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Last Updated: July 13, 2018
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Market Watch

Headline crude prices for the week beginning 9 July 2018 – Brent: US$78/b; WTI: US$73/b

  • Tensions over the looming sanctions on Iran – and the US appearing to take a hardline stance over waivers and exemptions – continue to keep crude prices high, supported by the outage in Canadian Syncrude production and falling Libyan production.
  • The trade spat between China and the US has now led to President Trump proposing tariffs on an additional US$200 billion worth of Chinese imports. China has threatened to retaliate, suggesting a 25% duty on US energy imports, a development that would rattle Trump’s key supporters.
  • South Korean and European refiners have already reduced their purchases to virtually zero, as Iran threatens to blockade the Strait of Hormuz in retaliation to US trade sanctions while the EU tries to save the Iranian nuclear deal.
  • As President Trump continues to complain over high oil prices on Twitter, publicly blaming OPEC and Saudi Arabia, Iran has taunted Trump by saying that his tweets have ‘added US$10 to oil prices’, requesting him to stop.
  • Libyan production is also fast becoming a concern, adding to OPEC’s headache with Venezuela and Iran, with output in Libya halving over the last five months to 527,000 b/d despite attempts to boost output.
  • The outage at the Syncrude plant in Alberta will continue through July, keeping the Brent-WTI differential narrow.
  • US drillers snapped two weeks of losses to add five rigs – all oil – to the active rig count, as drillers responded to stronger price signals.
  • Crude price outlook: The current range of factors keeping crude prices tight will continue, with some possible downward correction this week. We expect Brent to range in US$75-76/b and US$71-72/ for WTI.

Headlines of the week

Upstream

  • Chevron is looking to exit the UK Central North Sea, beginning the process of ‘marketing its assets’ including the Alba, Alder, Britannia, Captain, Elgin/Franklin, Erskine and Jade fields.
  • BP and its partners have sanctioned startup of the Shah Deniz 2 gas development in Azerbaijan, adding 16 bcm/y of capacity to total production.
  • BP will buy ConocoPhillips’ 16.5% stake in the UK North Sea Clair field, increasing its stake to 45.1%. In Alaska, BP has sold its 39.2% interest in the North Slope Greater Kuparuk Area to the Kuparuk Transportation Company.
  • China’s CNPC and Abu Dhabi’s ADNOC will be signing an agreement to cooperate on oil and gas exploration and refining projects later this month.
  • CNOOC has signed a new PSC for the Weizhou 10-3W oilfield and Block 22/04 in the South China Sea’s Beibu Gulf Basin with Roc Oil and Smart Oil.
  • In an effort to boost domestic output, Russia’s parliament is moving to approve a new profit-based taxation scheme for a select number of oilfields that could conceivably boost production by some 18,000 b/d.

Downstream

  • The Hovensa refinery in St. Croix, US Virgin Islands will be restarted, after being idled in 2012, in a US$1.4 billion plan to produce low-sulfur fuels and fill the growing hole in Caribbean refining created by PDVSA’s implosion.
  • Ineos has approved the first new ethane cracker in Europe for two decades, investing €2.7 billion in a cracker and PDH unit in Northern Europe to take advantage of US shale gas economics and support its olefins business.
  • With Egypt completing its natural gas revolution, the industry is moving further downstream as Carbon Holding is looking to start the US$10.9 billion Tahrir Petrochemicals Company complex in the Suez Canal Economic Zone.
  • The US$10 billion Dangote refinery being developed in Nigeria is now planning for an early-2020 start, with a capacity now planned for 650 kb/d.
  • Pemex has sold its 44.08% stake in chemical firm Petroquimica Mexicana de Vinilo to Mexichem for US$178.7 million.
  • Petronas has bought its first ever US cargo – 1 million barrels of Mars crude – to arrive at its Melaka refinery in September, replacing Middle Eastern crude.

Natural Gas/LNG

  • Gas production at Eni’s Sankofa field in Ghana’s Offshore Cape Three Points project has started, providing 180 mmscf/d for at least 15 years.
  • Eni has also started output at the Bahr Essalam Phase 2 project in Libya, which will raise production potential by 400 mmscf/d to 1.1 MMscf/d.
  • Vandalism has halted construction on ExxonMobil’s Angore gas pipeline connecting to the Hides gas plant in the Papua New Guinea highlands.
  • Japan’s JERA has purchased the LNG business of France’s EDF Trading, bulking out its energy trading unit in Asia and expanding into Europe.
  • The 65km, US$10 billion pipeline connecting Jordan with Israel’s Leviathan field is now set for completion at the end of 2019.
  • Equinor’s US$954.46 million plan to develop gas reserves in western Troll should support output at the field until about 2060, according to Norway.
  • Sonatrach has raised output at the Alrar gas field near Libya from 16 mcm/d to 24.7 mcm/d, the latest in an output expansion drive at existing fields.
  • Pertamina has decided to axe its planned land-based LNG receiving terminal in Bojonegara, near Jakarta, citing declining domestic gas consumption.

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Saudi Aramco Moves Into Russia’s Backyard

International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.

First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.

For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.

The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.

So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.

For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.

How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.

End of Article

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Market Outlook:

-       Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b

-       Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption

-       This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule 

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