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Last Updated: November 23, 2018
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Market Watch

Headline crude prices for the week beginning 19 November 2018 – Brent: US$67/b; WTI: US$57/b

  • After taking a severe beating all of last week – with Brent tumbling by over US$4/b alone on November 14 – global crude prices recovered somewhat this week, as language from OPEC signalled that production cuts might be back on the agenda
  • Crude has been sliding over the past two weeks as American sanctions on Iranian crude exports were muted by surprise waivers granted to 8 large importers, switching the narrative from constrained supply to a supply glut
  • South Korea seems to be taking full advantage of the waiver it received, scheduling meetings to resume Iranian oil imports after halting them for three months, aiming to take some 200,000 b/d of crude, mainly condensate
  • Alarmed by this change, Saudi Arabia is now backing a production cut of at least 1 mmb/d to stabilise the market – likely around the US$70/b sweet spot; with the biannual OPEC meeting around the corner, this would be the likely place to announce such a measure
  • A recent joint meeting between OPEC and NOPEC concluded that a majority of the members felt that the current market situation substantiates a production cut in 2019, which may rise to 1.5-2 mmb/d above the proposed 1mmb/d cut
  • Saudi Arabia already intends to export 500,000 b/d less barrels in December, taking the lead to stem the price rout, although Russia is advising against rash moves and a need to ‘monitor the situation’
  • Global trade tensions are also feeding into the demand outlook, as US Vice President Mike Pence issued sharp rebukes to China at the recent APEC meeting in Papua New Guinea, with the disagreements resulting in the failure to issue a joint communique for the first time
  • Meanwhile, the US gas markets have been on a see-saw ride, triggered by a ‘polar vortex’ that brought freezing Arctic temperatures to the US Midwest and northeast, moving against crude oil’s downward trajectory; US natural gas futures jumped 30% in a day, then plunged 25% the next day
  • In Asia, forecasts of a milder winter caused Asian spot LNG prices to weaken on the expectation that China’s short-term LNG demand will not be so strong this year
  • There was another gain in the US active rig count, with 2 new oil rigs added to the list, a slowdown from the large 14 rig gain from the week before; with American Thanksgiving being this weekend, drilling activity should slow down
  • Crude price outlook: OPEC+’s best efforts to prop up crude prices won’t see any fruit until early December, when – or if – a supply cut deal can be reached; until then the downward pressure on crude prices will continue. We see the range for Brent at US$63-65/b and WTI at US$53-55/b this week


Headlines of the week

Upstream

  • After being halted for a year, Iraq has resumed oil exports from Kirkuk via the region’s pipeline to Ceyhan, Turkey, with some 50-100/000 b/d flowing through, with plans to also increase total capacity to some 1 mmb/d
  • ADNOC has announced a US$1.4 billion investment plan to upgrade and expand the Bu Hasa oil field from 550,000 b/d to 650,000 b/d by 2020
  • India has signed an agreement with ADNOC to lease half of the Padur strategic reserve facility, giving it capacity to store up to 18 million barrels of crude
  • Saudi Aramco has signed a deal to supply some 130,000 b/d of crude to China’s Hengli Petrochemical in 2019 for its new refinery in Dalian, Aramco’s second such agreement with a Chinese firm this year after Zhejiang Rongsheng
  • ConocoPhillips has entered into exclusive talks with Ineos to sell off its UK oil and gas assets, including the Clair Field, for some US$3 billion

Downstream

  • Chevron is reportedly in talks to acquire the Pasadena Refining System’s 110 kb/d refinery in Texas from Petrobras, as it aims to expand its refining system to capitalise on rising volumes of American shale crude
  • Despite being officially opened, the commercial start-up of SOCAR’s 200 kb/d STAR refinery in Turkey has been delayed to Q1 2019, with full capacity only set to be reached in mid-2019 due to minor faults revealed during testing
  • ADNOC has signed a new sales agreement with China’s Wanhua Chemical Group to supply up to 1 million tons of LPG per year for 10 years
  • Spain has joined a number of European countries, including the UK and Denmark, in proposing to ban the sale of gasoline or diesel cars by 2040

Natural Gas/LNG

  • Cheniere has produced first LNG at its Corpus Christi LNG project in Texas, with the first of a planned five trains of 22.5 mtpa total capacity coming online following the recent start-up of Train 5 at its Sabine Pass site in Louisiana
  • Cheniere is also looking to make its Final Investment Decision on Train 6 at Sabine Pass by next year, with the firm being bullish about demand in China
  • ADNOC and Saudi Aramco have signed a new gas pact aimed at collaborating in the natural gas and LNG sectors, a move possibly aimed at challenging the status of Qatar as the Middle East’s LNG champion
  • Energean Oil and Gas is now aiming to deliver first gas from its Karish and Tanin developments offshore Israel in the first quarter of 2021
  • ADNOC has agreed to extend its gas supply agreement with ADNOC LNG, its joint venture with BP, Total and Mitsui, to 2040 after it expires in March 2019
  • Total, along with ExxonMobil and Oil Search, has signed a new MoU with Papua New Guinea on gas agreement terms for the 5.4 mtpa Papua LNG project
  • Eni has been awarded a new concession in Abu Dhabi by ADNOC, taking on 25% of the offshore ultra-sour Ghasha Concession gas mega project
  • In a very busy week for ADNOC, the Abu Dhabi firm also signed a framework agreement with Uzbekneftgaz to collaborate on upstream and downstream operations and projects in Uzbekistan
  • Russia’s Novatek has reported a sizable new commercial gas discovery in the giant Nyakhartinsky block in the Yamal-Nenets region

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EIA forecasts the U.S. will import more petroleum than it exports in 2021 and 2022

Throughout much of its history, the United States has imported more petroleum (which includes crude oil, refined petroleum products, and other liquids) than it has exported. That status changed in 2020. The U.S. Energy Information Administration’s (EIA) February 2021 Short-Term Energy Outlook (STEO) estimates that 2020 marked the first year that the United States exported more petroleum than it imported on an annual basis. However, largely because of declines in domestic crude oil production and corresponding increases in crude oil imports, EIA expects the United States to return to being a net petroleum importer on an annual basis in both 2021 and 2022.

EIA expects that increasing crude oil imports will drive the growth in net petroleum imports in 2021 and 2022 and more than offset changes in refined product net trade. EIA forecasts that net imports of crude oil will increase from its 2020 average of 2.7 million barrels per day (b/d) to 3.7 million b/d in 2021 and 4.4 million b/d in 2022.

Compared with crude oil trade, net exports of refined petroleum products did not change as much during 2020. On an annual average basis, U.S. net petroleum product exports—distillate fuel oil, hydrocarbon gas liquids, and motor gasoline, among others—averaged 3.2 million b/d in 2019 and 3.4 million b/d in 2020. EIA forecasts that net petroleum product exports will average 3.5 million b/d in 2021 and 3.9 million b/d in 2022 as global demand for petroleum products continues to increase from its recent low point in the first half of 2020.

U.S. quarterly crude oil production, net trade, and refinery runs

Source: U.S. Energy Information Administration, Short-Term Energy Outlook (STEO), February 2021

EIA expects that the United States will import more crude oil to fill the widening gap between refinery inputs of crude oil and domestic crude oil production in 2021 and 2022. U.S. crude oil production declined by an estimated 0.9 million b/d (8%) to 11.3 million b/d in 2020 because of well curtailment and a drop in drilling activity related to low crude oil prices.

EIA expects the rising price of crude oil, which started in the fourth quarter of 2020, will contribute to more U.S. crude oil production later this year. EIA forecasts monthly domestic crude oil production will reach 11.3 million b/d by the end of 2021 and 11.9 million b/d by the end of 2022. These values are increases from the most recent monthly average of 11.1 million b/d in November 2020 (based on data in EIA’s Petroleum Supply Monthly) but still lower than the previous peak of 12.9 million b/d in November 2019.

February, 18 2021
The Perfect Storm Pushes Crude Oil Prices

In the past week, crude oil prices have surged to levels last seen over a year ago. The global Brent benchmark hit US$63/b, while its American counterpart WTI crested over the US$60/b mark. The more optimistic in the market see these gains as a start of a commodity supercycle stemming from market forces pent-up over the long Covid-19 pandemic. The more cynical see it as a short-term spike from a perfect winter storm and constrained supply. So, which is it?

To get to that point, let’s examine how crude oil prices have evolved since the start of the year. On the consumption side, the market is vacillating between hopeful recovery and jittery reactions as Covid-19 outbreaks and vaccinations lent a start-stop rhythm to consumption trends. Yes, vaccination programmes were developed at lightning speed; and even plenty of bureaucratic hiccoughs have not hampered a steady rollout across the globe. In the UK, more than 20% of adults have received at least one dose of the vaccines, with the USA not too far behind. Israel has vaccinated more than 75% of its population, and most countries should be well into their own programmes by the end of March. That acceleration of vaccinations has underpinned expectations of higher oil demand, with hopes that people will begin to drive again, fly again and buy again. But those hopes have been occasionally interrupted by new Covid-19 clusters detected and, more worryingly, new mutations of the virus.

Against this hopeful demand picture, supply has been managed. Squabbling among the OPEC+ club has prevented a more aggressive approach to managing supply than kingpin Saudi Arabia would like, but OPEC+ has still managed to hold itself together to placate the market that crude spigots will remain restrained. And while the UAE has successfully shifted OPEC+ quota plan for 2021 from quarterly adjustments to monthly, Saudi Arabia stepped into the vacuum to stamp its authority with a voluntary 1 million barrels per day cut. The market was impressed.

That combination of events over January was enough to move Brent prices from the low US$50/b level to the upper US$50/b range. However, US$60/b remained seemingly out of reach. It took a heavy dusting of snow across Texas to achieve that.

Winter weather across the northern hemisphere seemed harsher than usual this year. Europe was hit by two large continent-wide storms, while the American Northeast and Pacific Northwest were buffeted with quite a few snowstorms. Temperatures in East Asia were fairly cold too, which led to strong prices for natural gas and LNG to keep the population warm. But it was a major snowstorm that swept through the southern United States – including Texas – that had the largest effect on prices. Some areas of Texas saw temperatures as low as -18 degrees Celsius, while electricity demand surged to the point where grids failed, leaving 4.3 million people without power. A national emergency was declared, with over 150 million Americans under winter storm warning conditions.

 

For the global oil complex, the effects of the storm were also direct. Some of the largest oil refineries in the world were forced to shut down due to the Arctic conditions, further disrupting power and fuel supplies. All in all, over 3 mmb/d of oil processing capacity had to be idled in the wake of the storm, including Motiva’s Port Arthur, ExxonMobil’s Baytown and Marathon’s Galveston Bay refineries. And even if the sites were still running, they would have to contend to upstream disruptions: estimates suggest that crude oil production in the prolific Permian Basin dropped by over a million barrels per day due to power outages, while several key pipelines connecting Cushing, Oklahoma to the Texas Gulf Coast were also forced to shutter.

That perfect storm was enough to send crude prices above the US$60/b level. But will it last? The damage from the Texan snowstorm has already begun to abate, and even then crude prices did not seem to have the appetite to push higher than US$63/b for Brent and US$60/b for WTI.

Instead, the key development that should determine the future range for crude prices going into the second quarter of 2021 will be in early March, when the OPEC+ club meets once again to decide the level of its supply quotas for April and perhaps beyond. The conundrum facing the various factions within the club is this: at US$60/b, crude oil prices are not low enough to scare all members in voting for unanimous stricter quotas and also not high enough to rescind controlled supply. Instead, prices are at a fragile level where arguments can be made both ways. Russia is already claiming that global oil markets are ‘balanced’, while Saudi Arabia is emphasising the need for caution in public messaging ahead of the meeting. Saudi Arabia’s voluntary supply cut will also expire in March, setting up the stage for yet another fractious meeting. If a snow overrun Texans was a perfect storm to push crude prices to a 13-month high, then the upcoming OPEC+ meeting faces another perfect storm that could negate confidence. Which will it be? The answer lies on the other side of the storm.

Market Outlook:

  • Crude price trading range: Brent – US$58-61/b, WTI – US$60-63/b
  • Better longer-term prospects for fuels demand over 2021 and a severe winter storm in the southern United States that idled many upstream and downstream facilities sent global crude oil prices to their highest levels since January 2021
  • Falling levels at key oil storage locations worldwide are also contributing to the crude rally, with crude inventories in Cushing falling to a six-month low and reports of drained storage tanks in the US Gulf Coast, the Caribbean and East Asia
February, 17 2021
The State of Industry: Q4 2020 Financials – A Fragile Recovery

Much like the year itself, the final quarter of 2020 proved to be full of shocks and surprises… at least in terms of financial results from oil and gas giants. With crude oil prices recovering on the back of a concerted effort by OPEC+ to keep a lid on supply, even at the detriment of their market share, the fourth quarter of 2020 was supposed to be smooth sailing. The tailwind of stronger crude and commodity prices, alongside gradual demand recovery, was expected to have smoothen out the revenue and profit curves for the supermajors.

That didn’t happen.

Instead, losses were declared where they were not expected. And where profits were to be had, they were meagre in volume. And crucially, a deeper dive into the financial results revealed worrying trends in the cash flow of several supermajors, calling into question the ability of these giants to continue on their capital expenditure and dividend plans, and the risks of resorting to debt financing in order to appease investors and yet also continue expanding.

Let’s start with the least surprising result of all. For months, ExxonMobil had been signalling that it would be taking a massive writedown on its upstream assets in Q4 2020, which could lead to a net loss for the quarter and the year. Unlike its peers, ExxonMobil had resisted making writedowns on the value of its crude-producing assets earlier in 2020. At the time, it stated that it had already built caution in the value assessments of those assets, reflecting ‘fair value’; not so long after that bold statement, ExxonMobil has been forced to backtrack and make a US$20.2 billion downward adjustment. Unusually, that meant that non-cash impairments aside, ExxonMobil actually eked out a tiny profit of US$110 million for the quarter on the strength of margins in the chemicals segment, but a full year loss of US$22.4 billion: the first ever annual loss since Exxon and Mobil merged in 1998. This was better than expected by Wall Street analysts, who would also be cheering the formation of ExxonMobil Low Carbon Solutions, in which the group would pump some US$3 billion through 2025 to reduce its greenhouse gas emissions by 20% from 2016 levels. That acknowledgement of a carbon neutral future is still far less ambitious than its European counterparts, but is a clear sign that ExxonMobil is starting to take the climate change element of its business more seriously.

If ExxonMobil managed to surprise in a good way, then its closest American rival did the opposite. Chevron had been outperforming ExxonMobil in quarterly results for a while now, but in Q4 2020 retreated with a net loss of US$665 million. That was narrower than the US$6.6 billion loss declared in Q4 2019, but still a shock since analysts were expecting a narrow profit. Calling 2020 ‘a year like no other’, the headwinds facing Chevron in Q4 2020 were the same facing all majors and supermajors, despite gains in crude prices, refining margins and fuel sales were still soft. Chevron’s cash flow was also a concern – as was ExxonMobil’s – which prompted chatter that the two direct descendants of JD Rockefeller’s Standard Oil were considering a merger. If so, then there is at least alignment on the climate topic: Chevron is also following the trail blazed by European supermajors in embracing a carbon neutral future, with CEO Michael Wirth conceding that Chevron may ‘not be an oil-first company in 2040’.

On the European side of the pond, that same theme of lowered downstream performance dragging down overall performance continued. But unlike the US supermajors, the likes of Shell, BP and Total were somewhat insulated from the Covid-19 blows at the peak of the pandemic as their opportunistic trading divisions capitalised on the wild swings in crude and fuel prices. That factor is now absent, with crude prices taking on a steady upward curve. That’s good for the rest of their businesses, but bad for trading, which thrives on uncertainty and volatility. And so BP reported a Q4 net profit of US$115 million, Shell followed with a Q4 net profit of US$393 million and Total closed out the earning season with industry-beating Q4 net profit of US$1.3 billion, above market expectations.

The softness of the financials hasn’t stopped dividend payouts, but has also been used by Europe’s Big Oil to set the tone for the next few decades of their existence. Total and BP paid a hefty premium to secure rights to build the next generation of UK wind farms; Total joined the Maersk-McKinney Moller Center for Zero Carbon Shipping to develop carbon neutral shipping solutions and splashed out on acquiring 2.2 GW of solar power projects in Texas; BP signed a strategic collaboration agreement with Russia’s Rosneft to develop new low carbon solutions; and aircraft carrier KLM took off with the first flight powered by synthetic kerosene that was developed by Shell through carbon dioxide, water and renewables. That’s a lot of a groundwork laid for the future where these giants can be carbon neutral by 2050.

The message from Q4 seems clear. Big Oil has barely begun its recovery from the Covid-19 maelstrom, and the road to a new normal remains long and painful. But this is also an opportunity to pivot; to set a new destination that is no longer business-as-usual, but embraces zero carbon ambitions. Even the American supermajors are slowly coming around, while the European continues to lead. Will majors in Asia, Latin America and Africa/Middle East follow? Let’s see what that attitude will bring over this new decade.

Market Outlook:

  • Crude price trading range: Brent – US$60-62/b, WTI – US$57-59/b
  • The Brent crude benchmark rose above US$60/b level for the first time in over a year, as the demand outlook for fuels improves with the accelerating rollout of Covid-19 vaccines and tight stockpiles brush off worries of oversupply
  • On the latter, the IEA estimated that global stockpiles of crude and fuels in onshore and floating storage has shrunk by 300 million barrels since OPEC+ first embarked on its deep production controls in May; in China, stockpiles are at their lowest level over a 12-month period, with US crude stockpiles also fell by 1 million barrels
  • Despite a tenuous alliance, OPEC+ has continuously reassured the market that it will work to clear the massive oil surplus created by the pandemic-induced demand slump, signalling that despite its internal differences, a repeat of last March’s surprise price war is not on the cards

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February, 10 2021