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Last Updated: April 26, 2018
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Market Watch

Headline crude prices for the week beginning 23 April 2017 – Brent: US$74/b; WTI: US$68/b

  • Geopolitical tensions continue to price crude oil at a premium; after US-led military action in Syria in response to alleged chemical weapons attacks and missile attacks from Iranian-backed rebels in Yemen towards Saudi Arabia boosted prices to their highest level since December 2014.
  • Reports of explosions and gunshots outside Saudi Arabian King Salman’s palace over the weekend also spooked talk of attacks and coups, contributing to a fragile atmosphere in the Middle East.
  • French President Emmanuel Macron is attempting to coax US President Donald Trump into preserving the 2015 nuclear deal with Iran, which mollified the market slightly, but Trump continues to show exasperation.
  • Additional positive sentiment came from OPEC, as a joint finding by OPEC and its NOPEC allies states that the global oil glut has been virtually eliminated, with the original target of the pact in sight.
  • There are signs that the successful OPEC-NOPEC cooperation has fuelled the desire of OPEC to expand cooperation, with UAE Oil Minister Suhail Mohamed Al Mazrouei stating ‘more countries were needed in the pact’ to ensure the burden is spread more evenly.
  • Even as OPEC mulled further cooperation and an extension of the supply cuts, President Trump slammed the cartel for inflating oil prices – an unusual response given that higher prices have been benefited American shale industry.
  • American stockpiles of crude and oil products declined across-the-board according to the EIA, while US crude production inched up by 15,000 barrels/day to 10.5 mmb/d.
  • Five new oil rigs entered service in the US last week, bringing the total active rig count up to 1013, one of many oil industry metrics that are returning to pre-2014 crisis levels.
  • Crude price outlook: OPEC’s seeming willingness to continue its supply pact might signal to the market that higher prices are acceptable, but the real variable is geopolitical sentiment. We expect Brent to move down to US$72/b and WTI/Shanghai to US$66/b.


Headlines of the week

Upstream

  • The Indonesian government has transferred rights to eight oil field blocks scheduled to expire to Pertamina, meant to ‘compensate’ the firm for any profitability drag by the government’s fuels subsidy policy. The oil blocks in question were formerly held by Chevron, CNOOC, Total and Inpex.
  • The Philippines is aiming to have a framework for joint oil and gas cooperation with China in the South China Sea by the end of this year, as it faces the prospect of dwindling domestic production.

Downstream

  • The refining crunch at PDVSA is getting worse, as data from the Venezuelan state oil firm shows that its domestic refineries – including the Isla refiner in Curacao – operated at only 31% in Q118.
  • Zambia has reportedly shortlisted five companies, including Glencore and Sahara Energy Resources, to purchase a majority stake in the country’s sole 24 kb/d Indeni refinery.
  • Kazakhstan is looking to upgrade its refineries in a modernisation drive that will lower its fuel oil exports by 35% as it focuses on higher value products. Upgrades at the Pavlodar refinery have been completed, with the Atyrau and Shymkent refineries expected later this year.

Natural Gas/LNG

  • BP and Reliance has formally sanctioned development of the deepwater gas ‘Satellite cluster’ in India’s offshore Block KG D6, the second of three projects to be developed in the integrated KG D6 development.
  • LNG exports from PNG LNG has resumed after a devastating earthquake, with the first export cargo departing from Port Moresby.
  • Having found success elsewhere on the Mediterranean, Eni is now looking at spending ‘billions’ in Algeria over the next three years to expand gas production in partnership with Sonatrach.
  • Australia’s Northern Territory has lifted a two-year moratorium on fracking, potentially unlocking huge onshore shale gas reserves.
  • Eni is moving ahead with the offshore Merakes field in Indonesia after its development plan was approved by the country’s upstream watchdog.
  • Petronas has made its first LNG delivery to South Korea’s S-Oil under a 15-year, 700 mtpa contract.

Corporate

  • With Q1 earnings filtering in, Schlumberger’s reporting of an 88% rise in net profit points to a healthy season for the industry, particularly on the service side, with revenue also jumping by 52% to US$2.84 billion.
  • Indonesia has stepped into Pertamina affairs once again, removing Chief Executive Elia Massa Manik after a recent oil spill and slow progress on refinery development plans. Nicke Widyawati will assume temporary stewardship, as Manik leaves along with four other directors.
  • BP and Petrobras have signed an MoU to ‘explore areas of cooperation’, which will cover upstream, downstream, trading and low carbon plans both inside and outside of Brazil.
  • Total has purchased French power utility company Direct Energie, as it follows in Shell's footsteps to expand for an electric future.

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U.S. refineries running at near-record highs

U.S. gross refinery inputs

Source: U.S. Energy Information Administration, Weekly Petroleum Status Report

For the week ending July 6, 2018, the four-week average of U.S. gross refinery inputs surpassed 18 million barrels per day (b/d) for the first time on record. U.S. refineries are running at record levels in response to robust domestic and international demand for motor gasoline and distillate fuel oil.

Before the most recent increases in refinery runs, the last time the four-week average of U.S. gross refinery inputs approached 18 million b/d was the week of August 25, 2017. Hurricane Harvey made landfall the following week, resulting in widespread refinery closures and shutdowns along the U.S. Gulf Coast.

Despite record-high inputs, refinery utilization as a percentage of capacity has not surpassed the record set in 1998. Rather than higher utilization, refinery runs have increased with increased refinery capacity. U.S. refinery capacity increased by 862,000 barrels per calendar day (b/cd) between January 1, 2011, and January 1, 2018.

The record-high U.S. input levels are driven in large part by refinery operations in the Gulf Coast and Midwest regions, the Petroleum Administration for Defense Districts (PADDs) with the most refinery capacity in the country. The Gulf Coast (PADD 3) has more than half of all U.S. refinery capacity and reached a new record input level the same week as the record-high overall U.S. capacity, with four-week average gross refinery inputs of 9.5 million b/d for the week ending July 6. The Midwest (PADD 2) has the second-highest refinery capacity, and the four-week average gross refinery inputs reached a record-high 4.1 million b/d for the week ending June 1.

Gulf Coast and Midwest gross refinery inputs


U.S. refineries are responding currently to high demand for petroleum products, specifically motor gasoline and distillate. The four-week average of finished motor gasoline product supplied—EIA’s proxy measure of U.S. consumption—typically hits the highest level of the year in August. Weekly data for this summer to date suggest that this year’s peak in finished motor gasoline product supplied is likely to match that of 2016 and 2017, the two highest years on record, at 9.8 million b/d. The four-week average of finished motor gasoline product supplied for the week ending August 3, 2018, was at 9.7 million b/d.

U.S. distillate consumption, again measured as product supplied, is also relatively high, averaging 4.0 million b/d for the past four weeks, 64,000 b/d lower than the five-year average level for this time of year. In addition to relatively strong domestic distillate consumption, U.S. exports of distillate have continued to increase, reaching a four-week average of 1.2 million b/d as of August 3, 2018. For the week ending August 3, 2018, the four-week average of U.S. distillate product supplied plus exports reached 5.2 million b/d.

In its August Short-Term Energy Outlook (STEO), EIA forecasts that U.S. refinery runs will average 16.9 million b/d and 17.0 million b/d in 2018 and 2019, respectively. If achieved, both would be new record highs, surpassing the 2017 annual average of 16.6 million b/d.

August, 14 2018
Offshore discoveries in the Mediterranean could increase Egypt’s natural gas production


Egypt natural gas fields and select infrastructure

Natural gas production in Egypt has been in decline, falling from a 2009 peak of 5.8 billion cubic feet per day (Bcf/d) to 3.9 Bcf/d in 2016, based on estimates in BP’s Statistical Review of World Energy. The startup of a number of natural gas development projects located offshore in the eastern Mediterranean Sea near Egypt’s northern coast has significantly altered the outlook for the region’s natural gas markets. Production from these projects could offset the growing need for natural gas imports to meet domestic demand, according to the Egyptian government.

The West Nile Delta, Nooros, Atoll, and Zohr fields were fast-tracked for development by the Egyptian government and have begun production, providing a substantial increase to Egypt’s natural gas supply. The Zohr field’s estimated recoverable natural gas reserves of up to 22 trillion cubic feet (Tcf) would make it the largest natural gas field in the Mediterranean, based on company reports gathered by IHS Markit. The Zohr field is currently producing 1.1 billion cubic feet (Bcf) per day and is expected to increase to 2.7 Bcf per day by the end of 2019.

Natural gas production in Egypt has declined largely as a result of relatively low investment, according to Business Monitor International research. Meanwhile, domestic demand for energy has grown, driven by economic growth, increased natural gas use for power generation, and energy subsidies. With the exception of small declines in 2013 and 2014, natural gas consumption has increased every year since at least 1990, and it is up 19% from 2009, when domestic production peaked.

Faced with growing demand and declining supply, Egypt had to close its liquefied natural gas (LNG) export terminals to divert supply to domestic consumption. Egypt became a net natural gas importer in 2015, and although LNG exports resumed in 2016, Egypt’s net imports of natural gas continued to increase.

Egypt dry natural gas production, consumption, and trade

Source: U.S. Energy Information Administration, based on 2017 BP Statistical Review of World Energy

The Middle East Economic Survey (MEES) indicated that Egypt will still need to import small volumes of natural gas in the coming years, particularly for the power sector. MEES reported that the state-owned Egyptian Electricity Holding Company (EEHC) awarded contracts that would add 25 gigawatts (GW) to total generation capacity, 70% of which would come from natural gas-fired projects. Three combined-cycle natural gas turbine power plants with a total capacity of 14.4 GW will collectively require as much as 2.0 Bcf/d of natural gas when they become fully operational in 2020.

August, 15 2018
US Energy Exports Spared the Wrath of the Middle Kingdom

A threat. And then a backing off. As the trade war between the US and China escalates, both countries are moving into politically sensitive areas as they ratchet up the scale of the standoff. When the US first introduced tariffs earlier this year, they were limited to washing machines and solar panels. Then as President Trump moved into a broader range of goods, China responded with tariffs that were designed to maximise impact on Trump’s voter base. That meant the agriculture heartlands of the US in the Midwest where soybeans are grown and shipped in record numbers to China last year to feed its massive demand for animal feed and edible oils. Last week, the US imposed tariffs on an additional US$16 billion worth of Chinese imports, targeting technological sectors, and of course, China replied. The list included for the first time US crude exports, demonstrating China’s willingness to hit one of America’s most vibrant industries. And then, a few days later, it backed down, removing crude oil from the list. 

What happened?

Chatter among the industry suggests that Sinopec had lobbied for the removal. Even though growth has slowed down nominally, China’s fuel demand is still growing massively on an absolute level. In a year where Iranian crude exports are being squeezed by new American sanctions, China needs oil. It may have defied a request by the US to completely halt Iranian exports, but it has also promised not to ramp up orders as well. China imported some 650,000 b/d of crude from Iran last year. To replace even some of that will be challenging without tapping into growing American production, particularly since Sinopec and Petrochina are in a tiff with Saudi Aramco over prices, and the government wants to diversify its crude sources away from overreliance on Russia.

So crude was removed from the tariff list. Leaving only refined fuels and petrochemical feedstocks – tiny in demand except for propane, which has become a key feedstock for China’s petrochemicals producers through PDH plants. But since President Trump has mooted more tariffs, this time on US$200 billion worth of imports, China may have backpedalled for strategic reasons this time – Sinopec’s trading arm had suspended all US purchases until the ‘uncertainty passed’- but can still wield its potent weapon in the future. And not just on crude, but tariffs on LNG as well. The latter is more sensitive, given that many of the LNG projects springing up along the Gulf Coast are depending on projected Chinese demand. Cheniere just signed a 25-year LNG deal with CNPC and is hoping for more to come. That hope burns bright for now, but if the trade war continues escalating at its current pace, the forecast could get a lot cloudier. For now, US energy exports have been spared from the wrath of the Middle Kingdom. Enjoy it while it lasts.

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August, 14 2018