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Last Updated: January 18, 2019
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Market Watch

Headline crude prices for the week beginning 14 January 2019 – Brent: US$61/b; WTI: US$51/b

  • After a rally, crude oil prices took a breather at the start of this week, as the market moved from a bullish mood to a cautious one as slowing Chinese trade data spooked the market
  • The US government shutdown – now the longest ever in history – continues with no end in sight, with Republicans and President Donald Trump at a stalemate with energised Democrats
  • That ended a week-long rally that allowed crude oil to bounce back from sub-US$50/b levels in December over OPEC+’s implementation of a new deal to shrink supplies and Saudi Arabia’s promise to ‘do more if needed’
  • Even Russia, which showed some reluctance in implementing a speedy cut, has made strides in reducing output, releasing data that showed that production fell by 30,000 b/d in December and is on track for a decrease of 50,000 b/d in January relative to October levels
  • However, the OPEC+ group is now reportedly struggling to set a date for their next meeting, where the supply deal will be reviewed; the review is set for April, ahead of OPEC’s usual Vienna meeting in June/July, but an April review is necessary to assess the expiration of American waivers on Iranian crude
  • Some downside to price trends is that the waivers on Iranian crude exports have nullified the impact of American sanctions; both Turkey and India have recently resumed imports of Iranian crude after a brief hiatus, with India electing to pay for all its crude in rupees
  • Although WTI prices have improved, American drillers are still reticent to add sites, wary of changing market conditions; Baker Hughes indicates that the active American drill count was flat last week, with the loss of 4 oil rigs offset by a gain of 4 gas ones
  • Crude price outlook: Upward momentum should continue with crude price this week, but at a more gradual pace, as fears of a slowing global economy weigh on the market. Brent should stay in the US$61-63/b range and WTI in the US$52-54/b range


Headlines of the week

Upstream

  • BP is proceeding with a major US$1.3 billion expansion of the Atlantis Phase 3 in the Gulf of Mexico, aimed at adding 38,000 b/d of additional output
  • Venezuela has announced plans to remap its Caribbean oil and gas prospects, a move that potentially puts it on collision course with ExxonMobil over the country’s long-disputed borders with the now oil-rich Guyana
  • New seismic studies at BP have identified a billion more barrels of oil in place at the deepwater Thunder Horse platform in the Gulf of Mexico
  • Saudi Arabia has published an updated figure of its oil reserves – its first in 40 years – pegging total volumes at 268.5 billion barrels
  • Norway has cut its crude production forecast, predicting the output will be 1.42 mmb/d in 2019, the lowest level since 1988
  • BP is reportedly looking to sell its 28% stake in the North Sea Shearwater assets to offset its recent US$10.6 billion acquisition of US shale fields
  • The Unity fields in South Sudan have resumed production, after being halted for five years over a civil war, with initial production targeted at 20,000 b/d
  • Eni and Thailand’s PTTEP have secured exploration rights to an oil and gas concession in Abu Dhabi, with Adnoc participating at 60% if oil is struck
  • TransCanada Corp – ahead of name change to TC Energy – is planning to start construction on the controversial Keystone XL oil pipeline in June, even in the face of continued social and legal setbacks
  • Spirit Energy’s Oda field in the Norwegian North Sea has received permission from the Norwegian Petroleum Directorate to start up
  • Aker Energy has completed successful appraisal of the offshore Pecan field in Ghana, estimating some 450-550 mmboe of resources in place
  • Shell and BP have submitted plans to begin exploratory drilling in Brazil’s Pau Brasil and Saturno pre-salt areas in early 2020

Downstream

  • Saudi Arabia has reiterated plans to build a US$10 billion oil refinery in Pakistan’s deepwater port of Gwadar, part of the larger China-Pakistan Economic Corridor plan that is part of the Belt and Road initiative
  • Shell Chemicals has started up its fourth alpha olefins unit at in Geismar, Louisiana, adding 425,000 tpa of capacity to a new total of 1.3 mtpa
  • After being idled over the paralysis between PDVSA and ConocoPhillips, the 335,000 b/d Isla refinery in Curacao has restarted, with operations likely to shift from PDVSA to Saudi Aramco’s Motiva US refining subsidiary

Natural Gas/LNG

  • After seemingly receiving official go-ahead from all levels of government and even indigenous groups, Shell’s US$31 billion Kitimat LNG project in Canada has now been blockaded by a group of protesting First Nation holdouts
  • Completion of major LNG projects in Australia’s west coast have allowed its LNG exports to increase by 23% in 2018, with greater growth expected in 2019
  • The NordStream 2, long championed by German Chancellor Angela Merkel, now faces new opposition in Germany over Russian global political interference – which could result in the controversial pipeline being delayed or cancelled
  • Shell has completed its acquisition of a 26% stake in the Hazira LNG and port venture in India from Total, bringing its equity interest to full ownership
  • BP has announced plans to drill six new exploration wells in Azerbaijan by 2020, hoping to strike a new natural gas play to rival its giant Shah Deniz field

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Saudi Aramco Moves Into Russia’s Backyard

International expansions for Saudi Aramco – the largest oil company in the world – are not uncommon. But up to this point, those expansions have followed a certain logic: to create entrenched demand for Saudi crude in the world’s largest consuming markets. But Saudi champion’s latest expansion move defies, or perhaps, changes that logic, as Aramco returns to Europe. And not just any part of Europe, but Eastern Europe – an area of the world dominated by Russia – as Saudi Aramco acquires downstream assets from Poland’s PKN Orlen and signs quite a significant crude supply deal. How is this important? Let us examine.

First, the deal itself and its history. As part of the current Polish government’s plan to strengthen its national ‘crown jewels’ in line with its more nationalistic stance, state energy firm PKN Orlen announced plans to purchase its fellow Polish rival (and also state-owned) Grupa Lotos. The outright purchase fell afoul of EU anti-competition rules, which meant that PKN Orlen had to divest some Lotos assets in order to win approval of the deal. Some of the Lotos assets – including 417 fuel stations – are being sold to Hungary’s MOL, which will also sign a long-term fuel supply agreement with PKN Orlen for the newly-acquired sites, while PKN Orlen will gain fuel retail assets in Hungary and Slovakia as part of the deal. But, more interestingly, PKN Orlen has chosen to sell a 30% stake in the Lotos Gdansk refinery in Poland (with a crude processing capacity of 210,000 bd) to Saudi Aramco, alongside a stake in a fuel logistic subsidiary and jet fuel joint venture supply arrangement between Lotos and BP. In return, PKN Orlen will also sign a long-term contract to purchase between 200,000-337,000 b/d of crude from Aramco, which is an addition to the current contract for 100,000 b/d of Saudi crude that already exists. At a maximum, that figure will cover more than half of Poland’s crude oil requirements, but PKN Orlen has also said that it plans to direct some of that new supply to several of its other refineries elsewhere in Lithuania and the Czech Republic.

For Saudi Aramco, this is very interesting. While Aramco has always been a presence in Europe as a major crude supplier, its expansion plans over the past decade have been focused elsewhere. In the US, where it acquired full ownership of the Motiva joint venture from Shell in 2017. In doing so, it acquired control of Port Arthur, the largest refinery in North America, and has been on a petrochemicals-focused expansion since. In Asia, where Aramco has been busy creating significant nodes for its crude – in China, in India and in Malaysia (to serve the Southeast Asia and facilitate trade). And at home, where the focus has on expanding refining and petrochemical capacity, and strengthen its natural gas position. So this expansion in Europe – a mature market with a low ceiling for growth, even in Eastern Europe, is interesting. Why Poland, and not East or southern Africa? The answer seems fairly obvious: Russia.

The current era of relatively peaceful cooperation between Saudi Arabia and Russia in the oil sphere is recent. Very recent. It was not too long ago that Saudi Arabia and Russia were locked in a crude price war, which had devastating consequences, and ultimately led to the détente through OPEC+ that presaged an unprecedented supply control deal. That was through necessity, as the world faced the far ranging impact of the Covid-19 pandemic. But remove that lens of cooperation, and Saudi Arabia and Russia are actual rivals. With the current supply easing strategy through OPEC+ gradually coming to an end, this could remove the need for the that club (by say 2H 2022). And with Russia not being part of OPEC itself – where Saudi Arabia is the kingpin – cooperation is no longer necessary once the world returns to normality.

So the Polish deal is canny. In a statement, Aramco stated that ‘the investments will widen (our) presence in the European downstream sector and further expand (our) crude imports into Poland, which aligns with PKN Orlen’s strategy of diversifying its energy supplies’. Which hints at the other geopolitical aspect in play. Europe’s major reliance on Russia for its crude and natural gas has been a minefield – see the recent price chaos in the European natural gas markets – and countries that were formally under the Soviet sphere of influence have been trying to wean themselves off reliance from a politically unpredictable neighbour. Poland’s current disillusion with EU membership (at least from the ruling party) are well-documented, but its entanglement with Russia is existential. The Cold War is not more than 30 years gone.

For Saudi Aramco, the move aligns with its desire to optimise export sales from its Red Sea-facing terminals Yanbu, Jeddah, Shuqaiq and Rabigh, which have closer access to Europe through the Suez Canal. It is for the same reason that Aramco’s trading subsidiary ATC recently signed a deal with German refiner/trader Klesch Group for a 3-year supply of 110,000 b/d crude. It would seem that Saudi Arabia is anticipating an eventual end to the OPEC+ era of cooperative and a return to rivalry. And in a rivalry, that means having to make power moves. The PKN Orlen deal is a power move, since it brings Aramco squarely in Russia’s backyard, directly displacing Russian market share. Not just in Poland, but in other markets as well. And with a geopolitical situation that is fragile – see the recent tensions about Russian military build-up at the Ukrainian borders – that plays into Aramco’s hands. European sales make up only a fraction of the daily flotilla of Saudi crude to enters international markets, but even though European consumption is in structural decline, there are still volumes required.

How will Russia react? Politically, it is on the backfoot, but its entrenched positions in Europe allows it to hold plenty of sway. European reservations about the Putin administration and climate change goals do not detract from commercial reality that Europe needs energy now. The debate of the Nord Stream 2 pipeline is proof of that. Russian crude freed up from being directed to Eastern Europe means a surplus to sell elsewhere. Which means that Russia will be looking at deals with other countries and refiners, possibly in markets with Aramco is dominant. That level of tension won’t be seen for a while – these deals takes months and years to complete – but we can certainly expect that agitation to be reflected in upcoming OPEC+ discussions. The club recently endorsed another expected 400,000 b/d of supply easing for January. Reading the tea leaves – of which the PKN Orlen is one – makes it sound like there will not be much more cooperation beyond April, once the supply deal is anticipated to end.

End of Article

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Market Outlook:

-       Crude price trading range: Brent – US$86-88/b, WTI – US$84-86/b

-       Crude oil benchmarks globally continue their gain streak for a fifth week, as the market bounces back from the lows seen in early December as the threat of the Omicron virus variant fades and signs point to tightening balances on strong consumption

-       This could set the stage for US$100/b oil by midyear – as predicted by several key analysts – as consumption rebounds ahead of summer travel and OPEC+ remains locked into its gradual consumption easing schedule 

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