongoing consolidation happening in US shale as the free-for-all days give way to big boy acquisitions following the price-upheaval there since 2019.

That could change. In fact, it will change. The incoming Biden administration marks a significant break from the Trump administration’s embrace of oil and gas. Instead of opening of protected federal lands to exploration, especially in Alaska and sensitive coastal areas and loosening environmental regulations, the US will now pivot to putting climate change at the top of the agenda. Although political realities may water it down, the progressive faction of the Democrats are pushing for a Green New Deal embracing sustainability as the future for the US. Biden has already hinted that he may cancel the controversial and long-running Keystone XL pipeline via executive order on his first day in the office. His nominees for key positions including the Department of the Interior, Department of Energy, Environmental Protection Agency and Council on Environmental Quality suggest that there will be a major push on low-carbon and renewable initiatives, at least for the next 4 years. A pledge to reach net zero fossil fuel emissions from the power sector by 2035 has been mooted. More will come.

The landscape is changing. But the two approaches still apply, the aggressive acceleration adopted by European majors, and the slower movement favoured by US firms. Political changes in the USA might hasten the change, but it is unlikely that convergence will happen anytime soon. There is room in the world for both approaches for now, but the future seems inevitable. It just depends on how energy companies want to get there.

Market Outlook:

  • Crude price trading range: Brent – US$54-56/b, WTI – US$51-53/b
  • Global crude oil benchmarks retreated slightly, as concerns of rising supplies and coronavirus spread impact consumption anticipations; in particular, new Covid-19 outbreaks in key countries such as Japan and China are menacing demand
  • Mapped against the new OPEC+ supply quotas, there is a risk that demand will retreat more than anticipated, weakening prices; however, a leaking pipeline in Libya has reduced oil output there by about 200,000 b/d, which could provide some price support
  • However, the longer-term prognosis remains healthier for oil prices factoring out these short-term concerns; the US EIA has raised its predicted average prices for Brent and WTI to US$52.70 and US$49.70 for the whole of 2021

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January, 22 2021
EIA expects crude oil prices to average near $50 per barrel through 2022

In its January Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects global demand for petroleum liquids will be greater than global supply in 2021, especially during the first quarter, leading to inventory draws. As a result, EIA expects the price of Brent crude oil to increase from its December 2020 average of $50 per barrel (b) to an average of $56/b in the first quarter of 2021. The Brent price is then expected to average between $51/b and $54/b on a quarterly basis through 2022.

EIA expects that growth in crude oil production from members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) will be limited because of a multilateral agreement to limit production. Saudi Arabia announced that it would voluntarily cut production by an additional 1.0 million b/d during February and March. Even with this cut, EIA expects OPEC to produce more oil than it did last year, forecasting that crude oil production from OPEC will average 27.2 million b/d in 2021, up from an estimated 25.6 million b/d in 2020.

EIA forecasts that U.S. crude oil production in the Lower 48 states—excluding the Gulf of Mexico—will decline in the first quarter of 2021 before increasing through the end of 2022. In 2021, EIA expects crude oil production in this region will average 8.9 million b/d and total U.S. crude oil production will average 11.1 million b/d, which is less than 2020 production.

EIA expects that responses to the recent rise in COVID-19 cases will continue to limit global oil demand in the first half of 2021. Based on global macroeconomic forecasts from Oxford Economics, however, EIA forecasts that global gross domestic product will grow by 5.4% in 2021 and by 4.3% in 2022, leading to energy consumption growth. EIA forecasts that global consumption of liquid fuels will average 97.8 million barrels per day (b/d) in 2021 and 101.1 million b/d in 2022, only slightly less than the 2019 average of 101.2 million b/d.

EIA expects global inventory draws will contribute to forecast rising crude oil prices in the first quarter of 2021. Despite rising forecast crude oil prices in early 2021, EIA expects upward price pressure will be limited through the forecast period because of high global oil inventory, surplus crude oil production capacity, and stock draws decreasing after the first quarter of 2021. EIA forecasts Brent crude oil prices will average $53/b in both 2021 and 2022.

quarterly global liquid fuels production and consumption

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO)

You can find more information on EIA’s expectations for changes in global petroleum liquids production, consumption, and crude oil prices in EIA’s latest This Week in Petroleum article and its January STEO.

January, 22 2021
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January, 21 2021