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Market Watch

Headline crude prices for the week beginning 29 January 2017 – Brent: US$69/b; WTI: US$65/b

  • Oil remains near its recent highs, correcting slightly at the start of this week with a rebound in the dollar and positive US crude output data.
  • The US dollar has been sliding since December, boosting prices – since crude oil is priced in US$. With the US seemingly signalling that a weak dollar might be beneficial, this could further fuel the crude rally.
  • Solidarity within OPEC and its NOPEC allies, led by Russia, is reassuring markets that the group will act beyond 2018 if necessary.
  • A tenth consecutive fall in weekly US crude inventories boosted prices last week, but consensus within the industry is that stockpiles will gain this week, while American output is expected to hit 10 mmb/d ‘soon.’
  • However, US Energy Secretary Rick Perry stood with energy ministers from Russia and Saudi Arabia at Davos last week, stating that he believes the US will not become a ‘spoiler’ for oil markets as new production gets absorbed by global demand, which has returned to healthy growth.
  • Hedge funds have also reportedly bet big on Brent and WTI continuing to rise, as the price future curve is moving in backwardisation all the way through 2022, indicating either rising demand, tightening supply, or both.
  • Confidence has returned, as a poll by DNV GL shows that 63% of 813 industry executives were positive for 2018, with Europe showing the largest improvement (25% to 64%) and Asia at 57% (up from 30%).
  • The active US oil and gas rig count jumped by 11 last week, as the addition of 12 new oil rigs – particularly in the Permian, where the number grew by 18 – offset the loss of a single gas rig.
  • Crude price outlook: The week started with a small correction, but there is enough confidence to keep oil prices at recent levels. US data may temper rises, but Brent should remain within range of US$70/b and WTI at US$66/b.


Headlines of the week

Upstream

  • BP has announced two more new major finds in the UK North Sea; the Capercaillie and Achmelvich discoveries join 18 expected new North Sea startups this year, while boosting BP’s output to 200,000 barrels by 2020.
  • The first export cargo of 500,000 barrels out of the North Sea Catcher Area are been sold a premium to Brent, surprising analysts.
  • China’s CNOOC and Norway’s Petoro has relinquished their interest in the last remaining exploration licence in Iceland; with only a minor junior partner left, this is likely to end of Iceland’s dream of finding oil.
  • Eni has begun exploratory drilling in the Black Sea with Rosneft, but keeping an eye out that it does not circumvent US sanctions on Russia.
  • Russia has remained China’s top crude oil supplier for a 10th month in December 2017, capping off its second year ahead of Saudi Arabia. Russian exports to China hit 1.194 mmb/d over 2017.

Downstream

  • Gunvor has received provisional approval from The Netherlands to add a fuel upgrading unit at its 88 kb/d Rotterdam refinery to meet strict new emission standards for shipping fuels.
  • Russia’s Tatneft has started up a naphtha hydrotreater and isomerisation unit at its TANEKO refinery to improve gasoline quality and gasoil yield.
  • The UAE’s Mubadala Petroleum has announced plans to double the capacity of the Pak Arab refinery in Karachi, Pakistan to 200 kb/d.

Natural Gas/LNG

  • The first Russian LNG cargo has landed in the USA, with the Gaselys tanker dropping off Siberia-sourced LNG in Boston. A second shipment, also by France’s Engie, may be on its way, heading to Massachusetts.
  • Nigeria is seeking to amend its law on gas-flaring penalty, moving it from a charge to a fine, as the former enjoys a tax relief which potentially cost the government billions in gas flaring penalty revenue.
  • Hess Midstream Partners and Targa Resources have formed a joint venture to build a 300 mscf/d dry gas processing plant in Little Missouri, North Dakota to capture gas that is currently being flared in the Bakken.
  • Bangladesh and Indonesia have signed an agreement on LNG imports, as the South Asian country seeks to plug its domestic shortage of natural gas. Bangladesh has several FSRU projects in the pipeline, signing its first ever LNG import deal with Qatar last September.
  • Mubadala Petroleum is aiming to finalise the FID on the Pegaga offshore gas condensate project in Malaysia within this quarter.
  • The government of Sarawak has acquired a 10% stake in the Bintulu LNG complex’s new Train 9, with Petronas acquiescing to the state’s demands.

Corporate

  • Preparing for the future, BP has invested US$5 million in US electric vehicle charging firm FreeWire and is also reportedly considering a US$1.8 billion bid for Italian solar firm Rete Rinnovabile.
  • Malaysia’s Sapura Energy – its largest oil and gas services company – is evaluating a potential public listing of its E&P business on the KLSE.

Thailand’s PTTEP reported a 60% jump in full year 2017 net profits, up to US$594 million from US$ US$372 million, while keeping an eye out to acquire oil and gas assets in Southeast Asia and the Middle East.

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The Strait of Hormuz and Oil Prices

The UK has just designated the Persian Gulf as a level 3 risk for its ships – the highest level possible threat for British vessel traffic – as the confrontation between Iran with the US and its allies escalated. The strategically-important bit of water - and in particular the narrow Strait of Hormuz – is boiling over, and it seems as if full-blown military confrontation is inevitable.

The risk assessment comes as the British warship HMS Montrose had to escort the BP oil tanker British Heritage out of the Persian Gulf into the Indian Ocean from being blocked by Iranian vessels. The risk is particularly acute as Iran is spoiling for a fight after the Royal Marines seized the Iranian crude supertanker Grace-1 in Gibraltar on suspicions that it was violating sanctions by sending crude to war-torn Syria. Tensions over the Gibraltar seizure kept the British Heritage tanker in ‘safe’ Saudi Arabian waters for almost a week after making a U-turn from the Basrah oil terminal in Iraq on fears of Iranian reprisals, until the HMW Montrose came to its rescue. Iran’s Revolutionary Guard Corps have warned of further ‘reciprocation’ even as it denied the British Heritage incident ever occurred.

This is just the latest in a series of events around Iran that is rattling the oil world. Since the waivers on exports of Iranian crude by the USA expired in early May, there were four sabotage attacks on oil tankers in the region and two additional attacks in June, all near the major bunkering hub of Fujairah. Increased US military presence resulted in Iran downing an American drone, which almost led to a full-blown conflict were it not for a last-minute U-turn by President Donald Trump. Reports suggest that Iran’s Revolutionary Guard Corps have moved military equipment to its southern coast surrounding the narrow Strait of Hormuz, which is 39km at its narrowest. Up to a third of all seaborne petroleum trade passes through this chokepoint and while Iran would most likely overrun by US-led forces eventually if war breaks out, it could cause a major amount of damage in a little amount of time.

The risk has already driven up oil prices. While a risk premium has already been applied to current oil prices, some analysts are suggesting that further major spikes in crude oil prices could be incoming if Iran manages to close the Strait of Hormuz for an extended period of time. While international crude oil stocks will buffer any short-term impediment, if the Strait is closed for more than two weeks, crude oil prices could jump above US$100/b. If the Strait is closed for an extended period of time – and if the world has run down on its spare crude capacity – then prices could jump as high as US$325/b, according to a study conducted by the King Abdullah Petroleum Studies and Research Centre in Riyadh. This hasn’t happened yet, but the impact is already being felt beyond crude prices: insurance premiums for ships sailing to and fro the Persian Gulf rose tenfold in June, while the insurance-advice group Joint War Committee has designated the waters as a ‘Listed Area’, the highest risk classification on the scale. VLCC rates for trips in the Persian Gulf have also slipped, with traders cagey about sending ships into the potential conflict zone.

This will continue, as there is no end-game in sight for the Iranian issue. With the USA vague on what its eventual goals are and Iran in an aggressive mood at perceived injustice, the situation could explode in war or stay on steady heat for a longer while. Either way, this will have a major impact on the global crude markets. The boiling point has not been reached yet, but the waters of the Strait of Hormuz are certainly simmering.

The Strait of Hormuz:

  • Connects the Persian Gulf to the Gulf of Oman/Indian Ocean
  • Length: 167km
  • Width: 96km (widest) to 39km (narrowest)
  • Controlled by Iran, the UAE and Musandam (Oman)
  • The conduit for 33% of all LNG trade and 20% of total crude oil demand
July, 16 2019
Your Weekly Update: 8 - 12 July 2019

Market Watch 

Headline crude prices for the week beginning 8 July 2019 – Brent: US$64/b; WTI: US$57/b

  • Bolstered by the renewed OPEC+ supply pact but rattled by increasing tensions between Iran and the US, oil prices started the week steady after gaining over the previous week
  • With the OPEC+ supply deal extended to March 2020, focus will now shift to adherence and in particular, Russian commitments to the agreement that previously wavered over 1H19
  • More critical to the market is the escalating standoff between the US and Iran around the Straits of Hormuz and even beyond; British forces seized an oil tanker off Gibraltar that was suspected to carrying Iranian crude to Syria, drawing share criticism from Iran
  • Iran itself confirmed that it was raising its level of nuclear enrichment above levels agreed to in the 2015 deal that ended sanctions, and accused European signatories to the deal of ‘not doing enough’
  • Iranian forces also confronted a British tanker escorted by a warship in the Persian Gulf, with the narrow channel now a flashpoint for action
  • As a recipient of Middle Eastern crude, China has also raised security levels for its vessel passing through the Straits of Malacca after doing the same for the Straits of Hormuz, raising some eyebrows
  • While the confrontation – or lack of – between the US and Iran will be the main driver behind oil prices movement in the second half of 2019, the trade policies of the Trump administration that may now hit secondary Asian manufacturing nations such as Vietnam is also leaving the global economy increasingly fragile
  • Against this backdrop, the US active oil and gas rig count fell again, dropping five oil sites and gaining one gas site for a net loss of four rigs
  • As the Iranian situation deteriorates, the market will be pricing more risk premiums into traded prices, which should inch up towards the US$65-67/b range for Brent and US$59-61/b for WTI

Headlines of the week

Upstream

  • Marathon Oil has completed the sale of its UK businesses to RockRose Energy, handing over the Brae and Foinaven area fields for US$345 million
  • Despite pulling out from the UK North Sea, ConocoPhillips is still active in Norway, recently submitting a new plan to re-develop the Tor field in Great Ekofisk, which was shut down in 2015 despite only 20% of resources extracted
  • In a bit to boost national production, Nigerian independent Aiteo Eastern E&P has announced plans to spend up to US$15 billion over the next five years to drill new wells and re-visit existing assets
  • Eni and Vitol have been awarded rights to Block WB03 in the offshore Tano basin in Ghana, with Eni holding 70% and expanding its presence in the country
  • Total has approved Phase 3 development at the onshore Dunga field in Kazakhstan that will increase capacity by 10% to some 20,000 b/d by 2022
  • Eni has launched production from the Mizton field in Mexico’s Bay of Campeche Area 1 – the first new offshore new field development by an international firm since reforms in 2008
  • Halliburton and Kuwait Oil have signed an agreement to explore for oil offshore Kuwait which makes Kuwait’s first foray in offshore upstream services
  • Energean Oil & Gas has purchased Electricite de France’s Italian unit for US$850 million, gaining assets in Egypt, Italy, Algeria, Croatia and the North Sea to complement its existing fields in Israel and Greece

Midstream/Downstream

  • China will be launching a new low-sulfur bunker fuel oil contract on the Shanghai Futures Exchange by the end of 2019, just as new IMO regulations on marine fuel oil sulfur content caps kick into effect in 2020
  • Just as American crude production hits new highs, American refining capacity has also reached a new record high of 18.8 million b/d
  • China has issued a new round of crude oil import quotas for private oil refiners, allowing them to bring in an additional 56.85 million tonnes (~1 mmb/d) over the remainder of 2019
  • In the fallout over the contaminated crude scandal at the Druzhba pipeline, Russian pipeline operator Transneft has capped volumes of Rosneft crude that can be transported to Germany and Poland on the pipeline
  • The US Environmental Protection Agency (EPA) has proposed an increased biodiesel mandate to 20.04 billion gallons in 2020 up from 19.92 billion gallons in 2019, but may not extend the hardship waiver program which drew criticism
  • Iraq and Oman have signed a new MoU to cooperate in the oil and gas sector which includes plans for a shared Omani refinery processing Iraqi crude

Natural Gas/LNG

  • Kosmos Energy has struck new gas at the Greater Tortue Ahmeyim-1 well in the Albian reservoir offshore Mauritania and Senegal, which will support the Greater Tortue Ahmeyim LNG project that is on track for a 2022 start
  • Kenya and Tanzania have entered into talks to explore cross-border natural gas trading, aimed at delivering Tanzanian natural gas to Kenya to bypass requiring and building facilities for LNG imports
  • Energean Oil & Gas is reportedly looking to sell its stake in the major Glengorn gas discovery in the UK once its acquisition of Edison E&P is completed
  • Saudi Aramco has started work on the Jafurah gas terminal that will take unconventional gas from the Ghawar oil field to the coast for processing
July, 12 2019
TODAY IN ENERGY: U.S. utility-scale battery storage power capacity to grow substantially by 2023

Utility-scale battery storage units (units of one megawatt (MW) or greater power capacity) are a newer electric power resource, and their use has been growing in recent years. Operating utility-scale battery storage power capacity has more than quadrupled from the end of 2014 (214 MW) through March 2019 (899 MW). Assuming currently planned additions are completed and no current operating capacity is retired, utility-scale battery storage power capacity could exceed 2,500 MW by 2023.

U.S. utility-scale battery storage capacity

Source: U.S. Energy Information Administration, Annual Electric Generator Report and the Preliminary Monthly Electric Generator Inventory

EIA's Annual Electric Generator Report (Form EIA-860) collects data on the status of existing utility-scale battery storage units in the United States, along with proposed utility-scale battery storage projects scheduled for initial commercial operation within the next five years. The monthly version of this survey, the Preliminary Monthly Electric Generator Inventory (Form EIA-860M), collects the updated status of any projects scheduled to come online within the next 12 months.

Growth in utility-scale battery installations is the result of supportive state-level energy storage policies and the Federal Energy Regulatory Commission’s Order 841 that directs power system operators to allow utility-scale battery systems to engage in their wholesale energy, capacity, and ancillary services markets. In addition, pairing utility-scale battery storage with intermittent renewable resources, such as wind and solar, has become increasingly competitive compared with traditional generation options.

The two largest operating utility-scale battery storage sites in the United States as of March 2019 provide 40 MW of power capacity each: the Golden Valley Electric Association’s battery energy storage system in Alaska and the Vista Energy storage system in California. In the United States, 16 operating battery storage sites have an installed power capacity of 20 MW or greater. Of the 899 MW of installed operating battery storage reported by states as of March 2019, California, Illinois, and Texas account for a little less than half of that storage capacity.

U.S. operating utlity-scale battery storage by state

Source: U.S. Energy Information Administration, Annual Electric Generator Report and the Preliminary Monthly Electric Generator Inventory

In the first quarter of 2019, 60 MW of utility-scale battery storage power capacity came online, and an additional 108 MW of installed capacity will likely become operational by the end of the year. Of these planned 2019 installations, the largest is the Top Gun Energy Storage facility in California with 30 MW of installed capacity.

As of March 2019, the total utility-scale battery storage power capacity planned to come online through 2023 is 1,623 MW. If these planned facilities come online as scheduled, total U.S. utility-scale battery storage power capacity would nearly triple by the end of 2023. Additional capacity beyond what has already been reported may also be added as future operational dates approach.

Of all planned battery storage projects reported on Form EIA-860M, the largest two sites account for 725 MW and are planned to start commercial operation in 2021. The largest of these planned sites is the Manatee Solar Energy Center in Parrish, Florida. With a capacity of 409 MW, this project will be the largest solar-powered battery system in the world and will store energy from a nearby Florida Power and Light solar plant in Manatee County.

The second-largest planned utility-scale battery storage facility is the Helix Ravenswood facility located in Queens, New York. The site is planned to be developed in three stages and will have a total capacity of 316 MW.

July, 11 2019