Barely had Saudi Arabia and Russia managed to rein in crude’s rally with a hard-earned OPEC/non-OPEC deal to increase output by up to 1 million b/d, that US President Donald Trump upped the ante again.
The US would press its allies to cut their crude imports from Iran to zero by November 4 (when US sanctions against Iran’s oil sector take effect), a senior State Department official told reporters in a “background briefing” in Washington on June 26, bringing crude bulls back into play.
Though there was some back-pedalling by US officials subsequently, the market was left rattled, once again. The surprising US declaration raised fears that the few OPEC/non-OPEC producers that do have meaningful spare capacity, would run out of steam if called upon to compensate, in theory, 2.4 million b/d of Iranian crude disappearing from the market.
The suggestion that the US was not inclined to waive sanctions against buyers in exchange for them paring their purchase of Iranian crude, as it did during the 2012-2015 sanctions era, prompted the market to factor in a much bigger potential loss of Iranian barrels than the 0.5-1.0 million b/d range estimated in recent weeks.
The June 26 State Department posturing could turn out to be a classic bargaining tactic — get an upper hand by starting out with an extreme demand — as the US dispatches its envoys to Iran’s crude customers China, India and Turkey.
A State Department official Thursday softened the original message, saying that the US was “prepared to work with the countries that are reducing their imports on a case-by-case basis.”
Comments on the same day by Nikki Haley, US ambassador to the UN on a visit to India, also suggested a moderation in stance. In an interview with a local TV channel, Haley acknowledged that India “can’t change its relationship with Iran in a day,” but nonetheless, said the US was encouraging it to re-evaluate that relationship.
Discussions between the US and China over Iran sanctions are bound to be more complicated, given that the two economic powers are locked in an increasingly fierce trade battle, having announced tit-for-tat import tariffs against each other. Besides, Beĳing continues to stand by the 2015 Iran nuclear deal as one of its signatories.
China has another lever to pull — its substantial and rising purchases of US crude. The country, which is now neck and neck with Canada as the largest importer of US crude, has threatened a 25% import tariff on the product. That would effectively stem the flow of US crude into China by making it economically unviable.
Russia is also under US sanctions, but both China and India have continued their trade relations with that country.
While neither Chinese nor Indian refiners would want to risk secondary US sanctions, the Iran crude imports issue could get stuck in protracted diplomatic wrangling. That would keep the oil market on tenterhooks and the Iran fear premium intact in crude prices through the third quarter.
Something interesting to share?
Join NrgEdge and create your own NrgBuzz today
According to the Nigeria National Petroleum Corporation (NNPC), Nigeria has the world’s 9th largest natural gas reserves (192 TCF of gas reserves). As at 2018, Nigeria exported over 1tcf of gas as Liquefied Natural Gas (LNG) to several countries. However domestically, we produce less than 4,000MW of power for over 180million people.
Think about this – imagine every Nigerian holding a 20W light bulb, that’s how much power we generate in Nigeria. In comparison, South Africa generates 42,000MW of power for a population of 57 million. We have the capacity to produce over 2 million Metric Tonnes of fertilizer (primarily urea) per year but we still import fertilizer. The Federal Government’s initiative to rejuvenate the agriculture sector is definitely the right thing to do for our economy, but fertilizer must be readily available to support the industry. Why do we import fertilizer when we have so much gas?
I could go on and on with these statistics, but you can see where I’m going with this so I won’t belabor the point. I will leave you with this mental image: imagine a man that lives with his family on the banks of a river that has fresh, clean water. Rather than collect and use this water directly from the river, he treks over 20km each day to buy bottled water from a company that collects the same water, bottles it and sells to him at a profit. This is the tragedy on Nigeria and it should make us all very sad.
Several indigenous companies like Nestoil were born and grown by the opportunities created by the local and international oil majors – NNPC and its subsidiaries – NGC, NAPIMS, Shell, Mobil, Agip, NDPHC. Nestoil’s main focus is the Engineering Procurement Construction and Commissioning of oil and gas pipelines and flowstations, essentially, infrastructure that supports upstream companies to produce and transport oil and natural gas, as well as and downstream companies to store and move their product. In our 28 years of doing business, we have built over 300km of pipelines of various sizes through the harshest terrain, ranging from dry land to seasonal swamp, to pure swamps, as well as some of the toughest and most volatile and hostile communities in Nigeria. I would be remiss if I do not use this opportunity to say a big thank you to those companies that gave us the opportunity to serve you. The over 2,000 direct staff and over 50,000 indirect staff we employ thank you. We are very grateful for the past opportunities given to us, and look forward to future opportunities that we can get.
Headline crude prices for the week beginning 15 July 2019 – Brent: US$66/b; WTI: US$59/b
Headlines of the week
Unplanned crude oil production outages for the Organization of the Petroleum Exporting Countries (OPEC) averaged 2.5 million barrels per day (b/d) in the first half of 2019, the highest six-month average since the end of 2015. EIA estimates that in June, Iran alone accounted for more than 60% (1.7 million b/d) of all OPEC unplanned outages.
EIA differentiates among declines in production resulting from unplanned production outages, permanent losses of production capacity, and voluntary production cutbacks for OPEC members. Only the first of those categories is included in the historical unplanned production outage estimates that EIA publishes in its monthly Short-Term Energy Outlook (STEO).
Unplanned production outages include, but are not limited to, sanctions, armed conflicts, political disputes, labor actions, natural disasters, and unplanned maintenance. Unplanned outages can be short-lived or last for a number of years, but as long as the production capacity is not lost, EIA tracks these disruptions as outages rather than lost capacity.
Loss of production capacity includes natural capacity declines and declines resulting from irreparable damage that are unlikely to return within one year. This lost capacity cannot contribute to global supply without significant investment and lead time.
Voluntary cutbacks are associated with OPEC production agreements and only apply to OPEC members. Voluntary cutbacks count toward the country’s spare capacity but are not counted as unplanned production outages.
EIA defines spare crude oil production capacity—which only applies to OPEC members adhering to OPEC production agreements—as potential oil production that could be brought online within 30 days and sustained for at least 90 days, consistent with sound business practices. EIA does not include unplanned crude oil production outages in its assessment of spare production capacity.
As an example, EIA considers Iranian production declines that result from U.S. sanctions to be unplanned production outages, making Iran a significant contributor to the total OPEC unplanned crude oil production outages. During the fourth quarter of 2015, before the Joint Comprehensive Plan of Action became effective in January 2016, EIA estimated that an average 800,000 b/d of Iranian production was disrupted. In the first quarter of 2019, the first full quarter since U.S. sanctions on Iran were re-imposed in November 2018, Iranian disruptions averaged 1.2 million b/d.
Another long-term contributor to EIA’s estimate of OPEC unplanned crude oil production outages is the Partitioned Neutral Zone (PNZ) between Kuwait and Saudi Arabia. Production halted there in 2014 because of a political dispute between the two countries. EIA attributes half of the PNZ’s estimated 500,000 b/d production capacity to each country.
In the July 2019 STEO, EIA only considered about 100,000 b/d of Venezuela’s 130,000 b/d production decline from January to February as an unplanned crude oil production outage. After a series of ongoing nationwide power outages in Venezuela that began on March 7 and cut electricity to the country's oil-producing areas, EIA estimates that PdVSA, Venezuela’s national oil company, could not restart the disrupted production because of deteriorating infrastructure, and the previously disrupted 100,000 b/d became lost capacity.