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Last Updated: May 17, 2018
Business Trends

Market Watch

Headline crude prices for the week beginning 14 May 2017 – Brent: US$77/b; WTI: US$71/b

  • US President Donald Trump’s decision to withdraw from the nuclear deal with Iran continues to rattle the markets, with a six-month deadline issued for companies to wind down purchases of Iranian crude.
  • Unlike previous sanctions, this is the US acting as a lone wolf, with the EU already considering moves to nullify the effects of the sanctions on its firms, and both China and India apparently committed to Iranian volumes.
  • Iran appears to be blithely ignoring the new sanctions, readying first commercial exports of a new crude grades – West Karoun.
  • The risk of the row escalating has pushed prices up, with Brent looking like it could challenge US$80/b if it continues. The Brent-WTI spread is also widening, given that Brent is the global benchmark and widely used East of Suez as a pricing basis.
  • With prices approaching US$80/b, some analysts have warned of the higher prices causing some demand destruction. Strong demand, particularly from Asia, has underpinned crude price recoveries this year.
  • OPEC’s internal data shows that the global oil glut has been virtually eliminated, but will continue the supply freeze. This points to divergence in OPEC, with some members like Saudi Arabia gunning for higher prices while others believing US$60/b is a more stable equilibrium.
  • With the potential loss of Iranian volumes from the global market, some suppliers are jostling for position. Even Saudi Arabia, so committed to its OPEC production freeze, has raised the prospect of raising its output.
  • Adherence to the OPEC-NOPEC production freeze deal also appears to be slipping, as some members take advantage of the Iranian (and Venezuelan) distraction.
  • In the US, WTI prices exceeding US$70/b should trigger a new slew of shale output, but Centennial Resource Development CEO Mark Papa says US shale producers are unlikely to boost output, having been burnt from previous experiences.
  • However, oil and gas drilling permits in Texas were issued at rates 34% higher in April year-on-year, while 10 new oil rigs entered service last week, bringing the active oil rig total to 844 and the total rig count to 1,045.
  • Crude price outlook: Turmoil over the Iranian nuclear deal situation – and now new belligerence from North Korea – should keep prices high. Expect Brent to trade at US$78-80/b and WTI/Shanghai to US$70-72/b.

Headlines of the week


  • Shell will be selling its stake in oil sands producer Canadian Natural Resources for US$3.3 billion, as it refocuses from dirty oil to clean energy.
  • Eni has completed its ramp-up project at Angola’s Ochigufu field, bringing output of Block 15/06 above 150,000 b/d and in line with its plan to add some 54,000 b/d to the block’s output by 2019.
  • Lukoil and Iraq’s Basra Oil Company will collaborate to lift output at the West-Qurna 2 field to 480,000 b/d by 2020 and to 800,000 b/d by 2025.
  • Completion of a new oil processing facility has lifted production at Eni’s Zubair field in south Iraq by 50,000 b/d to 475,000 b/d. Three additional facilities are planned, which will bring output up to 625,000 b/d.
  • Shell is aiming to begin offshore drilling in Mexico in late 2019 or 2020, after it was awarded nine blocks in the recent deepwater auction.
  • American independent Apache is aiming to fast-track its Garten oil discovery in the North Sea, linking it to the Beryl Alpha platform.
  • The shortlist is out for Thailand’s upcoming upstream auction, with PTTEP, Chevron, Total, Mubadala and OMV among those vying for the prodigious Bongkot and Erawan offshore gas fields.


  • ExxonMobil has sold its 190 kb/d Augusta refinery in Italy, three fuel terminals in Augusta, Palermo and Naples, and associated pipelines to Algeria’s Sonatrach, but will retain its Italian based oils operations.
  • Total and Sonatrach will build a US$1.5 bn polypropylene plant in Arzew, Algeria, designed for 550kt of polypropylene and 650kt of propane.
  • SABIC is aiming to purchase a 50% stake in the US$4.6 billion petrochemical plant planned by ONGC in Western Gujarat.
  • Sinopec has begun construction of a 4.2 mtpa catalytic cracking unit at its Sino-Kuwait Guangdong refinery, expected to be completed in September.
  • South Korean firms Lotte Chemical and Hyundai Oilbank are planning a US$2.5 billion, 1.15 mtpa petchems plant fed by heavy fuel oil in Daesan.
  • Saudi Arabia and Sudan are discussing a five-year oil deal, where Saudi Arabia will supply some 1.8 million tons of oil products to Sudan per year.
  • Total will be selling its fuel retail business in Haiti to Bandari Corporation, consisting of 92 service stations and fuel trading operations.
  • In an attempt to appease both Big Oil and Big Corn, the Trump administration is considering allowing exported ethanol volumes to count towards America’s national biofuels mandate.

Natural Gas/LNG

  • Eni has started up its third production unit at its Zohr project in Egypt, increasing installed capacity to 1.2 bcf/d. This follows the successful startup of the second unit last month, with output now at 1.1 bcf/d.
  • After multiple delays, Inpex is finally set to launch its Ichthys LNG project in Australia, with a target start date of end May 2018.
  • SDX Energy has announced a conventional natural gas discovery at the LMS-1 exploration wells in Morocco’s Lalla Mimouna, which has ‘significantly exceeded’ pre-drill estimates.
  • Total and Oman have agreed to jointly develop an integrated gas project in Oman aimed to developing and establishing an LNG bunkering service.

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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