Easwaran Kanason

Co - founder of PetroEdge
Last Updated: January 1, 2019
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Business Trends
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The year 2018 has been quite a rollercoaster. It started off with optimism, veered into uncertainty and ends with the blues. Oil prices started on an upward swing at US$66/b for Brent, reached a peak of US$81/b, then fell to a low of US$49/b. The market swang from balanced supply/demand to a supply crunch to a glut – dealing with American sanctions on Iranian crude exports, surging American crude oil production, the implosion of Venezuela’s economy and signs that the global economy might be entering a slowdown. If this was a wild ride, what could 2019 hold?

Quarter 1 2019 – The crude oil market will start the year off in a slightly stronger position than it ended 2018, bouncing back from recent lows at US$54/b. The new OPEC+ supply deal – which aims to curb production by 1.2 mmb/d – goes into effect, and traders will be watching to see if the cuts have a material impact. Sometime in the first quarter, American crude oil production will hit 12 mmb/d, cementing its position as the world’s largest oil producer as Saudi Arabia and Russia cut back output as part of the OPEC+ supply deal. Upstream production curbs in Canada’s Alberta – hampered by pipeline capacity – will continue. A new Democrat-led House of Representatives takes office in the US, which could frustrate President Donald Trump’s agenda, with the threat of investigation and impeachment raising the risk of triggering volatility.

Quarter 2 2019 – OPEC+ meets in April to review the supply deal agreed in December 2018. Saudi Arabia has been promising ‘deeper cuts’, but there will be pushback from some members worried about ceding ground to American shale. Russia has already expressed some reticence, and Iran is unlikely to support another major cut. The power of OPEC – which has already lost Qatar as a member – will be questioned. A lot will depend on the question of American waivers of Iranian crude imports for eight major buyers, which expire in May. The waivers should continue – which should allow room for negotiation – but a shock could happen if they are allowed to expire.

Quarter 3 2019 – The first of a new wave of pipelines connecting the Permian Basin to the US Gulf Coast should begin commissioning and operation. With capacity of at least an additional 1.5 mmb/d of American shale oil making it to market, this could trigger another boom in Permian output and change the dynamics of the global oil market, just as American LNG has upended the global gas market. OPEC’s bi-annual Vienna meeting in June will address this. Will there be a place for light, sweet US crude in the world, particularly since there will continue to be a global oversupply of gasoline? Perhaps for petrochemical use, but refining demand will increasingly be geared toward medium and heavier grades to be cracked by upgraded refineries into gasoil ahead of the IMO’s new rules of fuel oil and sulfur levels rolling out in 2020

Quarter 4 2019 – Depending on market conditions, American crude production could be on the cusp of hitting 13 mmb/d – presenting yet another problem as OPEC meets in December. The inexorable rise of US oil is inevitable, and we could see OPEC switch tactics from accommodation to aggression. If the Iranian crude export waivers are extended in May, they will end in this quarter – throwing another finicky variable into a complicated year. The year might end the way it began, characterised by a frustrating stalemate between free market and controlled oil production.

Major predictions for 2019 oil prices (Brent)

  • Bloomberg (survey): US$70/b
  • Citigroup: US$59/b
  • Morgan Stanley: US$78/b
  • EIA: US$61/b
  • Standard Chartered: US$78/b
  • JP Morgan Chase: US$74/b
  • Wood Mackenzie: US$66/b

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January, 17 2019
EIA forecasts world crude oil prices to rise gradually, averaging $65 per barrel in 2020

monthly Brent and WTI crude prices

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2019

EIA’s January Short-Term Energy Outlook forecasts that world benchmark Brent crude oil will average $61 per barrel (b) in 2019 and $65/b in 2020, an increase from the end of 2018, but overall it will remain lower than the 2018 average of $71/b. U.S. benchmark West Texas Intermediate (WTI) crude oil prices were $8/b lower than Brent prices in December 2018, and EIA expects this difference to narrow to $4/b in the fourth quarter of 2019 and throughout 2020.

EIA expects U.S. regular retail gasoline prices to follow changes to the cost of crude oil, dipping from an average of $2.73/gallon in 2018 to $2.47/gallon in 2019, before rising to $2.62/gallon in 2020. Because each barrel of crude oil holds 42 gallons, a $1-per-barrel change in the price of crude oil generally translates to about a 2.4-cent-per-gallon change in the price of petroleum products such as gasoline, all else being equal.

EIA estimates that global petroleum and other liquid fuels inventories grew by an average rate of 0.4 million barrels per day (b/d) in 2018 and by an estimated 1.0 million b/d in the fourth quarter of 2018. EIA expects growth in liquid fuels production in the United States and in other countries not part of the Organization of the Petroleum Exporting Countries (OPEC) will contribute to global oil inventory growth rates of 0.2 million b/d in 2019 and 0.4 million b/d in 2020.

Although EIA forecasts that oil prices will remain lower than during most of 2018, the forecast includes some increase in prices from December 2018 levels in early 2019 in order to keep up with demand growth and support the increased need for global oil inventories to maintain five-year average levels of demand cover. EIA expects crude oil prices to continue to increase in late 2019 and early 2020 because of an increase in refinery demand for light-sweet crude oil, which is the result of regulations from the International Maritime Organization that will limit the sulfur content in marine fuels used by ocean-going vessels.

world liquid fuels production and consumption balances

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2019

EIA expects global oil production growth in 2019 to be led by countries that are not part of OPEC, particularly the United States. EIA expects non-OPEC producers will increase oil supply by 2.4 million b/d in 2019 which will offset forecast supply declines from OPEC members, resulting in an average of 1.4 million b/d in total global supply growth in 2019.

In 2020, EIA expects oil production to increase by 1.7 million b/d because of production growth in the United States, Canada, Brazil, and Russia, while overall OPEC crude oil production is expected to remain flat. EIA forecasts global oil demand to grow by 1.5 million b/d in 2019 and in 2020. In both 2019 and 2020, China is the leading contributor to global oil demand growth.

January, 17 2019
Your Weekly Update: 7 - 11 January 2019

Market Watch

Headline crude prices for the week beginning 7 January 2019 – Brent: US$57/b; WTI: US$49/b

  • Crude oil looks set to climb back to previous support levels as OPEC’s new supply deal kicks in and the US Federal Reserve sought to soothe investor confidence after initiating a surprise hike in interest rates that caused widespread global financial panic in December
  • Even as OPEC+ moves forwards with a planned 1.2 mmb/d cut in collective output, production across OPEC had already fallen over November and December as Saudi Arabia throttled production to support falling prices
  • Together with dwindling production in Venezuela, disruptions in Libya and losses in Iran, oil output from OPEC countries has already fallen by 530,000 b/d in December to 32.6 mmb/d, the sharpest pullback since January 2017
  • This has managed to re-assure the market that the global supply/demand balance is on firmer footing, even as Russian oil output reached a post-Soviet high of 11.16 mmb/d, just slightly off the all-time record of 11.42 mmb/d in 1987
  • With the recovery in prices, planned upstream projects will be back on firmer footing, with Rystad Energy expecting some US$123 billion of offshore projects to be sanctioned over 2019 if Brent crude averages US$60/b
  • Also supporting the upward momentum is the removal of 8 oil rigs from the active US rig count, as American drillers weighed up the risks of the fragile trajectory in WTI prices
  • Crude price outlook: Momentum is with crude oil prices this week, and we expect that to continue as OPEC+ implements its production plan, with Brent recovering to US$60-62/b and WTI to US$51-53/b


Headlines of the week

Upstream

  • Eni has acquired the remaining 70% of the Oooguruk field in Alaska from Caelus Natural Resources, bringing its stake to 100% to synergise with the nearby Nikaitchuq field, where Eni also owns a 100% interest interest
  • The deepwater Egina field in Nigeria, operated by Total through an FPSO, has started up production, with peak output expected at 200,000 b/d
  • Commercial production of crude at PAO Novatek/Gazprom’s Yaro-Yakhinskoye field has commenced, with output expected at 24,000 b/d
  • Total has sold a 2% interest in Oman’s Block 53 to Sweden’s Tethys Oil, bringing it into Occidental Petroleum’s 100,000 b/d Mukhaizna field
  • Brazil is preparing for its sixth round of upstream auctions, offering up pre-salt acreage in five areas expected to raise more than US$2 billion in sales
  • After recently making its 10th discovery in Guyana, ExxonMobil has its sights set on more as it drills two more exploration wells – Haimara-1 and Tilapia-1 – in the prolific Stabroek block, both close to existing discoveries
  • Ecuador is initiating a probe into some US$4.9 billion worth of oil-related infrastructure projects initiated by the previous administration on charges of corruption and looting

Downstream

  • China appears to be tempering crude demand, with the first batch of crude oil import quotas issued to state and private refineries at 26% lower than 2018, with quotas for teapots at some 78% of the 89.84 million tons approved
  • Saudi Aramco has acquired complete ownership of German specialty chemicals producers Lanxess AG by acquisition Dutch firm Arlanxeo’s 50% stake at €1.5 billion, strengthening its foray into petrochemicals
  • Iran will be investing some US$212 million into Chennai Petroleum’s 180 kb/d expansion of the Nagapatinam refinery on India’s east coast, as Iran looks for ways to ensure captive demand for its crude in one of its largest markets
  • The Mariner East 2 NGLs pipeline – transporting ethane, propane and butane over 560km to the Marcus Hook processing plant in Pennsylvania – has been completed, with the Mariner East 2X pipeline schedules for late 2019

Natural Gas/LNG

  • Shell’s 3.6 mtpa Prelude FLNG has finally started up initial production, the last of Australia’s giant natural gas projects to be completed
  • Brunei Shell Petroleum (BSP) has completed the onshore Darat Gas Project in Lumut, expanding LNG capacity in Brunei by 5% at the Rasau station
  • ExxonMobil’s Rovuma LNG project in Mozambique will be aiming to sanction FID in 2019 for its first phase, involving two trains with a combined capacity of 7.6 million tpa from the offshore Area 4 block
  • As LNG developments in Papua New Guinea move quickly to commercialisation, the PNG government has passed new laws to impose a domestic gas requirement and other provisions for new gas projects, to ensure adequate supply of resources for growing local demand
January, 11 2019