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Last Updated: April 26, 2019
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Market Watch

Headline crude prices for the week beginning 22 April 2019 – Brent: US$75/b; WTI: US$65/b

  • A chill ran through the oil market Monday as the US announced that it was eliminating sanction waivers on Iranian crude, causing crude oil futures to leap to its highest level in six months as traders worried about a supply shortfall
  • The US move, which will negate waivers granted to eight large oil importers back in November, was partially expected as a winding down instead of a hard-stop, although the US said it would announce crude supply offsets through Saudi Arabia and the UAE
  • Most of the importers – China, India, Japan, South Korea, Italy, Greece, Turkey and Taiwan – had stopped or wound down their purchase of Iranian crude ahead of the expiry in early May; with key importer India turning to Iraq, Mexico and the US to attempt to offset the loss
  • This will place the current OPEC supply deal under pressure ahead of the upcoming Vienna meeting, with key supporters like Russia or Iraq likely to flout the quotas, along with Saudi Arabia and the UAE
  • Also supporting prices is a surprising loss streak in the active US rig count, which fell again by a net 10 rigs last week – 8 oil, 2 gas – despite rising WTI prices; the active rig count is now merely 1 above the total this time last year
  • The wind is in the sales for crude prices, with the end of Iranian waivers and troubles in Venezuela and Libya likely to push Brent up to a trading range of US$74-75/b and WTI to US$65-66/b


Headlines of the week

Upstream

  • The hit don’t seem to stop coming from Guyana, with ExxonMobil announcing a new oil discovery at the Yellowtail-1 well, the 13th discovery in the prolific Stabroek Block and the fifth in its Turbot area
  • The young nation of South Sudan is aiming to reach crude output levels of 200,000 b/d – up from a current 168,000 b/d – by restarting blocks left dormant over the past five years due to its civil war
  • While discoveries are piling up in Guyana, international majors are also betting on Brazil’s massive pre-salt Santos Basin, with Total being the latest, announcing a four well drilling campaign in its Campo de Lapa asset
  • Eni has signed an agreement with UAE emirate Ras al Khaimah over the offshore Block A, covering an E&P sharing agreement with RAK GAS
  • BP and its partners have officially sanctioned the 100,000 b/d Azeri Central East (ACE) project in Azerbaijan, the next stage of the giant ACG oilfield
  • In Argentina’s recently concluded first offshore bid round, ExxonMobil and its partner Qatar Petroleum have won three blocks in the Malvinas Basin offshore Tierra del Fuego, adding 2.6 million net acres to ExxonMobil’s holdings
  • In the same Argentine bid round, Equinor won 7 blocks – five as a sole operator and two with partners, one with Total and one with YPF
  • ConocoPhillips has finalised the sale of its two UK upstream subsidiaries to Chrysaor E&P for a reported US$2.68 billion
  • Gazprom is exploiting oil-bearing tracts in the Western Siberia, tasking two of its subsidiaries to access the Yamburg, Pestsovoye and En-Yakhinskoye field

Midstream & Downstream

  • In a major move, Saudi Aramco is in ‘serious discussions’ to acquire up to a 25% stake in Reliance’s massive Jamnagar refining complex in India, which could be worth up to US$10-15 billion
  • After India, Saudi Arabia continues on its downstream investment spree, signing an agreement to acquire 17% in South Korean refinery Hyundai Oilbank
  • After buying out Shell from its US refining venture Motiva, Saudi Aramco is now reportedly aiming to acquire Shell’s 50% stake in the 305 kb/d SASREF refinery in Saudi Arabia’s Jubail Industrial City
  • Iraq has announced that it plans to construct a 150 kb/d oil refinery in its northern oil-rich province of Kirkuk
  • Chinese refiner Shandong Tianhong Chemical has signed a 3-year crude deal with BP for annual delivery of 8 mmb of crude beginning this year

Natural Gas/LNG

  • Israeli player Energean Oil and Gas announced a ‘significant gas discovery’ at its Karish North exploration well, with initial estimates of natural gas flowing at some 1-1.5 trillion cubic feet
  • In Australia, Santos has struck new gas at the Corvus appraisal well in the offshore Carnarvon Basin in Western Australia, with estimates suggesting a 2.5 tcf natural gas and 25-million-barrel condensate asset
  • Eagle LNG Partners has received approval from the US government to begin construction of the 3-train, 1 mtpa Jacksonville LNG project in Florida
  • Qatar is preparing for its massive North Field expansion project by issuing tenders for four mega-LNG trains with total capacity of some 33 mtpa
  • The US LNG rush continues, with Venture Global LNG now planning to add a third LNG train to its Delta LNG export project in Louisiana

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High Oil Prices and Indonesia’s Ban on Oil Palm Exports

Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.  

A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.

Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.

Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.

And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.

That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.

Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.

End of Article

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Market Outlook:

  • Crude price trading range: Brent – US$110-1113/b, WTI – US$105-110/b
  • As the war in Ukraine becomes increasingly entrenched, the pressure on global crude prices as Russian energy exports remain curtailed; OPEC+ is offering little hope to consumers of displaced Russian crude, with no indication that it is ready to drastically increase supply beyond its current gentle approach
  • In the US, the so-called NOPEC bill is moving ahead, paving the way for the US to sue the OPEC+ group under antitrust rules for market manipulation, setting up a tense next few months as international geopolitics and trade relations are re-evaluated

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