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Last Updated: October 19, 2018
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Market Watch

Headline crude prices for the week beginning 15 October 2018 – Brent: US$81/b; WTI: US$71/b

  • After settling lower on promises of increased supply, the crude oil markets were rocked this week as it became clearer and clearer that the Saudi Arabian state was involved in the disappearance and alleged assassination of prominent Saudi critic Jamal Khashoggi in Istanbul
  • Internal condemnation has been loud, but US President Donald Trump has ruled out trade sanctions and cancelling of defense contracts with Saudi Arabia; the Kingdom issued veiled threats to use its vast oil reserves as a political weapon if punitive measures are taken against it – the first time it has made such a threat since the 1973 Arab oil war.
  • Grapevine chatter suggests that Saudi Arabia is preparing to admit its involvement of Khashoggi’s disappearance as the result of an ‘investigation gone wrong’, and has activated its diplomatic network to push back against criticism
  • This comes at a fragile time, with Saudi Arabia required to play a key role in balancing the market ahead of the new American sanctions on Iran and the upcoming OPEC meeting on December 3
  • Meanwhile, global oil demand and supply have risen to new records according to the International Energy Agency, with global supply rising to 100.3 mmb/d and demand very close to the 100 mmb/d level, implying a very narrow level of spare supply in the market
  • Fears of the removal of Iranian crude from the market continue to haunt prices, but Saudi Arabia did state that the Kingdom was ready to absorb the shock and supply additional to India to counter their loss of Iranian volumes
  • The level of crude prices is expected to persist at their current levels for a while, with BP now looking to sanction projects that would require crude oil prices at the US$60-65/b level, up from US$50-55/b last year
  • While China hasn't imposed sanctions on US crude imports yet, Chinese importers have largely halted all imports of American crude since August, moving to using West Africa and also tapping into cheap Canadian oil sands crude, which is currently selling for under US$50/b
  • With the American EIA reporting an unexpected decline in US crude inventories, crude prices also got a boost from that early this week
  • After weeks of caution, American drills boosted active rig numbers last week, adding 8 new oil rigs and 4 new gas rigs for a net gain of 11 sites, with all new rigs being onshore ones; this comes as signs are showing that mature wells in the Permian are showing high decline rates
  • Crude price outlook: The Saudi scandal over Jamal Khashoggi is concerning, but there is resistance to taking too harsh an action on the fear that it could lead to a deliberate supply shock. As the market settles, we think Brent and WTI will trend downwards to the US$79-80/b and US$69-70/b this week


Headlines of the week

Upstream

  • BP, Eni and Libya’s National Oil Corporation have agreed to work towards resuming exploration activities on the EPSA production contract in Libya, covering the onshore Ghadames basin and the offshore Sirt basin, with Eni acquiring 42.5% interest in the contract
  • Chevron is fully exiting the Norwegian portion of the North Sea Basin, transferring its 20% stake in the PL859 licence in the Barents Sea to DNO ASA, part of the plan to completely exit the area in search of higher returns elsewhere
  • While others are exiting the North Sea, others are still keen; RockRose Energy has sanctioned FID on the Arran field, expecting to produce 100 mscf/d and 4,000 b/d of condensate at peak production
  • Murphy Oil and Petrobras’ American subsidiary have agreed to enter into a joint venture merging their Gulf of Mexico, with Murphy holding 80% and Petrobras the remaining 20% of a JV covering the St. Malo field and other assets
  • ConocoPhillips has achieved first oil at the Greater Mooses Tooth#1 site on the Alaskan North Slope, with peak output expected to be 25-30,000 b/d

Downstream

  • Hammered by the recent rise in crude prices, India is taking a commercial model for its strategic petroleum reserves, inviting global oil producers and traders to invest US$1.5 billion in storing some 6.5 million tons of crude at two sites
  • Saudi Aramco and Total have signed a new joint development agreement for engineering and design of the giant 1.5 mtpa petrochemicals plant in Jubail, located next to the SATORP refinery and now scheduled for start-up in 2024
  • Fresh off signing an MoU with Italy’s Eni on developing bio-refineries, Indonesia is mulling plans to convert two of its aging refineries – Plaju and Dumai – into biofuels plants producing 100% biodiesel from palm oil
  • The new 200 kb/d SOCAR Star refinery in Turkey – the first in the country in 30 years – will be starting up this month, boosting Turkish capacity by 30%
  • Total has opened up a new state-of-the-art 40,000 tpa lubricants blending plant in Russia’s Kaluga region, aimed at localising production to feed Russia’s growing hunger for top quality lubricants

Natural Gas/LNG

  • The first cargo at Inpex’s Ichthys LNG export project in Australia is ready for loading this week, finally bringing to a fruition a much-delayed project
  • Qatar Petroleum has signed a new mid-term supply agreement with China’s Oriental Energy, providing 600,000 tpa of LNG over a five year period
  • Egypt’s plan to import natural gas from Israel is accelerating, with partners now evaluating the condition of the East Mediterranean Gas pipeline, expecting the first gas to flow in March 2019 at 100 mscf/d
  • Shell is reportedly dropping plans to purchase a stake in Kazakhstan’s KazMunayGas National Co, after the results of a due diligence study into the role of the Kazakh state in the natural gas firm
  • ExxonMobil has signed a long-term, 20-year deal to supply Zhejiang Provincial Energy Group with LNG, as the Chinese power utility player expands on its role in energy after agreeing to a joint venture with Glencore this year
  • Novatek has made a massive 11 tcf gas discovery in the Ob Bay area of the North Obsk licence area, expected to feed into a future Arctic LNG project

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Natural gas inventories surpass five-year average for the first time in two years

Working natural gas inventories in the Lower 48 states totaled 3,519 billion cubic feet (Bcf) for the week ending October 11, 2019, according to the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report (WNGSR). This is the first week that Lower 48 states’ working gas inventories have exceeded the previous five-year average since September 22, 2017. Weekly injections in three of the past four weeks each surpassed 100 Bcf, or about 27% more than typical injections for that time of year.

Working natural gas capacity at underground storage facilities helps market participants balance the supply and consumption of natural gas. Inventories in each of the five regions are based on varying commercial, risk management, and reliability goals.

When determining whether natural gas inventories are relatively high or low, EIA uses the average inventories for that same week in each of the previous five years. Relatively low inventories heading into winter months can put upward pressure on natural gas prices. Conversely, relatively high inventories can put downward pressure on natural gas prices.

This week’s inventory level ends a 106-week streak of lower-than-normal natural gas inventories. Natural gas inventories in the Lower 48 states entered the winter of 2017–18 lower than the previous average. Episodes of relatively cold temperatures in the winter of 2017–18—including a bomb cyclone—resulted in record withdrawals from storage, increasing the deficit to the five-year average.

In the subsequent refill season (typically April through October), sustained warmer-than-normal temperatures increased electricity demand for natural gas. Increased demand slowed natural gas storage injection activity through the summer and fall of 2018. By November 30, 2018, the deficit to the five-year average had grown to 725 Bcf. Inventories in that week were 20% lower than the previous five-year average for that time of year. Throughout the 2019 refill season, record levels of U.S. natural gas production led to relatively high injections of natural gas into storage and reduced the deficit to the previous five-year average.

The deficit was also decreased as last year’s low inventory levels are rolled into the previous five-year average. For this week in 2019, the preceding five-year average is about 124 Bcf lower than it was for the same week last year. Consequently, the gap has closed in part based on a lower five-year average.

Lower 48 natural gas inventories, difference to five-year average

Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report

The level of working natural gas inventories relative to the previous five-year average tends to be inversely correlated with natural gas prices. Front-month futures prices at the Henry Hub, the main price benchmark for natural gas in the United States, were as low as $1.67 per million British thermal units (MMBtu) in early 2016. At about that same time, natural gas inventories were 874 Bcf more than the previous five-year average.

By the winter of 2018–19, natural gas front-month futures prices reached their highest level in several years. Natural gas inventories fell to 725 Bcf less than the previous five-year average on November 30, 2018. In recent weeks, increasing the Lower 48 states’ natural gas storage levels have contributed to lower natural gas futures prices.

Lower 48 natural gas inventories and Henry Hub futures prices

Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report and front-month futures prices from New York Mercantile Exchange (NYMEX)

October, 21 2019
Your Weekly Update: 14 - 18 October 2019

Market Watch  

Headline crude prices for the week beginning 14 October 2019 – Brent: US$59/b; WTI: US$53/b

  • Crude oil prices remain stubbornly stuck in their range, despite several key issues that could potentially move the market occurring over the week
  • The sudden thawing of the icy trade relations between the US and China last week – announcing a partial trade deal where new tariffs would be halted – was a positive for the waning health of the global economy; this, however, failed to send prices any higher as previous optimism has always been dashed
  • The trade spat has already caused fears of an economic recession and tumbling global oil demand, with the IEA projecting yet another drop in the demand that has neutralised another possible ‘geopolitical premium’ on prices
  • That geopolitical premium focuses on the fragile situation in the Middle East, with risk spiking up as Iran announced that one of its tankers in the Red Sea – far away from the Persian Gulf - had been struck by missiles; an initial accusation that Saudi Arabia was behind the attack was later withdrawn
  • Meanwhile, news emerged that Nigeria had been quietly handed an increased quota under the OPEC+ supply deal, from 1.685 mmb/d to 1.774 mmb/d, in July, which would help it meet compliance under the deal
  • After more than two months of continuous declines, the US active rig count increased for the first time, but not by much; two oil rigs were added, offset by the loss of a gas rig, but a net gain of 1 to a total of 856
  • We expect prices to remain entrenched as it displays resilience against political and economic factors, with Brent hovering in the US$58-60/b area and WTI at the US$52-54/b range


Headlines of the week

Upstream

  • The US Department of the Interior will be opening up 722,000 acres of federal land along California’s central coast near Fresno, San Benito and Monterey for oil and gas leasing – the first sale in the state since 2013
  • Alongside the lease sale in California, the US will also be opening up some 78 million acres in Gulf of Mexico federal waters for sale in 2020, covering all available unleased areas not subject to Congressional moratorium
  • Santos has confirmed oil flows at the Dorado-3 well in the Bedout Basin offshore Western Australia, with some 11,1000 b/d in place
  • After having exited Norway, ExxonMobil is now reportedly looking into selling its Malaysian offshore upstream assets as part of its divestiture programme, fetching up to US$3 billion for assets including the Tapis Blend operations
  • Equinor has won a new exploration permit – WA-542-P – in the offshore Western Australia Northern Carnarvon Basin, located new the Dorado well
  • Nigeria is looking to settle a US$62 billion income-sharing dispute with international oil firms such as ExxonMobil, Shell, Chevron, Total and Eni operating in the country, with hopes of reaching a settlement
  • Barbados is looking to emulate its nearby neighbour Guyana as it gears up for its third offshore bid round that will launch in early 2020
  • Petroecuador has been forced to declare force majeure on its crude exports, as widespread protests over the removal of fuel subsidies have led to the shutdown of some oilfields
  • Abu Dhabi is looking to create a new benchmark price for Middle Eastern crude based on its Murban grade that could compete with Brent and WTI

Midstream/Downstream

  • Aruba has ended its contract with Citgo – PDVSA’s US refining arm – to operate its 209,000 b/d refinery that is currently idled; a new operator is being sought, paralleling the situation over Curacao’s Isla refinery and PDVSA
  • Poland’s crude pipeline operator expects to only be able to clear its system of contaminated Russian oil from the Druzhba incident by July 2020
  • Gunvor’s Rotterdam refinery will only be able to produce low sulfur fuel oil by March 2020, part of a larger planned overhaul of the 88,000 b/d site

Natural Gas/LNG

  • After Total’s departure, it is now the turn of CNPC to quit the South Pars Phase 11 project in Iran, leaving Iran to go ahead alone its largest natural gas project ever as the threat of US sanctions bites down
  • CNPC has taken over operation of the Chuandongbei sour gas field in China’s Sichuan basin from Chevron, and will kick of Phase 2 development soon
  • Qatar has invited ExxonMobil, Shell, Total, ConocoPhillips and some other ‘big players’ to assist in the North Field expansion that will underpin its ambitions to boost gas output to 110 million tpa from a current 77 million tpa
  • The FID on the Rovuma LNG project in Mozambique has been pushed back by a year, with first production now expected by 2025 at the earliest
  • Pakistan has cancelled a ‘huge’ 10-year tender covering 240 LNG cargoes to its second LNG terminal, turning instead to spot cargoes due to inadequate demand
  • Inpex has formally received a 35-year extension for the PSC covering the Abadi LNG project in Indonesia, extending its operation of the Masela block to 2055
October, 18 2019
Ecuador Exits OPEC

Amid ongoing political unrest, Ecuador has chosen to withdraw from OPEC in January 2020. Citing a need to boost oil revenues by being ‘honest about its ability to endure further cuts’, Ecuador is prioritising crude production and welcoming new oil investment (free from production constraints) as President Lenin Moreno pursues more market-friendly economic policies. But his decisions have caused unrest; the removal of fuel subsidies – which effectively double domestic fuel prices – have triggered an ongoing widespread protests after 40 years of low prices. To balance its fiscal books, Ecuador’s priorities have changed.

The departure is symbolic. Ecuador’s production amounts to some 540,000 b/d of crude oil. It has historically exceeded its allocated quota within the wider OPEC supply deal, but given its smaller volumes, does not have a major impact on OPEC’s total output. The divorce is also not acrimonious, with Ecuador promising to continue supporting OPEC’s efforts to stabilise the oil market where it can. 

This isn’t the first time, or the last time, that a country will quit OPEC. Ecuador itself has already done so once, withdrawing in December 1992. Back then, Quito cited fiscal problems, balking at the high membership fee – US$2 million per year – and that it needed to prioritise increasing production over output discipline. Ecuador rejoined in October 2007. Similar circumstances over supply constraints also prompted Gabon to withdraw in January 1995, returning only in July 2016. The likelihood of Ecuador returning is high, given this history, but there are also two OPEC members that have departed seemingly permanently.

The first is Indonesia, which exited OPEC in 2008 after 46 years of membership. Chronic mismanagement of its upstream resources had led Indonesia to become a net importer of crude oil since the early 2000s and therefore unable to meet its production quota. Indonesia did rejoin OPEC briefly in January 2016 after managing to (slightly) improve its crude balance, but was forced to withdraw once again in December 2016 when OPEC began requesting more comprehensive production cuts to stabilise prices. But while Indonesia may return, Qatar is likely gone permanently. Officially, Qatar exited OPEC in January 2019 after 48 years of continuous membership to focus on natural gas production, which dwarfs its crude output. Unofficially, geopolitical tensions between Qatar and Saudi Arabia – which has resulted in an ongoing blockade and boycott – contributed to the split.

The exit of Ecuador will not make much material difference to OPEC’s current goal of controlling supply to stabilise prices. With Saudi production back at full capacity – and showing the willingness to turn its taps on or off to control the market – gains in Ecuador’s crude production can be offset elsewhere. What matters is optics. The exit leaves the impression that OPEC’s power is weakening, limiting its ability to influence the market by controlling supply. There are also ongoing tensions brewing within OPEC, specifically between Iran and Saudi Arabia. The continued implosion of the Venezuelan economy is also an issue. OPEC will survive the exit of Ecuador; but if Iran or Venezuela choose to go, then it will face a full-blown existential crisis. 

Current OPEC membership:

  • Middle East: Iran, Iraq, Kuwait, Saudi Arabia, UAE
  • Africa: Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, Republic of Congo
  • Latin America: Venezuela
  • Total: 13
  • Withdrawing: Ecuador (January 2020)
  • Membership under consideration: Sudan (October 2015)
October, 18 2019