The world oil order is becoming dangerously more polarised and politicised. Fresh battle lines are being drawn across geographies and long-established political and commercial relationships are being dramatically redefined.
While a strong underlying bullishness from tightening global oil supply and thinning spare capacity persists, the bears are looking at potential economic headwinds from trade battles erupting almost daily between the US and the rest of the world, and starting to unpick the oil demand growth story.
Even the unprecedented OPEC/non-OPEC cohesion of the past 18 months has wobbled. Under rising pressure to cool down prices, the group of 24 has split into the haves and have-nots of sustainable production capacity.
Iran and Venezuela asked that OPEC formally denounce US sanctions against them at its ministerial meeting in Vienna June 23, but failed to have their way.
US President Donald Trump once again demanded that OPEC act to cool down oil prices in a tweet on July 4, this time pointing out that the US “defends many of their [OPEC’s] members for very little $’s.”
Oil is also in the crosshairs of tit-for-tat tariffs between the US and China that took effect just past midnight Washington time, 12 noon Beĳing time, on July 6. Though US crude is not on the initial list of the $34 billion worth of goods on which China imposed 25% retaliatory import tariffs, it has been included in the second round of an additional $16 billion worth of products that will attract import duty, possibly in two weeks’ time. That would snuff out US crude exports to its second largest market after Canada.
In March, the US levied 25% duty on steel imports that not only hurt China, but also its own oil industry, which needs the metal for new pipelines being built to carry the growing tight oil output to domestic refiners and export terminals.
The US-China face-off is drawing Venezuela and Iran, major oil producers targeted by US sanctions, closer into Beĳing’s orbit. The China Development Bank this week threw Venezuela’s embattled state oil company PDVSA a $5- billion loan lifeline.
Beĳing is digging in its heels over US demands to distance itself from Iran. Not only is China Iran’s largest crude buyer, but it is also a major investor in various sectors, including the giant South Pars gas development project.
Neighbouring South Korea, in contrast, Friday said it was suspending all crude loadings from Iran starting this month, as it negotiates a sanctions waiver with the US. It imported about 315,000 b/d of Iranian crude over January-April.
China’s relationship with Saudi Arabia, its largest crude supplier for decades until it was displaced by Russia two years ago, is under some strain. In a surprisingly audacious move, state trading giant Unipec slashed its term Saudi crude imports by 40% over May-July and went on to announce it publicly. It can’t be a mere coincidence that China is deepening its ties with Iran while re- evaluating its equation with the latter’s political arch-rival, Saudi Arabia.
Saudi Aramco this week announced a change in its decades-old crude pricing marker for term sales into Asia to an average of Platts Dubai assessments and Dubai Mercantile Exchange’s Oman quotes, starting from October. The DME Oman component replaces Platts Oman. Aramco said it was “rebalancing [its] Asia marker to ensure that it is underpinned by a broad and vibrant marketplace.” Could it be that the Saudi switch was partly aimed at countering Chinese pressure on Middle Eastern producers to use the recently launched Shanghai crude futures contract for pricing their crude? It’s a possibility.
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This winter, natural gas prices have been at their lowest levels in decades. On Monday, February 10, the near-month natural gas futures price at the New York Mercantile Exchange (NYMEX) closed at $1.77 per million British thermal units (MMBtu). This price was the lowest February closing price for the near-month contract since at least 2001, in real terms, and the lowest near-month futures price in any month since March 8, 2016, according to Bloomberg, L.P. and FRED data.
In addition, according to Natural Gas Intelligence data, the daily spot price at the Henry Hub national benchmark was $1.81/MMBtu on February 10, 2020, the lowest price in real terms since March 9, 2016. Henry Hub spot prices have ranged between $1.81/MMBtu and $2.84/MMBtu this winter heating season (since November 1, 2019), generally because relatively warm winter weather has reduced demand for natural gas for heating. Natural gas production growth has outpaced demand growth, reducing the need to withdraw natural gas from underground storage.
Dry natural gas production in January 2020 averaged about 95.0 billion cubic feet per day (Bcf/d), according to IHS Markit data. IHS Markit also estimates that in January 2020 the United States saw the third-highest monthly U.S. natural gas production on record, down slightly from the previous two months.
IHS Markit estimates that U.S. natural gas consumption by residential, commercial, industrial, and electric power sectors averaged 96 Bcf/d for January, which was about 4.4 Bcf/d less than the average for January 2019, largely because of decreases in residential and commercial consumption as a result of warmer temperatures.
However, IHS Markit estimates that overall consumption of natural gas (including feed gas to liquefied natural gas (LNG) export facilities, pipeline fuel losses, and net exports by pipeline to Mexico) averaged about 117.5 Bcf/d in January 2020, an increase of about 0.2 Bcf/d from last year. This overall increase is largely a result of an almost doubling of LNG feed gas to about 8.5 Bcf/d.
Because supply growth has outpaced demand growth, less natural gas has been withdrawn from storage withdrawals this winter. Despite starting the 2019–20 heating season with the third-lowest level of natural gas inventory since 2009, by January 17, 2020, working natural gas inventories reached relatively high levels for mid-winter. The U.S. Energy Information Administration’s (EIA) data on natural gas inventories for the Lower 48 states as of February 7, 2020, reflect a 215 Bcf surplus to the five-year average. In EIA’s latest short-term forecast, more natural gas remains in storage levels than the previous five-year average through the remainder of the winter.
According to the National Oceanic and Atmospheric Administration (NOAA), January 2020 was the fifth-warmest in its 126-year climate record. Heating degree days (HDDs), a temperature-based metric for heating demand, have been relatively low this winter, which is consistent with a warmer winter. During some weeks in late December and early January, the United States saw 25% to 30% fewer HDDs than the 30-year average. This winter, through February 8, residential natural gas customers in the United States have seen 11% fewer HDDs than the 30-year average.
Source: U.S. Energy Information Administration, based on National Oceanic and Atmospheric Administration Climate Prediction Center data
Headline crude prices for the week beginning 10 February 2020 – Brent: US$53/b; WTI: US$49/b
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