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Last Updated: May 24, 2018
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Market Watch

Headline crude prices for the week beginning 21 May 2018 – Brent: US$79/b; WTI: US$72/b

  • Oil remains within touching distance of the US$80/b level amid the Iranian situation, as well as Venezuela.
  • The US has issued an executive order to restrict Venezuela’s ability to liquidate state assets and additional sanctions have been mooted, which could cripple the country’s already waning crude output.
  • The move was in response to the re-election of President Nicolas Maduro, in an election denounced as a farce and ‘cementing autocracy’.
  • Efforts to save the Iranian nuclear deal on the EU side are continuing, but most international firms are taking a cautious approach to the new US sanctions, with Total stating that it ‘cannot risk’ additional investment.
  • With oil at its highest levels since 2014, the IEA has warned of demand destruction if prices continue at their current levels.
  • However, Saudi Arabia claims that it is consulting with other producers within and outside of OPEC to ensure there is enough supply to support economic growth and to ‘coordinate global action to ease global market anxiety’ if necessary.
  • The longer term outlook sees crude oil prices maintaining their strength into the early 2020s, with BMI Research expecting Brent to average in the US$80-90/b range.
  • This view seems to have been corroborated by a jump in the five-year Brent forward price, which rose to the mid-US$60/b level, after being stuck at US$55/b for the past 18 months.
  • American oil drillers took a pause in adding new units, with the US oil rig count holding steady last week after six consecutive weeks of gains, with the current total standing at 844 and 4 gains in the Permian offset by losses elsewhere.
  • Crude price outlook: Continued turmoil over the Iranian nuclear deal situation and the new uncertainty arising out of Venezuela should keep prices at their current level. Expect Brent to trade at US$78-80/b and WTI/Shanghai to US$71-73/b.

Headlines of the week

Upstream

  • Rosneft has begun drilling a new production well offshore in Vietnam, brushing off concerns that it falls within China’s red-dashed line that recently scuppered a project by Spain’s Repsol.
  • BP is planning to cut some 3% of its upstream jobs by the end of 2018, part of a global restructuring move in its upstream business.
  • Total may be forced to pull out of the South Pars 11 project in Iran, stating that it ‘cannot risk investing in Iran’ unless a waiver can be secured.
  • BP and ConocoPhillips are reportedly in discussions for an asset swap that would see BP gain some assets in the UK North Sea (including the Clair Field), and ConocoPhillips gaining sites in Alaska.
  • The Wintershall Norge consortium for the North Sea Nova field has submitted a US$1.2 billion development plan to the Norwegian Ministry of Petroleum and Energy, which would tie back to the Gjøa platform.
  • Ghana will award six new upstream oil blocks offshore its western coast this year, and an additional three next year.

Downstream

  • Iran has reportedly agreed to build a new oil refinery for Sri Lanka, to replace its ageing 50 kb/d site, which is now some 50 years old.
  • The planned US$44 billion mega-refinery between the Indian state oil firms and Saudi Aramco may be hitting a crucial snag, as thousands of farmers at the planned site are refusing to surrender their land.
  • CNPC expects its 200 kb/d Huabei Petrochemical refiner to begin operating this October, supplying the Jing Six-quality gasoline to Beijing.
  • Qatar is inviting international firms to partner with Qatar Petroleum to build a 1.6 mtpa ethylene plant at the Ras Laffan Industrial City.
  • ExxonMobil will be upgrading the coking unit at its 362 kb/d Beaumont refinery in Texas when the site is shut down for maintenance next month.
  • Hyundai Oilbank will be expanding its heavy oil upgrading capacity during August routine maintenance at the 390 kb/d Daesan refinery.
  • Court orders have allowed ConocoPhillips to seize oil products owned by PDVSA from the Isla refinery in Curacao, in an effort to collect a US$2 billion arbitral award from the 2007 nationalisation of Venezuelan assets.
  • With key state elections over, Indian state refiner have now resumed raising retail gasoline and diesel prices after a three-week hiatus, in response to surging global crude prices.

Natural Gas/LNG

  • China’s ENN is readying the first private LNG import terminal in the country, seeking a cargo for delivery in mid-June to the Zhejiang terminal.
  • Germany has brushed aside American concerns over the Nord Stream 2 pipeline from Russia, underscoring the importance of the project to Germany despite some objection from other EU countries.
  • In a curious twist of fate, Australia is now turning to Japan to aid it in securing LNG volumes for import to ease the chronic domestic supply crunch on Australia’s populous east coast states.
  • Bangladesh has ended talks with Trafigura for a small floating LNG import terminal, while moving ahead with Gunvor on a separate project.

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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