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Last Updated: May 3, 2019
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Market Watch

Headline crude prices for the week beginning 29 April 2019 – Brent: US$72/b; WTI: US$63/b

  • After touching fresh peaks the previous week, as the USA confirmed its intention to hold firm to its decision to end waivers on Iranian crude, global crude oil prices have taken a bit of a breather, easing back as the Americans vowed to make up for the loss of Iranian crude volumes
  • Iran itself has threatened to close the Strait of Hormuz – a threat it has used in the past – stating that ‘if we are prevented from using it, we will close it’, a direct threat to the US’ return to aggressive sanctions designed to reduce Iranian oil export ‘to zero’
  • With Saudi Arabia and Russia appearing poised to make up for the Iranian loss, the market also noted that President Donald Trump was once again calling on OPEC to reduce oil prices, despite being responsible for causing it in the first place
  • Meanwhile in strife-set Venezuela, crude oil production fell to 840,000 b/d in March, the lowest level for the country since January 2003; renewed tensions between pro-Maduro and pro-Guaido forces in the country could lead to a possible civil war, further hampering output
  • The active US rig count fell by a huge 21 sites last week – 20 oil and 1 gas – bringing the total rig count below the 1000 level for the first time in 15 months to 991 sites with most of the losses in onshore shale basins
  • Crude oil is like to fall back to the US$70-72/b range for Brent and US$61-63/b for WTI, with reports of ample supplies in the market washing over concerns of the end of Iranian crude waivers and the continued implosion in Iran

Headlines of the week

Upstream

  • The Chevron-Anadarko deal is not yet set in stone, with rival Occidental Petroleum engaging in a bidding war with a new US$38 billion takeover proposal – or a 20% premium over Chevron’s offer
  • Shell claims that it has made a ‘blockbuster’ discovery at its Blacktip deepwater well in the Gulf of Mexico, with the Perdido Corridor asset shared with Chevron, Equinor and Respsol reporting ‘significant’ oil flows
  • Lukoil has achieved cumulative production of 100 million tons at Iraq’s West-Qurna-2 field over Phase 1 of the project, with current output of 400,000 b/d
  • CNOOC and PetroChina have signed a new Petroleum Contract, covering the Beibu Gulf 23/29 and Beibu Gulf 24/11 blocks in the South China Sea
  • ExxonMobil will be adding some 28,000 sq.km to its exploration acreage in Namibia through the addition of offshore Blocks 1710 and 1810 and farm-in agreements with state firm NAMCOR for Blocks 1711 and 1811A
  • The Trump administration will be delaying its plans to vastly open up federal coastal waters for oil and gas drilling until after 2020 Presidential election, following legal setbacks and opposition from coastal Republicans
  • ADNOC has launched a second licensing round in Abu Dhabi, covering the offshore Block 3, 4 and 5, and the onshore Blocks 2 and 5
  • Angola is reportedly planning to offer nine oil blocks in the prolific Namibe basin for auction this year to capitalise on a swell in crude prices

Midstream & Downstream

  • ExxonMobil will be expanding its 270 kb/d Fawley refinery in the UK to increase ultra-low sulfur diesel output by 38 kb/d, the latest in a string of clean fuel investments across the supermajor global refining network
  • Azerbaijan’s new STAR refinery in Turkey will be expanding its crude diet away from the current source of Russian Urals crude to include other Middle Eastern and African grades beginning this month
  • Indian Oil’s 160 kb/d Mathura refinery in northern state Uttar Pradesh will be shut down for over a month beginning November 2019 for full maintenance
  • Shell employees at the 400 kb/d Pernis refinery in the Netherlands have voted to end a union-backed strike after a new wage offer was made by Shell
  • As rumoured, Saudi Aramco has bought out Shell’s 50% stake in the Jubail Industrial City SASREF refining joint venture for US$631 million

Natural Gas/LNG

  • Saudi Aramco has sold its first shipment of LNG ever – despite not producing a single drop of the fuel – with the trade coming out of its Singapore trading arm to an unidentified Indian buyer
  • ExxonMobil and China’s Zhejiang Provincial Energy Group have signed a sales agreement for the 20-year supply of 1 mtpa of LNG beginning 2021
  • China’s CNOOC has reached an agreement with Russia’s Novatek to acquire a 10% interest in the Arctic LNG-2 project located on the Gydan Peninsula
  • President Donald Trump is reportedly considering waiving a requirement that only US-flagged ships can move natural gas between two US ports, to ease distribution and bottlenecks within the US natural gas system
  • Australia’s Santos has acquired all remaining equity in the Tern and Frigate gas discoveries in Australia, boosting its position in the growing LNG space there
  • China is reportedly looking into a plan to build a network of LNG plants along the Yangtze river to improve supplies to underdeveloped areas upstream

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May, 24 2022
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May, 20 2022
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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May, 09 2022