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Market Watch

Headline crude prices for the week beginning 25 February 2019 – Brent: US$67/b; WTI: US$57/b

  • Crude oil prices maintained at elevated levels on optimism that the US and China were headed on a path of agreement on their trade spat
  • Initially teased by President Trump, the US has officially shelved its threat to increase tariffs on US$200 billion worth of Chinese imports ‘until further notice’, reducing the risk of a shock to the global economy
  • However, President Trump has gone on the attack again, calling on OPEC to ‘relax and take it easy’ instead of supporting oil prices at what the US believes to be ‘too high a level’
  • As Venezuela faces more US sanctions, India has been taking the advantage, becoming the largest buyer of Venezuelan crude in February, with volumes of some 620,000 b/d mainly driven by buying from Reliance
  • But while India feasts on Venezuelan oil, it has also hedged bets as Indian Oil Corp entered into the first annual deal to purchase US crude in India, taking in 60,000 b/d of oil through March 2020 to diversify sources
  • The US active rig count dropped by four last week, losing four oil sites, breaking a two-week streak of gains to close the week at 1,047 active rigs
  • Easing trade tensions between the US and China should keep oil prices afloat, with Brent expected to stay in the US$66-68/b range and WTI at US$55-57/b


Headlines of the week

Upstream

  • US pipeline company Targa Resources is selling a 45% stake in Targa Badlands LLC, which holds shale plays in the Bakken and Three Forks areas of North Dakota, for some US$1.6 billion in cash
  • Kenya has accused Somalia of ‘misleading investors’ by offering up four offshore oil blocks in a maritime area disputed by both nations
  • To ease its oil sands industry that has been hampered by a pipeline crunch, the Canadian province of Alberta is investing US$2.8 billion in adding 120,000 b/d of crude-by-rail capacity through the addition of 4,400 rail cars over 3 years
  • PetroChina has made a shale oil discovery in a remote area of northwestern China, with test well results from the Jimsar field in Xinjiang suggesting strong potential for shale plays after years of disappointing results
  • Canada’s National Energy Board has recommended approval of the Trans-Mountain pipeline expansion, clearing the way for a project necessary to help clear heavy crude oil trapped in the Alberta province
  • As part of US$20 billion in investments, Saudi Arabia has signed an agreement to supply Pakistan with crude oil and fuel products to plug its national deficit

Midstream & Downstream

  • India’s giant US$44 billion refinery in Maharashtra is heading for delays, as farmer opposition has forced the joint venture between India’s state oil firms and Saudi Aramco to relocate from its initial site in Nanar near Mumbaiz
  • Saudi Aramco has made another major investment in China, joining Norinco and Panjin Sincen in a 300,000 b/d refinery in the Liaoning province, stepping up its efforts to secure crude oil market share in the Chinese market
  • Saudi Aramco and Total have announced plans to invest US$1 billion over the next six years in their 50:50 fuel retail joint venture, focusing on Saudi Arabia
  • Kenya has shot down suggestions of constructing a new refinery to capitalise on the expected 80,000 b/d of crude output flowing from the Lokichar basin; Kenya’s only refinery in Mombasa has been converted in a storage facility
  • Saudi Aramco’s trading arm has opened up offices in London and Fujairah, following an initial international setup in Singapore in June 2018
  • Pertamina has announced plans to spend US$4.2 billion in 2019 and US$7 billion per year from 2021 to double Indonesia’s domestic refining capacity to 2 mmb/d by 2026, focusing on planned new sites in Bontang and Tuban
  • Citgo has put on hold the US$685 million refurbishment of the 209,000 b/d refinery in Aruba due to ongoing sanctions imposed on Venezuela by the US

Natural Gas/LNG

  • Repsol has made the largest natural gas discovery in Indonesia in over 18 years, with the KBD-2X well in the Sakakemang block in South Sumatra estimated to provide at least 2 tcf of recoverable resources since the Cepu field in 2001
  • After receiving approval from the Federal Energy Regulatory Commission, Venture Global LNG has decided to start immediate construction on its US$5 billion Calcasieu Pass LNG terminal in Louisiana

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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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