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Last Updated: September 13, 2018
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Market Watch

Headline crude prices for the week beginning 10 September 2018 – Brent: US$78/b; WTI: US$67/b

  • International oil prices are holding steady on the high end of their range, as ongoing concern over the Iranian situation and escalating trade tensions continues.
  • The abating of Tropical Storm Gordon led the WTI discount to Brent to grow to US$11/b, the widest spread in over a month; however, with three new tropical storms developing, including Hurricane Florence due to hit the Carolinas, WTI prices could be in for a rocky road.
  • In the ongoing trade spat between the US and China, President Trump is now threatening to impose tariffs on an additional US$267 billion worth of Chinese imports; China’s room to retaliate with like-for-like tariffs is now constrained, and crude and LNG will now inevitably be dragged into the fracas.
  • The route in emerging currencies – particularly the Turkish lira, Indian rupee and Indonesia rupiah – has sapped some strength from the market over worries that these large oil buyers would have to curb demand.
  • On the impending Iranian sanctions, the US is returning to more of a hard-line stance, saying that it will consider waivers for dependent buyers like India only if imports are eventually eliminated completely.
  • Meanwhile, South Korea became the first of Iran’s major customers to cut its imports to zero, hoping to appease its ally during a delicate time in its relations with North Korea.
  • OPEC believes that world oil consumption will reach 100 mmb/d by the end of 2018, earlier than previously forecast and a sign of robust demand that validates the organisation’s decision to expand its oil supply.
  • Despite concerns over growing crude inventories in the US, investment into the Permian Basin continues unabated; some shale assets recently sold for US$95,001 per acre, more than double the previous record of US$40,001, as overall sales in a recent auction raised almost a billion dollars over two days.
  • While the future of the Permian remains bright, immediate action is cautious; US drillers cut active oil rigs for the second time in three weeks, shedding two sites, although two additional gas rigs left the net count unchanged.
  • Crude price outlook: Uncertainty will keep oil prices on an upward trend, with Brent likely to test to US$80/b level again, while WTI returns to the US$69-71/b level as the Atlantic hurricane season kicks into full gear.


Headlines of the week                                                                                    

Upstream

  • Hot on the heels of ExxonMobil’s stellar discoveries in Guyana, Tullow Oil will be drilling its first well in the Orinduik licence, which borders the recent Hammerhead-1 discovery by ExxonMobil and Hess.
  • Total has ruled out investing in the US shale oil industry, citing a lack of its own infrastructure in the region and increasing competition.
  • CNOOC has signed a new agreement with Uganda National Oil Company, paving the way for new exploration in the promising Albertine Graben.
  • Norway’s Equinor will begin drilling in Brazil’s North Carcara field by the end of 2018, aiming to increase output to 300-500,000 b/d before 2030.
  • Israel’s Ratio Oil Exploration was finally awarded its upstream rights in the Philippines, after winning the 416,000 hectare East Palawan block in 2015.
  • Despite national attempts to pull back away from energy, there is still great interest in Norwegian upstream, with 38 firms bidding in the latest APA auction.
  • Mexico’s incoming President Andres Manuel Lopez Obrador has allocated US$3.9 billion in the 2019 budget to resuscitate flagging national output.
  • Equatorial Guinea is threatening to exclude service firms like Technip, Subsea 7 and Schlumberger from operating for not complying with local content rules.
  • Gazprom, Mubadala Petroleum and Russia’s RDIF fund have established a joint venture to develop oil fields in Western Siberia’s Tomsk and Omsk regions.
  • Santos has sold a suite of its non-core Asian assets to Ophir Energy for US$221 million, including its interest in Indonesia’s Sampang and Madura Offshores PSCs and the Block 12W PSC in Vietnam.

Downstream

  • China’s Hengyi Industries International has delayed the startup of its 175 kb/d Pulau Muara Besar refinery in Brunei by several months, with construction now set to be complete by Q119, receiving first crude by end-March 2019.
  • ExxonMobil is looking at constructing a major petrochemicals complex in Guangdong, which would incorporate a 1.2 mtpa ethylene cracker, which could begin operations in 2023 if all milestones are hit.
  • Delta Air Lines is looking to sell off a stake in its Monroe Energy refining business, after its attempt to control jet fuel supply proved to be too risky alone.
  • Ahead of Saudi Aramco’s attempt to acquire part of SABIC, the Saudi petrochemicals giant has now purchased a 24.99% stake in specialty chemicals leader Clariant, beefing up its overall petchems capacity.

Natural Gas/LNG

  • Qatargas has signed a new 22-year agreement with PetroChina to supply up to 3.4 mtpa of LNG annually through to 2040.
  • Enterprise Product Partners has begun construction of a new 150 kb/d NGL fractionator in Mont Belvieu Texas – its tenth – aimed at boosting its total capacity to 1.4 mmb/d to service growing markets in Asia.
  • Anadarko’s Area 1 in Mozambique is now estimated to hold some 50-75 tcf of natural gas, enough to create some 50 mtpa of LNG.
  • Spain’s Repsol has agreed to purchase 1 mtpa of LNG from Venture Global’s Calcasieu Pass LNG plant in Louisiana over a period of 20 years.

Corporate

  • Transocean and Ocean Rig UDW has agreed to merge in a cash-and-stock transaction valued at some US$2.7 billion, consolidating the deepwater submersible industry even further.

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Your Weekly Update: 13 - 17 May 2019

Market Watch

Headline crude prices for the week beginning 13 May 2019 – Brent: US$70/b; WTI: US$61/b

  • Crude oil prices are holding their ground, despite the markets showing nervousness over the escalating trade dispute between the USA and China, as well as brewing tensions in the Middle East over the Iranian situation
  • China retaliated against President Trump’s decision to raise tariffs from 10% to 25% on US$200 billion worth of Chinese imports by raising its own tariffs; crucially, China has also slapped taxes on US LNG imports at a time when American export LNG projects banking on Chinese demand are coming online
  • In the Middle East, Saudi Arabia reported that two of its oil tankers were attacked in the Persian Gulf, with the ‘sabotage attack’ near the UAE speculated to be related to Iran; with the US increasing its military presence in the area, the risk of military action has escalated
  • The non-extension of US waiver on Iranian crude is biting hard on Iran, with its leaders calling it ‘unprecedented pressure’, setting the stage for a contentious OPEC meeting in Vienna
  • In a move that is sure to be opposed by Iran, Saudi Arabia has said it is willing to meet ‘all orders’ from former Iranian buyers through June at least; Saudi Aramco is also responding to requests by Asian buyers to provide extra oil
  • The see-saw trend in US drilling activity continues; after a huge gain two weeks ago, the active US rig count declined for a second consecutive rig, with the loss of two oil rigs bringing the total site count to 988, below the equivalent number of 1,045 last year
  • There is considerably more upside to crude prices at the moment, with jitters over the health of the global economy and a delicate situation in the Middle East likely to keep Brent higher at US$71-73/b and WTI at US$62-64/b


Headlines of the week

Upstream

  • Occidental Petroleum and Warren Buffet have triumphed, as Chevron bowed out of a bidding war for Anadarko Petroleum; Occidental will now acquire Anadarko for US$57 billion, up significantly from Chevron’s US$33 billion bid
  • The deal means that Occidental’s agreement to sell Anadarko’s African assets to Total for US$8.8 billion will also go through, covering the Hassi Berkine, Ourhoud and El Merk fields in Algeria, the Jubilee and TEN fields in Ghana, the Area 1 LNG project in Mozambiuqe and E&P licences in South Africa
  • BP has sanctioned the Thunder Horse South Expansion Phase 2 deepwater project in the US Gulf of Mexico, which is expected to add 50,000 boe/d of production at the Thunder Horse platform beginning 2021
  • Africa is proving to be very fruitful for Eni, as it announced a new gas and condensate discovery offshore Ghana; the CTP-Block 4 in the Akoma prospect is estimated to hold some 550-650 bcf of gas and 18-20 mmbl of condensate
  • In an atypical development, South Africa has signed a deal for the B2 oil block in South Sudan, as part of efforts to boost output there to 350,000 b/d
  • Shell expects to drill its first deepwater well in Mexico by December 2019 after walking away with nine Mexican deepwater blocks last year

Midstream & Downstream

  • China’s domestic crude imports surged to a record 10.64 mmb/d in April, as refiners stocked up on an Iranian crude bonanza due to uncertainty over US policy, which has been confirmed as crude waivers were not renewed
  • Having had to close the Druzhba pipeline and Ust-Luga port for contaminated crude, Russia says it will fully restore compliant crude by end May shipments, including cargoes to Poland and the Czech Republic
  • Mexico’s attempt to open up its refining sector has seemingly failed, with Pemex taking over the new 340 kb/d refinery as private players balked at the US$8 billion price tag and 3-year construction deadline
  • Ahead of India’s move to Euro VI fuels in April 2020, CPCL is partially shutting down its 210 kb/d Manali refinery for a desulfurisation revamp
  • China’s Hengli Petrochemical is reportedly now stocking up on Saudi Arabian crude imports as it prepares to ramp up production at its new 400 kb/d Dalian refinery alongside its 175 kb/d site in Brunei
  • South Korea’s Lotte Chemical Corp expects its ethane cracker in Louisiana to start up by end May, adding 1 mtpa of ethylene capacity to its portfolio
  • Due to water shortage, India’s MRPL will be operating its 300 kb/d refinery in Katipalla at 50% as drought causes a severe water shortage in the area

Natural Gas/LNG

  • Partners in the US$30 billion Rovuma LNG project in Mozambique now expect to sanction FID by July, even after a recent devastating cyclone
  • Also in Mozambioque, Anadarko is set to announce FID on its Mozambique LNG project on June 18, calling it a ‘historic day’
  • After talks of a joint LNG export complex to develop gas resources in Tanzania, Shell and Equinor now appear to be planning separate projects
  • Gazprom has abandoned plans to build an LNG plant in West Siberia to compete with Novatek, focusing instead on an LNG complex is Ust-Luga
  • First LNG has begun to flow at Sempra Energy’s 13.5 mtpa Cameron LNG project in Louisiana, with exports expected to begin by Q319
May, 17 2019
Shell Eclipses ExxonMobil Once Again

The world’s largest oil & gas companies have generally reported a mixed set of results in Q1 2019. Industry turmoil over new US sanctions on Venezuela, production woes in Canada and the ebb-and-flow between OPEC+’s supply deal and rising American production have created a shaky environment at the start of the year, with more ongoing as the oil world grapples with the removal of waivers on Iranian crude and Iran’s retaliation.

The results were particularly disappointing for ExxonMobil and Chevron, the two US supermajors. Both firms cited weak downstream performance as a drag on their financial performance, with ExxonMobil posting its first loss in its refining business since 2009. Chevron, too, reported a 65% drop in the refining and chemicals profit. Weak refining margins, particularly on gasoline, were blamed for the underperformance, exacerbating a set of weaker upstream numbers impaired by lower crude pricing even though production climbed. ExxonMobil was hit particularly hard, as its net profit fell below Chevron’s for the first time in nine years. Both supermajors did highlight growing output in the American Permian Basin as a future highlight, with ExxonMobil saying it was on track to produce 1 million barrels per day in the Permian by 2024. The Permian is also the focus of Chevron, which agreed to a US$33 billion takeover of Anadarko Petroleum (and its Permian Basin assets), only for the deal to be derailed by a rival bid from Occidental Petroleum with the backing of billionaire investor guru Warren Buffet. Chevron has now decided to opt out of the deal – a development that would put paid to Chevron’s ambitions to match or exceed ExxonMobil in shale.

Performance was better across the pond. Much better, in fact, for Royal Dutch Shell, which provided a positive end to a variable earnings season. Net profit for the Anglo-Dutch firm may have been down 2% y-o-y to US$5.3 billion, but that was still well ahead of even the highest analyst estimates of US$4.52 billion. Weaker refining margins and lower crude prices were cited as a slight drag on performance, but Shell’s acquisition of BG Group is paying dividends as strong natural gas performance contributed to the strong profits. Unlike ExxonMobil and Chevron, Shell has only dipped its toes in the Permian, preferring to maintain a strong global portfolio mixed between oil, gas and shale assets.

For the other European supermajors, BP and Total largely matched earning estimates. BP’s net profits of US$2.36 billion hit the target of analyst estimates. The addition of BHP Group’s US shale oil assets contributed to increased performance, while BP’s downstream performance was surprisingly resilient as its in-house supply and trading arm showed a strong performance – a business division that ExxonMobil lacks. France’s Total also hit the mark of expectations, with US$2.8 billion in net profit as lower crude prices offset the group’s record oil and gas output. Total’s upstream performance has been particularly notable – with start-ups in Angola, Brazil, the UK and Norway – with growth expected at 9% for the year.

All in all, the volatile environment over the first quarter of 2019 has seen some shift among the supermajors. Shell has eclipsed ExxonMobil once again – in both revenue and earnings – while Chevron’s failed bid for Anadarko won’t vault it up the rankings. Almost ten years after the Deepwater Horizon oil spill, BP is now reclaiming its place after being overtaken by Total over the past few years. With Q219 looking to be quite volatile as well, brace yourselves for an interesting earnings season.

Supermajor Financials: Q1 2019

  • ExxonMobil – Revenue (US$63.6 million, down 6.7% y-o-y), Net profit (US$2.35 billion, down 49.5% y-o-y)
  • Shell - Revenue (US$85.66 billion, down 5.9% y-o-y), Net profit (US$5.3 billion, down 2% y-o-y)
  • Chevron – Revenue (US$35.19 billion, down 5% y-o-y), Net profit (US$2.65 billion, down 27.2% y-o-y)
  • BP - Revenue (US$67.4 billion, down 2.51% y-o-y), Net profit (US$2.36 billion, down 9.2% y-o-y)
  • Total - Revenue (US$51.2billion, up 3.2% y-o-y), Net profit (US$2.8 billion, down 4.0% y-o-y)
May, 15 2019
EIA revises its crude oil price forecast upward as supply expectations change

monthly average Brent crude spot price

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January, April, and May 2019 editions

In its May 2019 edition of the Short-Term Energy Outlook (STEO), EIA revised its price forecast for Brent crude oil upward, reflecting price increases in recent months, more recent data, and changing expectations of global oil markets. Several supply constraints have caused oil markets to be generally tighter and oil prices to be higher so far in 2019 than previous STEOs expected.

Members of the Organization of the Petroleum Exporting Countries (OPEC) had agreed at a December 2018 meeting to cut crude oil production in the first six months of 2019; compliance with these cuts has been more effective than EIA initially expected. In the January STEO, OPEC’s crude oil and petroleum liquids production was expected to decline by 1.0 million b/d in 2019 compared with the 2018 level, but EIA now forecasts OPEC production to decline by 1.9 million b/d in the May STEO.

Within OPEC, EIA expects Iran’s liquid fuels production and exports to also decline. On April 22, 2019, the United States issued a statement indicating that it would not reissue waivers, which previously allowed eight countries to continue importing crude oil and condensate from Iran after their waivers expired on May 2. Although EIA’s previous forecasts had assumed that the United States would not reissue waivers, the increased certainty regarding waiver policy and enforcement led to lower forecasts of Iran’s crude oil production.

Venezuela—another OPEC member—has experienced declines in production and exports as a result of recurring power outages, political instability, and U.S. sanctions. In addition to supply constraints that have already materialized in 2019, political instability in Libya may further affect global supply. Any further escalation in conflict may damage crude oil infrastructure or result in a security environment where oil fields are shut in. Either situation could reduce global supply by more than EIA currently forecasts.

In the May STEO, total OPEC crude oil and other liquids supply was estimated at 37.3 million b/d in 2018, and EIA forecasts that it will average 35.4 million b/d in 2019. EIA assumes that the December 2018 agreement among OPEC members to limit production will expire following the June 2019 OPEC meeting.

annual changes in global liquids production

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January, April, and May 2019 editions

U.S. crude oil and other liquids production is sensitive to changes in crude oil prices, taking into account a lag of several months for drilling operations to adjust. As crude oil prices have increased in recent months, so too have EIA’s domestic liquid fuels production forecasts for the remaining months of 2019.

U.S. crude oil and other liquids production, which grew by 2.2 million b/d in 2018, is forecast in EIA’s May STEO to grow by 2.0 million b/d in 2019, an increase of 310,000 b/d more than anticipated in the January STEO. In 2019, EIA expects overall U.S. crude oil and liquids production to average 19.9 million b/d, with crude oil production alone forecast to average 12.4 million b/d.

Relative to these changes in forecasted supply, EIA’s changes in forecasted demand were relatively minor. EIA expects that global oil markets will be tightest in the second and third quarters of 2019, resulting in draws in global inventories. By the fourth quarter of 2019, EIA expects that inventories will build again, and Brent crude oil prices will fall slightly.

More information about changes in STEO expectations for crude oil prices, supply, demand, and inventories is available in This Week in Petroleum.

May, 15 2019