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Last Updated: July 27, 2018
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Market Watch

Headline crude prices for the week beginning 23 July 2018 – Brent: US$67/b; WTI: US$73/b

  • Signs that OPEC members are ramping up production are causing the market to worry about oversupply again. Saudi Arabia has turned on its spigots, and Iraq and Russia are both also raising output, ahead of the expected loss of Iranian volumes in November.
  • A flood is not expected, as Saudi Arabia has pledged not to ‘push oil into the market beyond its customers’ needs’, translating into support for prices at US$70/b.
  • The end of the oil workers’ strike in Norway on July 19 removed some concern over supply risk in the market, although a spat of worker kidnappings in Libya’s Sharara field may yet curb Libyan output.
  • Japan expects to import its last barrel of Iranian crude in October, a sign that America’s sanctions against Iran are being adhered to.
  • However, American belligerence may yet threaten the macroeconomic environment. Talks with the EU to reduce tariffs ‘to zero’ diffused the situation somewhat, but there are rocky waters ahead with China, Mexico and Canada. Meanwhile, the US is mulling anti-cartel legislation that could subject OPEC to antitrust lawsuits for manipulating energy prices.
  • Despite strong prices, worries over the US-China trade spat hurting demand led American drillers to cut the active rig count for a third consecutive week. Five oil rigs and three gas rigs were halted, lowering the total count to 1,046.
  • Crude price outlook: The market will be focusing on supply for the foreseeable future - whether or not the immediate rise in OPEC+ volumes will be enough to offset the loss of Iranian volumes. Prices should stay rangebound, at some US$73-75/b for Brent and US$67-69/b for WTI.

Headlines of the week

Upstream

  • Shell is reportedly looking to sell two Nigerian onshore oil licences in the Niger Delta, removing it from an oil-rich region beset with civil and militant strife to concentrate on safer offshore opportunities.
  • China’s CNOOC is looking to expand its presence in Nigeria, expecting to invest an additional US$3 billion into its existing operations with NNPC.
  • Lukoil has sanctioned development on the Rakushechnoye field in the Caspian Sea, with commercial output expected to begin in 2023.
  • The Intercontinental Exchange (ICE) has launched plans for a Permian West Texas Intermediate (WTI) crude oil futures contract for physical delivery into Houston, expected to begin in 3Q18.
  • An enduring impasse with local communities may force Tullow Oil to shut down operations in northern Kenya, threatening the country’s plans to ship crude from the Turkana region to the port of Mombasa.
  • Iraq’s crude exports have hit their fastest pace in the wake of the new OPEC resolution, jumping by 6% m-o-m to some 4.05 mmb/d in early July, according to port tracking data.
  • Russia too is planning to boost output, announcing plans to raise volumes at Sakhalin-1 from 215,000 b/d in 2Q18 to some 260,000 b/d in 3Q18.
  • Shell has obtained two new PSCs in Mauritania, bringing it into the West African Atlantic Margin for the first time with the C-10 and C-19 blocks.

Downstream

  • Malaysia has announced a new timeline for the introduction of B10 biodiesel, expecting to raise the national mandate from B7 in the second half of 2019 after twice delaying it due to unfavourable palm oil prices.
  • A minor fire at Saudi Aramco’s Riyadh refinery has been attributed to an ‘operational incident’ at a storage tank instead of a drone attack by Iranian-backed Houthi rebels from Yemen.
  • Weak profits have caused Azerbaijan’s Socar to refocus its trading arm from crude to LNG and marketing output from its new Turkish refinery.

Natural Gas/LNG

  • Woodside is exiting Port Arthur LNG in Texas, three years after buying into the Sempra Energy project, citing lower expected returns.
  • Sonatrach and Eni has signed a new agreement to strengthen their gas operations in Algeria, combining the BRN Block 43 and MLE Block 405b assets to create a major gas hub in the Berkine basin.
  • Vopak has agreed to purchase a 29% stake in Elenergy Terminal Pakistan, which is building Pakistan’s first LNG import site in Port Qasim.
  • TransCanada has completed its US$1.2 billion, 560 km Topolobampo natural gas pipeline in northern Mexico, adding some 670 mcf/d of capacity to markets in the Chihuahua and Sinaloa states.
  • PetroChina has inked a mid-term 3-year deal with the ExxonMobil-led PNG LNG project, purchasing 450,000 tons per year with immediate effect.

Corporate

  • Saudi Aramco is reportedly in talks to buy a strategic stake in SABIC, the world’s fourth largest petrochemical maker and fellow Saudi firm. The move could raise its market valuation but delay its planned IPO.

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The Growing Divergence In Energy

Two acquisitions in the energy sector were announced in the last week that illustrate the growing divergence in approaching the future of oil and gas between Europe and the USA. In France, Total announced that it had bought Fonroche Biogaz, the market leader in the production of renewable gas in France. In North America, ConocoPhillips completed its acquisition of Concho Resources, deepening the upstream major’s foothold into the lucrative Permian Basin and its shale riches. One is heading towards renewables, and the other is doubling down on conventional oil and gas.

What does this say about the direction of the energy industry?

Total’s move is unsurprising. Like almost all of its European peers operating in the oil and gas sector, Total has announced ambitious targets to become carbon-neutral by 2050. It is an ambition supported by the European population and pushed for by European governments, so in that sense, Total is following the wishes of its investors and stakeholders – just like BP, Shell, Repsol, Eni and others are doing. Fonroche Biogaz is therefore a canny acquisition. The company designs, builds and operates anaerobic digestion units that convert organic waste such as farming manure into biomethane to serve a gas feedstock for power generation. Fonroche Biogaz already has close to 500 GWh of installed capacity through seven power generation units with four in the pipeline. This feeds into Total’s recent moves to expand its renewable power generation capacity, with the stated intention of increasing the group’s biomethane capacity to 1.5 terawatts per hour (TWh) by 2025. Through this, Total vaults into a leading position within the renewable gas market in Europe, which is already active through affiliates such as Méthanergy, PitPoint and Clean Energy.

In parallel to this move, Total also announced that it has decided not to renew its membership in the American Petroleum Institute for 2021. Citing that it is only ‘partially aligned’ with the API on climate change issues in the past, Total has now decided that those positions have now ‘diverged’ particularly on rolling back methane emission regulations, carbon pricing and decarbonising transport. The French supermajor is not alone in its stance. BP, which has ditched the supermajor moniker in favour of turning itself into a clean energy giant, has also expressed reservations over the API’s stance over climate issues, and may very well choose to resign from the trade group as well. Other European upstream players might follow suit.

However, the core of the API will remain American energy firms. And the stance among these companies remains pro-oil and gas, despite shareholder pressure to bring climate issues and clean energy to the forefront. While the likes of ExxonMobil and Chevron have balanced significant investments into prolific shale patches in North America with public overtures to embrace renewables, no major US firm has made a public commitment to a carbon-neutral future as their European counterparts have. And so ConocoPhillips acquisition of Concho Resources, which boosts its value to some US$60 billion is not an outlier, but a preview of the ongoing consolidation happening in US shale as the free-for-all days give way to big boy acquisitions following the price-upheaval there since 2019.

That could change. In fact, it will change. The incoming Biden administration marks a significant break from the Trump administration’s embrace of oil and gas. Instead of opening of protected federal lands to exploration, especially in Alaska and sensitive coastal areas and loosening environmental regulations, the US will now pivot to putting climate change at the top of the agenda. Although political realities may water it down, the progressive faction of the Democrats are pushing for a Green New Deal embracing sustainability as the future for the US. Biden has already hinted that he may cancel the controversial and long-running Keystone XL pipeline via executive order on his first day in the office. His nominees for key positions including the Department of the Interior, Department of Energy, Environmental Protection Agency and Council on Environmental Quality suggest that there will be a major push on low-carbon and renewable initiatives, at least for the next 4 years. A pledge to reach net zero fossil fuel emissions from the power sector by 2035 has been mooted. More will come.

The landscape is changing. But the two approaches still apply, the aggressive acceleration adopted by European majors, and the slower movement favoured by US firms. Political changes in the USA might hasten the change, but it is unlikely that convergence will happen anytime soon. There is room in the world for both approaches for now, but the future seems inevitable. It just depends on how energy companies want to get there.

Market Outlook:

  • Crude price trading range: Brent – US$54-56/b, WTI – US$51-53/b
  • Global crude oil benchmarks retreated slightly, as concerns of rising supplies and coronavirus spread impact consumption anticipations; in particular, new Covid-19 outbreaks in key countries such as Japan and China are menacing demand
  • Mapped against the new OPEC+ supply quotas, there is a risk that demand will retreat more than anticipated, weakening prices; however, a leaking pipeline in Libya has reduced oil output there by about 200,000 b/d, which could provide some price support
  • However, the longer-term prognosis remains healthier for oil prices factoring out these short-term concerns; the US EIA has raised its predicted average prices for Brent and WTI to US$52.70 and US$49.70 for the whole of 2021

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January, 22 2021
EIA expects crude oil prices to average near $50 per barrel through 2022

In its January Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) expects global demand for petroleum liquids will be greater than global supply in 2021, especially during the first quarter, leading to inventory draws. As a result, EIA expects the price of Brent crude oil to increase from its December 2020 average of $50 per barrel (b) to an average of $56/b in the first quarter of 2021. The Brent price is then expected to average between $51/b and $54/b on a quarterly basis through 2022.

EIA expects that growth in crude oil production from members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) will be limited because of a multilateral agreement to limit production. Saudi Arabia announced that it would voluntarily cut production by an additional 1.0 million b/d during February and March. Even with this cut, EIA expects OPEC to produce more oil than it did last year, forecasting that crude oil production from OPEC will average 27.2 million b/d in 2021, up from an estimated 25.6 million b/d in 2020.

EIA forecasts that U.S. crude oil production in the Lower 48 states—excluding the Gulf of Mexico—will decline in the first quarter of 2021 before increasing through the end of 2022. In 2021, EIA expects crude oil production in this region will average 8.9 million b/d and total U.S. crude oil production will average 11.1 million b/d, which is less than 2020 production.

EIA expects that responses to the recent rise in COVID-19 cases will continue to limit global oil demand in the first half of 2021. Based on global macroeconomic forecasts from Oxford Economics, however, EIA forecasts that global gross domestic product will grow by 5.4% in 2021 and by 4.3% in 2022, leading to energy consumption growth. EIA forecasts that global consumption of liquid fuels will average 97.8 million barrels per day (b/d) in 2021 and 101.1 million b/d in 2022, only slightly less than the 2019 average of 101.2 million b/d.

EIA expects global inventory draws will contribute to forecast rising crude oil prices in the first quarter of 2021. Despite rising forecast crude oil prices in early 2021, EIA expects upward price pressure will be limited through the forecast period because of high global oil inventory, surplus crude oil production capacity, and stock draws decreasing after the first quarter of 2021. EIA forecasts Brent crude oil prices will average $53/b in both 2021 and 2022.

quarterly global liquid fuels production and consumption

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO)

You can find more information on EIA’s expectations for changes in global petroleum liquids production, consumption, and crude oil prices in EIA’s latest This Week in Petroleum article and its January STEO.

January, 22 2021
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January, 21 2021