Russia and Saudi Arabia were coming around to the idea Friday that they need to ease the OPEC/non-OPEC production cuts, which have gone overboard in recent months, removing much more than the 1.72 million b/d of supply they had pledged to curb under the November 2016 agreement.
There was no formal statement by the time we closed this report Friday evening in Asia, but there was talk of putting 1 million b/d more into the market to cool overheated crude prices, according to media reports citing sources privy to the discussions taking place between energy ministers on the sidelines of the St. Petersburg International Economic Forum in Russia.
The proposed addition of 1 million b/d would be a fair correction, in line with our estimate that the market has been deprived of as much as 3 million b/d of supply from the 22 OPEC/non-OPEC producers in the reduction pact in recent months.
Benchmark crude futures, which had closed more than $1/barrel lower Thursday on talk of OPEC looking to ease supply, plummeted by another $2/barrel on Friday’s headlines out of St. Petersburg. Brent, which had pierced the $80/barrel psychological mark a few times during intraday trading over the past fortnight, had slid below $77, while WTI was changing hands under $69 as of 1300 GMT.
Russian Energy Minister Alexander Novak took the lead Thursday, telling reporters that the supply restrictions could be unwound gradually, though the output cut deal should remain in place. Novak said he and Saudi Arabia had a common position on the future of the deal, suggesting an amicable meeting of the minds between the de facto leaders of the OPEC and non-OPEC blocs.
Novak, Saudi Energy Minister Khalid Al-Falih, UAE Energy Minister and current OPEC president Suhail al-Mazrouei, and OPEC secretary-general Mohammad Barkindo were scheduled to hold discussions on the global oil markets in St. Petersburg.
The leaders have less than four weeks to chart a new course, which would be formally adopted at the OPEC/non-OPEC ministerial meeting in Vienna on June 22. Deciding to release more barrels into the market might be the easier part. Agreeing on how exactly it will be done could prove to be far more difficult.
A major reason behind the OPEC/non-OPEC supply cuts reaching far deeper than agreed over the past few months has been the inability of several producers in both groups to fulfill their agreed quotas. The most prominent OPEC member with production woes is Venezuela, which languished around 460,000 b/d below its quota of 1.972 million b/d on average in the first four months of this year. Angola has also been struggling to maintain its output, falling short of its target by around 160,000 b/d in April, according to the latest OPEC data.
Libya and Nigeria, which do not have production limits, continue to be plagued by outages from militant attacks on infrastructure. The only voluntary overshooting of the targeted cut within OPEC has been by Saudi Arabia, which could be corrected, but that would put only about 100,000 b/d more into the market.
Within the non-OPEC group of 10 collaborators, Russia has the capacity to raise output by the 300,000 b/d that it took off the market gradually starting in 2017. However, at least three major producers in this bloc — Mexico, Kazakhstan and Azerbaijan — have under-delivered against their targets in recent months, causing a collective shortfall of nearly 730,000 b/d in March, according to the latest monthly data available. Of these, Kazakhstan is expected to catch up to its ceiling in the second half of this year, but not Mexico and Azerbaijan.
This means Russia and Saudi Arabia will have to do most of the heavy lifting to put more barrels into the market. That would mark a major departure from OPEC’s policy of apportioning any agreed reductions or additions in supply to all members in proportion to their share of the group’s overall production.
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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:
Headline crude prices for the week beginning 8 July 2019 – Brent: US$64/b; WTI: US$57/b
Headlines of the week
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.
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.
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.