Two big bearish influences have yanked Brent and WTI down by $5-6/barrel from their 42-month peaks, but may be overturned by a supply shock as we approach the fourth quarter of this year. The price slide was triggered by a substantial boost in Saudi production in June and reinforced this week by reports of a rising tide in July not only from the kingdom, but joined by growing flows from Iraq, Kuwait, UAE, Algeria, Russia and Brazil. The countries are pumping at their highest levels since end-2016.
Within OPEC, the hikes more than offset the declines from Venezuela, Iran and Libya, to produce a net increase of around 340,000 b/d in July compared with June.
Incremental supply resulting from the OPEC/non-OPEC ministers’ agreement for a 1 million b/d boost in Vienna on June 23, meant to calm Brent down from the $80/barrel mark that had rattled several producer countries, may have come too soon.
Much would depend on how the second factor weighing on crude prices — mounting trade conflict between the US and China — pans out. Tensions spiked this week after the US said it was considering raising the proposed import tariff rate on $200 billion worth of goods from China from 10% to 25%.
China said it would have to retaliate “to defend the nation’s dignity”. The country might be running out of ammunition, though, as it buys much less from the US than what it sells to that country — an annual trade deficit of around $370 billion, which is at the heart of Donald Trump’s crusade.
China might compensate for that lack of leverage by continuing to shun US crude imports and rejecting Washington’s demands to curtail its business with Iran. And it might let the yuan depreciate against the US dollar, which makes Chinese exports more competitive, while discouraging imports, as they become relatively costlier.
The yuan has slumped by around 8.8% against the dollar since mid-April, accelerating its fall in recent weeks. The first round of tit-for-tat tariffs by the US and China on $34 billion worth of imports went into effect on July 6.
Data this week showed Chinese manufacturing activity grew at its slowest pace in eight months in July as new export orders contracted for the fourth month in a row, a fallout of the bitter trade dispute with the US. The full impact on China’s economy is not expected to be felt until early 2019. But it has begun to weigh on an oil market predisposed to bearishness due to the additional barrels flowing from the OPEC/non-OPEC producers who had been curtailing output since January 2017.
Fears of the trade war dampening Chinese oil demand — the second-largest in the world after the US — come on top of two successive monthly contractions in China’s crude imports, which saw June purchase volumes shrinking to the lowest level since December 2017. A marked slowdown in the appetite of the country’s independent refiners or so-called “teapots”, which have slashed operating rates due to shrinking margins after the government plugged some tax loopholes in March, is expected to sustain. These refiners hold 25-30% of China’s 15 million b/d refining capacity.
Meanwhile, US President Donald Trump this week dangled an ad hoc offer through the press to meet the Iranian leaders without pre-conditions, to which Secretary of State Mike Pompeo promptly added a list of conditions. Tehran, as expected, scoffed at the proposal. While the Iran-backed Houthi rebels in Yemen declared a two-week halt to attacking ships passing through the Bab el-Mandeb strait linked the Red Sea with the Arabian Sea after targeting two Saudi oil tankers in the choke point last week, Iran decided to flex its muscles by launching naval exercises in the Persian Gulf.
With the first round of US sanctions targeting Iran’s automobiles, gold and currency due to take effect on Monday (August 6), the Iranian rial has gone into a tailspin and there are reports of public protests erupting across the country again.
The oil market may remain complacent for a few more weeks. But it may be in for a rude shock once US sanctions against Iran’s oil sector begin to bite.
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The Permian is in desperate need of pipelines. That much is true. There is so much shale liquids sloshing underneath the Permian formation in Texas and New Mexico, that even though it has already upended global crude market and turned the USA into the world’s largest crude producer, there is still so much of it trapped inland, unable to make the 800km journey to the Gulf Coast that would take them to the big wider world.
The stakes are high. Even though the US is poised to reach some 12 mmb/d of crude oil production next year – more than half of that coming from shale oil formations – it could be producing a lot more. This has already caused the Brent-WTI spread to widen to a constant US$10/b since mid-2018 – when the Permian’s pipeline bottlenecks first became critical – from an average of US$4/b prior to that. It is even more dramatic in the Permian itself, where crude is selling at a US$10-16/b discount to Houston WTI, with trends pointing to the spread going as wide as US$20/b soon. Estimates suggest that a record 3,722 wells were drilled in the Permian this year but never opened because the oil could not be brought to market. This is part of the reason why the US active rig count hasn’t increased as much as would have been expected when crude prices were trending towards US$80/b – there’s no point in drilling if you can’t sell.
Assistance is on the way. Between now and 2020, estimates suggest that some 2.6 mmb/d of pipeline capacity across several projects will come onstream, with an additional 1 mmb/d in the planning stages. Add this to the existing 3.1 mmb/d of takeaway capacity (and 300,000 b/d of local refining) and Permian shale oil output currently dammed away by a wall of fixed capacity could double in size when freed to make it to market.
And more pipelines keep getting announced. In the last two weeks, Jupiter Energy Group announced a 90-day open season seeking binding commitments for a planned 1 mmb/d, 1050km long Jupiter Pipeline – which could connect the Permian to all three of Texas’ deepwater ports, Houston, Corpus Christi and Brownsville. Plains All American is launching its 500,000 b/d Sunrise Pipeline, connecting the Permian to Cushing, Oklahoma. Wolf Midstream has also launched an open season, seeking interest for its 120,000 b/d Red Wolf Crude Connector branch, connecting to its existing terminal and infrastructure in Colorado City.
Current estimates suggest that Permian output numbered around 3.5 mmb/d in October. At maximum capacity, that’s still about 100,000 b/d of shale oil trapped inland. As planned pipelines come online over the next two years, that trickle could turn into a flood. Consider this. Even at the current maxing out of Permian infrastructure, the US is already on the cusp on 12 mmb/d crude production. By 2021, it could go as high as 15 mmb/d – crude prices, permitting, of course.
As recently reported in the WSJ; “For years, the companies behind the U.S. oil-and-gas boom, including Noble Energy Inc. and Whiting Petroleum Corp. have promised shareholders they have thousands of prospective wells they can drill profitably even at $40 a barrel. Some have even said they can generate returns on investment of 30%. But most shale drillers haven’t made much, if any, money at those prices. From 2012 to 2017, the 30 biggest shale producers lost more than $50 billion. Last year, when oil prices averaged about $50 a barrel, the group as a whole was barely in the black, with profits of about $1.7 billion, or roughly 1.3% of revenue, according to FactSet.”
The immense growth experienced in the Permian has consequences for the entire oil supply chain, from refining balances – shale oil is more suitable for lighter ends like gasoline, but the world is heading for a gasoline glut and is more interested in cracking gasoil for the IMO’s strict marine fuels sulphur levels coming up in 2020 – to geopolitics, by diminishing OPEC’s power and particularly Saudi Arabia’s role as a swing producer. For now, the walls keeping a Permian flood in are still standing. In two years, they won’t, with new pipeline infrastructure in place. And so the oil world has two years to prepare for the coming tsunami, but only if crude prices stay on course.
Recent Announced Permian Pipeline Projects
Headline crude prices for the week beginning 3 December 2018 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
The engine oil market has grown up around 10 to 12% in the last three years because of various reasons, mostly because of the rise of automobiles.
According to the Bangladesh Road Transport Authority (BRTA), the number of registered petrol and diesel-powered vehicles is 3,663,189 units.
The number of automotive vehicles has increased by 2.5 times in the last eight years.
The demand for engine oils will rise keeping pace with the increasing automotive vehicles, with an expected 3% yearly growths.
Mostly, for this reason, the annual lubricant consumption raised over 14% growth for the last four years. Now its current demand is around 160 million tonnes.
The overall lubricants demand has increased also for the growth of the power sector, which has created a special market for industrial lubricants oil.
The lubricants oil market size for industries has doubled in the last five years due to the establishment of a number of power plants across the country.
The demand for industrial oil will continue to rise at least for the next 15 years, as the quick rental power plants need a huge quantity of lube oil to run.
The industries account for 30% of the total lubricant consumption; however, it is expected to take over 35% of the overall demand in the next 10 years.
Mobil is the market leader with 27% market share; however, market insiders say that around 70% market shares belong to various brands altogether, which is still undefined.
It is already flooded with many global and local brands.