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Last Updated: April 5, 2018
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Headline crude prices for the week beginning 2 April 2017 – Brent: US$67/b; WTI: US$63/b

  • After the Easter break, oil prices started the week on a weaker note as geopolitical development exacerbated operational concerns.
  • Chatter in the market suggests that Saudi Arabia will be cutting the price for the crude grades it sells to Asia, sparking off speculation that Aramco will aiming to recapture lost market share and signalling an end to the production freeze.
  • Russian crude output also rose in March, from 10.95 mmbpd to 10,97 mmbpd, in spite of the OPEC/NOPEC supply cut agreement still in place.
  • The trade spat between the US and China has also been escalating, with China replying with tariffs on some US$50 billions of US imports after the White House announced more tariffs on Chinese products last week; the potential trade war has been rattling financial markets, especially in Asia.
  • Bahrain’s announcement that it has made its largest oil discovery in decades also caused traders to take stock of the major upstream projects in the pipeline that will raise supply in the long run.
  • With US crude production still rising and crude inventories also building, the host of bearish factors is likely to weigh on traders’ minds; however, the API reported that overall crude inventories declined by 3.28 million barrels last week, which has lifted prices slightly.
  • Despite their numbers, Russia and Saudi Arabia say they will set up a joint mechanism to govern OPEC and NOPEC cooperation will be set up by the end of the year, with talk at an energy conference in Baghdad suggesting that the supply freeze may have to be extended, instead of cut short.
  • The active US rig count unexpectedly declined by 2 last week, with a 7 site drop in oil rigs, bringing the overall total to 979 sites.
  • Crude price outlook: Although concerns over geopolitical and trade spats will cap gains, a more optimistic sentiment this week should see Brent trade at US$68/b and WTI at US$64/b. The new Shanghai crude contract will be in line with WTI prices.


Headlines of the week

Upstream

  • The new Shanghai crude futures contract is attaining benchmark status faster than expected, as Unipec – Sinopec’s trading arm – inked a one-year deal to purchase Middle Eastern crude from a ‘western oil major’ based on the Shanghai crude contract, displacing the Dubai and Oman markers.
  • Just as its fuel retail business is attracting foreign investment, almost half of 35 shallow water blocks offered by Mexico have been awarded, with European majors like Total, Eni and Repsol being the major winners.
  • Repsol has officially declared force majeure over the US$2 billion Ca Rong Do development, as Vietnam capitulates to Chinese pressure.
  • Reliance’s exit from US shale plays continues as its sold shale assets to Sundance Energy for US$100 million, including some Eagle Ford sites.
  • ExxonMobil emerged with eight blocks from Brazil’s recent offshore block auction – either alone or in partnership – with interest in the pre-salt concessions more than doubling the government’s estimates.
  • Iraq will be holding an oil and gas field auction for 11 sites on April 15, attracting major interest from ExxonMobil, Total and Lukoil.
  • Apache has made a ‘significant’ new discovery in Block 9/18a Area-W in the UK North Sea, with Graten possibly have 10 million barrels of light oil.


Downstream

  • India’s BPCL has announced plans to build a US$3 billion petrochemical plant in Mumbai, having purchased 202 hectares of land in March. The petchem complex will be integrated with its 240 kb/d Mumbai refinery.
  • The RAPID refinery in Johor is finally getting off the ground, as Saudi Aramco finalised its deal to buy a US$7 billion stake in the project and supply an initial 50% of its crude, with an option to rise to 70%.
  • The Trump administration is moving to reverse Obama-era fuel efficiency regulations for cars and light trucks, arguing that the Environmental Protection Agency targets were ‘too aggressive’.
  • Iraq is looking into building crude oil storage facilities in Japan and South Korea to increase sales to East Asia, following the example of Aramco.
  • Adnoc has signed two 3-year deals with Japan’s Idemitsu Kosan and Thailand’s SCG Chemicals to deliver up to 1.5 mtpa of naphtha per year.


Natural Gas/LNG

  • Petronas is reviving its K5 sour gas project in Sarawak, which will serve as a pilot project to test its carbon capture and storage technology.
  • China’s Sinopec has set out a plan to increase its natural gas supply capacity to some 60 bcm/y across its domestic output and imported volumes over the next 6 years, up from a current 27 bcm/y. Sinopec will also be doubling its LNG handling capacity to 26 mtpa.
  • Thailand’s PTTEP is now looking at a gas-to-power concept for the Aung Sinkha gas condensate field in Myanmar, part of the M3 gas block.
  • Iraq has officially enlisted Baker Hughes and General Electric to process natural gas extracted from the Nassiriya and Al Gharraf oilfields, which are currently being flared due to lack of gas capture facilities.

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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