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Last Updated: July 20, 2018
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Market Watch

Headline crude prices for the week beginning 16 July 2018 – Brent: US$71/b; WTI: US$68/b

  • Signs that crude oil supply could expand in coming weeks have dragged crude prices down to a three-month low, particularly the promise of more oil from OPEC and its allies.
  • While Saudi Arabia will be reluctant to use up all its spare capacity and the question of replacing Iranian volumes is still up in the air, Russia stated that the OPEC+ group of 24 countries could boost production by more than the 1 mmb/d agreed in Vienna last month, if need be.
  • The re-opening of four key export terminals in Libya – following the ending of a blockade by eastern rebel factions – should reverse the decline in Libyan exports. However, a recent abduction at the Sharara oil field shows the situation is still fragile.
  • An ongoing strike by upstream oil workers in Norway is also feeding into concerns over short-term global supply, but the market seems to be assured that OPEC+ will be able to act to balance things.
  • News that China’s second quarter GDP growth was slower than expected – and June factory output slowing to a two-year low – caused worries that high oil prices could be arresting fuel demand growth at a time when China’s trade war with the US is intensifying.
  • Although American economic data is robust, there are fears of a slowdown elsewhere in the world, which could further hurt the demand-led improvement in crude prices over 2018.
  • With signs of cloudy weather over crude prices, American drillers took a step back, leaving the active oil rig count unchanged last week, while adding 2 new gas rigs to bring the total up to 1,054.
  • Crude price outlook: The market is balanced between immediate supply concerns and cloudier forecasts over mid and long-term demand, which should keep prices stable. The return of some functions at Suncor’s Syncrude facility should allow the Brent-WTI differential to fall. We expect Brent to range in US$70-73/b and WTI at US$65-67/b.

Headlines of the week

Upstream

  • Norwegian oil workers have gone on strike for the first time since 2012 in a dispute over wages and pensions, which has already forced Shell to close down production at its Knarr field.
  • BP is now the frontrunner in the race to buy BHP Billiton’s US onshore oil and gas operations, which the mining giant wants to sell as a single package.
  • Eni’s streak in Egypt continues, announcing a second light oil discovery at the B1-X prospect within the Faghur basin, which Eni is hoping will combine with its previously discovered A2-X well to form a new productive area.
  • The UK’s Oil and Gas Authority (OGA) has launched its 31st Offshore Licensing Round, with some 1,766 blocks covering 370,000 square kilometres from the Shetlands, North Sea and English Channel up for grabs.
  • Crude production in Kazakhstan has risen by some 6.2% y-o-y in the first half of 2018, with expansions at the Tengischevroil, Kashagan and Karachaganak fields contributing to a total output figure of 1.046 mmb/d. Over the same period, Kazakh exports were up 6% to 845,000 b/d.
  • The outage at Suncor’s Syncrude oil sands project in Alberta, Canada, which caused the dramatic narrowing of the WTI-Brent spread recently, will only be fully quelled by September, although some output will resume over July.

Downstream

  • The US Environmental Protection Agency will be ditching a plan requiring refiners to raise biofuel blending levels in 2019 to compensate for its waver program, capitulating to intense protest from the American refining industry.
  • Japanese refiners Idemitsu Kosan and Showa Shell Sekiyu have finally agreed to merge on April 1, 2019 through a share swap, after the Idemitsu founding family was convinced to drop its long-standing opposition to the plan.
  • Iraq has extended its deadline for submissions to build a planned 100,000 b/d refinery in its Kut province, with the new deadline being October 4.
  • Just as China unveiled measures to ease foreign investment, BASF announced that it is considering building China’s first fully-foreign-owned petrochemical plant in Guangdong, a US$10 billion project scheduled for 2030.

Natural Gas/LNG

  • Total has completed its acquisition of Engie’s upstream LNG assets, purchased for US$1.5 billion, making the French major the world’s second largest LNG player behind Shell.
  • ExxonMobil, Eni and CNPC – partners in Mozambique Rovuma Venture – have submitted their development plan for the first phase of the Rovuma LNG project, which include two LNG trains with 7.6 mmtpa capacity each.
  • Nigeria has started on its US$12 billion plan to expand its LNG capacity by a third, with Nigeria LNG – a joint venture between NNPC, Total, Shell and Eni – signing off on new trains that would increase capacity to 30 mmtpa by 2030.
  • Gazprom expects full-scale development of the Kharasaveyskoye gas and condensate field in the Yamal Peninsula to begin in 2019.
  • As the US LNG industry continues to take off, Cheniere and the CME Group are working to develop the first US physical LNG futures contract based on deliveries from Cheniere’s Sabine Pass export terminal.
  • Even as Inpex’s Ichthys LNG project approaches its long-delayed start, Australia’s safety regulator has reportedly found some electrical mistakes, which could delay the project’s start-up.

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Pricing-in The Covid 19 Vaccine

In a few days, the bi-annual OPEC meeting will take place on November 30, leading into a wider OPEC+ meeting on December 30. This is what all the political jostling and negotiations currently taking place is leading up to, as the coalition of major oil producers under the OPEC+ banner decide on the next step of its historic and ambitious supply control plan. Designed to prop up global oil prices by managing supply, a postponement of the next phase in the supply deal is widely expected. But there are many cracks appearing beneath the headline.

A quick recap. After Saudi Arabia and Russia triggered a price war in March 2020 that led to a collapse in oil prices (with US crude prices briefly falling into negative territory due to the technical quirk), OPEC and its non-OPEC allies (known collectively as OPEC+) agreed to a massive supply quota deal that would throttle their production for 2 years. The initial figure was 10 mmb/d, until Mexico’s reticence brought that down to 9.7 mmb/d. This was due to fall to 7.7 mmb/d by July 2020, but soft demand forced a delay, while Saudi Arabia led the charge to ensure full compliance from laggards, which included Iraq, Nigeria and (unusually) the UAE. The next tranche will bring the supply control ceiling down to 5.7 mmb/d. But given that Covid-19 is still raging globally (despite promising vaccine results), this might be too much too soon. Yes, prices have recovered, but at US$40/b crude, this is still not sufficient to cover the oil-dependent budgets of many OPEC+ nations. So a delay is very likely.

But for how long? The OPEC+ Joint Technical Committee panel has suggested that the next step of the plan (which will effectively boost global supply by 2 mmb/d) be postponed by 3-6 months. This move, if adopted, will have been presaged by several public statements by OPEC+ leaders, including a pointed comment from OPEC Secretary General Mohammad Barkindo that producers must be ready to respond to ‘shifts in market fundamentals’.

On the surface, this is a necessary move. Crude prices have rallied recently – to as high as US$45/b – on positive news of Covid-19 vaccines. Treatments from Pfizer, Moderna and the Oxford University/AstraZeneca have touted 90%+ effectiveness in various forms, with countries such as the US, Germany and the UK ordering billions of doses and setting the stage for mass vaccinations beginning December. Life returning to a semblance of normality would lift demand, particularly in key products such as gasoline (as driving rates increase) and jet fuel (allowing a crippled aviation sector to return to life). Underpinning the rally is the understanding that OPEC+ will always act in the market’s favour, carefully supporting the price recovery. But there are already grouses among OPEC members that they are doing ‘too much’. Led by Saudi Arabia, the draconian dictates of meeting full compliance to previous quotas have ruffled feathers, although most members have reluctantly attempt to abide by them. But there is a wider existential issue that OPEC+ is merely allowing its rivals to resuscitate and leapfrog them once again; the US active oil rig count by Baker Hughes has reversed a chronic decline trend, as WTI prices are at levels above breakeven for US shale.

Complaints from Iran, Iraq and Nigeria are to be expected, as is from Libya as it seeks continued exemption from quotas due to the legacy of civil war even though it has recently returned to almost full production following a truce. But grievance is also coming from an unexpected quarter: the UAE. A major supporter in the Saudi Arabia faction of OPEC, reports suggest that the UAE (led by the largest emirate, Abu Dhabi) are privately questioning the benefit of remaining in OPEC. Beset by shrivelling oil revenue, the Emiratis have been grumbling about the fairness of their allocated quota as they seek to rebuild their trade-dependent economy. There has been suggestion that the Emiratis could even leave OPEC if decisions led to a net negative outcome for them. Unlike the Qatar exit, this will not just be a blow to OPEC as a whole, questioning its market relevance but to Saudi Arabia’s lead position, as it loses one of its main allies, reducing its negotiation power. And if the UAE leaves, Kuwait could follow, which would leave the Saudis even more isolated.

This could be a tactic to increase the volume of the UAE’s voice in OPEC+, which has been dominated by Saudi Arabia and Russia. But it could also be a genuine policy shift. Either way, it throws even more conundrums onto a delicate situation that could undermine an already fragile market. Despite the positive market news led by Covid-19 vaccines and demand recovery in Asia, American crude oil inventories in Cushing are now approaching similar high levels last seen in April (just before the WTI crash) while OPEC itself has lowered its global demand forecast for 2020 by 300,000 b/d. That’s dangerous territory to be treading in, especially if members of the OPEC+ club are threatening to exit and undermine the pack. A postponement of the plan seems inevitable on December 1 at this point, but it is what lies beyond the immediate horizon that is the true threat to OPEC+.

Market Outlook:

  • Crude price trading range: Brent – US$44-46/b, WTI – US$42-44/b
  • More positive news on Covid-19 vaccines have underpinned a crude price rally despite worrying signs of continued soft demand and inventory build-ups
  • Pfizer’s application for emergency approval of its vaccine is paving the way for mass vaccinations to begin soon, with some experts predicting that the global economy could return to normality in Q2 2021
  • Market observers are predicting a delay in the OPEC+ supply quota schedule, but the longer timeline for the club’s plan – which is set to last until April 2022 – may have to be brought forward to appease current dissent in the group

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November, 25 2020
EIA expects U.S. crude oil production to remain relatively flat through 2021

In the U.S. Energy Information Administration’s (EIA) November Short-Term Energy Outlook (STEO), EIA forecasts that U.S. crude oil production will remain near its current level through the end of 2021.

A record 12.9 million barrels per day (b/d) of crude oil was produced in the United States in November 2019 and was at 12.7 million b/d in March 2020, when the President declared a national emergency concerning the COVID-19 outbreak. Crude oil production then fell to 10.0 million b/d in May 2020, the lowest level since January 2018.

By August, the latest monthly data available in EIA’s series, production of crude oil had risen to 10.6 million b/d in the United States, and the U.S. benchmark price of West Texas Intermediate (WTI) crude oil had increased from a monthly average of $17 per barrel (b) in April to $42/b in August. EIA forecasts that the WTI price will average $43/b in the first half of 2021, up from our forecast of $40/b during the second half of 2020.

The U.S. crude oil production forecast reflects EIA’s expectations that annual global petroleum demand will not recover to pre-pandemic levels (101.5 million b/d in 2019) through at least 2021. EIA forecasts that global consumption of petroleum will average 92.9 million b/d in 2020 and 98.8 million b/d in 2021.

The gradual recovery in global demand for petroleum contributes to EIA’s forecast of higher crude oil prices in 2021. EIA expects that the Brent crude oil price will increase from its 2020 average of $41/b to $47/b in 2021.

EIA’s crude oil price forecast depends on many factors, especially changes in global production of crude oil. As of early November, members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) were considering plans to keep production at current levels, which could result in higher crude oil prices. OPEC+ had previously planned to ease production cuts in January 2021.

Other factors could result in lower-than-forecast prices, especially a slower recovery in global petroleum demand. As COVID-19 cases continue to increase, some parts of the United States are adding restrictions such as curfews and limitations on gatherings and some European countries are re-instituting lockdown measures.

EIA recently published a more detailed discussion of U.S. crude oil production in This Week in Petroleum.

November, 19 2020
OPEC members' net oil export revenue in 2020 expected to drop to lowest level since 2002

The U.S. Energy Information Administration (EIA) forecasts that members of the Organization of the Petroleum Exporting Countries (OPEC) will earn about $323 billion in net oil export revenues in 2020. If realized, this forecast revenue would be the lowest in 18 years. Lower crude oil prices and lower export volumes drive this expected decrease in export revenues.

Crude oil prices have fallen as a result of lower global demand for petroleum products because of responses to COVID-19. Export volumes have also decreased under OPEC agreements limiting crude oil output that were made in response to low crude oil prices and record-high production disruptions in Libya, Iran, and to a lesser extent, Venezuela.

OPEC earned an estimated $595 billion in net oil export revenues in 2019, less than half of the estimated record high of $1.2 trillion, which was earned in 2012. Continued declines in revenue in 2020 could be detrimental to member countries’ fiscal budgets, which rely heavily on revenues from oil sales to import goods, fund social programs, and support public services. EIA expects a decline in net oil export revenue for OPEC in 2020 because of continued voluntary curtailments and low crude oil prices.

The benchmark Brent crude oil spot price fell from an annual average of $71 per barrel (b) in 2018 to $64/b in 2019. EIA expects Brent to average $41/b in 2020, based on forecasts in EIA’s October 2020 Short-Term Energy Outlook (STEO). OPEC petroleum production averaged 36.6 million barrels per day (b/d) in 2018 and fell to 34.5 million b/d in 2019; EIA expects OPEC production to decline a further 3.9 million b/d to average 30.7 million b/d in 2020.

EIA based its OPEC revenues estimate on forecast petroleum liquids production—including crude oil, condensate, and natural gas plant liquids—and forecast values of OPEC petroleum consumption and crude oil prices.

EIA recently published a more detailed discussion of OPEC revenue in This Week in Petroleum.

November, 16 2020