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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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