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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 Impact of COVID 19 In The Downstream Oil & Gas Sector

Recent headlines on the oil industry have focused squarely on the upstream side: the amount of crude oil that is being produced and the resulting effect on oil prices, against a backdrop of the Covid-19 pandemic. But that is just one part of the supply chain. To be sold as final products, crude oil needs to be refined into its constituent fuels, each of which is facing its own crisis because of the overall demand destruction caused by the virus. And once the dust settles, the global refining industry will look very different.

Because even before the pandemic broke out, there was a surplus of refining capacity worldwide. According to the BP Statistical Review of World Energy 2019, global oil demand was some 99.85 mmb/d. However, this consumption figure includes substitute fuels – ethanol blended into US gasoline and biodiesel in Europe and parts of Asia – as well as chemical additives added on to fuels. While by no means an exact science, extrapolating oil demand to exclude this results in a global oil demand figure of some 95.44 mmb/d. In comparison, global refining capacity was just over 100 mmb/d. This overcapacity is intentional; since most refineries do not run at 100% utilisation all the time and many will shut down for scheduled maintenance periodically, global refining utilisation rates stand at about 85%.

Based on this, even accounting for differences in definitions and calculations, global oil demand and global oil refining supply is relatively evenly matched. However, demand is a fluid beast, while refineries are static. With the Covid-19 pandemic entering into its sixth month, the impact on fuels demand has been dramatic. Estimates suggest that global oil demand fell by as much as 20 mmb/d at its peak. In the early days of the crisis, refiners responded by slashing the production of jet fuel towards gasoline and diesel, as international air travel was one of the first victims of the virus. As national and sub-national lockdowns were introduced, demand destruction extended to transport fuels (gasoline, diesel, fuel oil), petrochemicals (naphtha, LPG) and  power generation (gasoil, fuel oil). Just as shutting down an oil rig can take weeks to complete, shutting down an entire oil refinery can take a similar timeframe – while still producing fuels that there is no demand for.

Refineries responded by slashing utilisation rates, and prioritising certain fuel types. In China, state oil refiners moved from running their sites at 90% to 40-50% at the peak of the Chinese outbreak; similar moves were made by key refiners in South Korea and Japan. With the lockdowns easing across most of Asia, refining runs have now increased, stimulating demand for crude oil. In Europe, where the virus hit hard and fast, refinery utilisation rates dropped as low as 10% in some cases, with some countries (Portugal, Italy) halting refining activities altogether. In the USA, now the hardest-hit country in the world, several refineries have been shuttered, with no timeline on if and when production will resume. But with lockdowns easing, and the summer driving season up ahead, refinery production is gradually increasing.

But even if the end of the Covid-19 crisis is near, it still doesn’t change the fundamental issue facing the refining industry – there is still too much capacity. The supply/demand balance shows that most regions are quite even in terms of consumption and refining capacity, with the exception of overcapacity in Europe and the former Soviet Union bloc. The regional balances do hide some interesting stories; Chinese refining capacity exceeds its consumption by over 2 mmb/d, and with the addition of 3 new mega-refineries in 2019, that gap increases even further. The only reason why the balance in Asia looks relatively even is because of oil demand ‘sinks’ such as Indonesia, Vietnam and Pakistan. Even in the US, the wealth of refining capacity on the Gulf Coast makes smaller refineries on the East and West coasts increasingly redundant.

Given this, the aftermath of the Covid-19 crisis will be the inevitable hastening of the current trend in the refining industry, the closure of small, simpler refineries in favour of large, complex and more modern refineries. On the chopping block will be many of the sub-50 kb/d refineries in Europe; because why run a loss-making refinery when the product can be imported for cheaper, even accounting for shipping costs from the Middle East or Asia? Smaller US refineries are at risk as well, along with legacy sites in the Middle East and Russia. Based on current trends, Europe alone could lose some 2 mmb/d of refining capacity by 2025. Rising oil prices and improvements in refining margins could ensure the continued survival of some vulnerable refineries, but that will only be a temporary measure. The trend is clear; out with the small, in with the big. Covid-19 will only amplify that. It may be a painful process, but in the grand scheme of things, it is also a necessary one.

Infographic: Global oil consumption and refining capacity (BP Statistical Review of World Energy 2019)

Region
Consumption (mmb/d)*
Refining Capacity (mmb/d)
North America

22.71

22.33

Latin America

6.5

5.98

Europe

14.27

15.68

CIS

4.0

8.16

Middle East

9.0

9.7

Africa

3.96

3.4

Asia-Pacific

35

34.75

Total

95.44

100.05

*Extrapolated to exclude additives and substitute fuels (ethanol, biodiesel)

Market Outlook:

  • Crude price trading range: Brent – US$33-37/b, WTI – US$30-33/b
  • Crude oil prices hold their recent gains, staying rangebound with demand gradually improving as lockdown slowly ease
  • Worries that global oil supply would increase after June - when the OPEC+ supply deal eases and higher prices bring back some free-market production - kept prices in check
  • Russia has signalled that it intends to ease back immediately in line with the supply deal, but Saudi Arabia and its allies are pushing for the 9.7 mmb/d cut to be extended to end-2020, putting the two oil producers on another collision course that previously resulted in a price war
  • Morgan Stanley expects Brent prices to rise to US$40/b by 4Q 2020, but cautioned that a full recovery was only likely to materialise in 2021

End of Article

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May, 31 2020
North American crude oil prices are closely, but not perfectly, connected

selected North American crude oil prices

Source: U.S. Energy Information Administration, based on Bloomberg L.P. data
Note: All prices except West Texas Intermediate (Cushing) are spot prices.

The New York Mercantile Exchange (NYMEX) front-month futures contract for West Texas Intermediate (WTI), the most heavily used crude oil price benchmark in North America, saw its largest and swiftest decline ever on April 20, 2020, dropping as low as -$40.32 per barrel (b) during intraday trading before closing at -$37.63/b. Prices have since recovered, and even though the market event proved short-lived, the incident is useful for highlighting the interconnectedness of the wider North American crude oil market.

Changes in the NYMEX WTI price can affect other price markers across North America because of physical market linkages such as pipelines—as with the WTI Midland price—or because a specific price is based on a formula—as with the Maya crude oil price. This interconnectedness led other North American crude oil spot price markers to also fall below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS), and Bakken Clearbrook. However, the usefulness of the NYMEX WTI to crude oil market participants as a reference price is limited by several factors.

pricing locations of selected North American crudes

Source: U.S. Energy Information Administration

First, NYMEX WTI is geographically specific because it is physically redeemed (or settled) at storage facilities located in Cushing, Oklahoma, and so it is influenced by events that may not reflect the wider market. The April 20 WTI price decline was driven in part by a local deficit of uncommitted crude oil storage capacity in Cushing. Similarly, while the price of the Bakken Guernsey marker declined to -$38.63/b, the price of Louisiana Light Sweet—a chemically comparable crude oil—decreased to $13.37/b.

Second, NYMEX WTI is chemically specific, meaning to be graded as WTI by NYMEX, a crude oil must fall within the acceptable ranges of 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI can therefore be unsuitable as a price for crude oils with characteristics outside these specific ranges.

Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1,000 barrels of crude oil within a specific month in the future (typically at least 10 days). The last day of trading for the May 2020 contract, for instance, was April 21, with physical delivery occurring between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a NYMEX WTI futures contract provides. Consequently, these market participants will instead turn to shorter-term spot price alternatives.

Taken together, these attributes help to explain the variety of prices used in the North American crude oil market. These markers price most of the crude oils commonly used by U.S. buyers and cover a wide geographic area.

Principal contributor: Jesse Barnett

May, 28 2020
Financial Review: 2019

Key findings

  • Brent crude oil daily average prices were $64.16 per barrel in 2019—11% lower than 2018 levels
  • The 102 companies analyzed in this study increased their combined liquids and natural gas production 2% from 2018 to 2019
  • Proved reserves additions in 2019 were about the same as the 2010–18 annual average
  • Finding plus lifting costs increased 13% from 2018 to 2019
  • Occidental Petroleum’s acquisition of Anadarko Petroleum contributed to the largest reserve acquisition costs incurred for the group of companies since 2016
  • Refiners’ earnings per barrel declined slightly from 2018 to 2019

See entire annual review

May, 26 2020