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Last Updated: May 31, 2019
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Market Watch

Headline crude prices for the week beginning 27 May 2019 – Brent: US$68/b; WTI: US$58/b

  • After tumbling down last week on the escalation of the US-China trade war, global crude oil prices have steadied up although the downside risk remains vast as the health of the global economy has become fragile
  • Beyond just China, US President Donald Trump launched a new front in his trade war, imposing tariffs on all Mexican imports over ‘facilitating illegal immigration’; in between the trade tiffs with allies, sanctions on rogue-ish states and possible military action towards Iran, the global geopolitical situation is dicey and crude prices have tumbled in response.
  • Ahead of its meeting in Vienna next month, OPEC and the wider OPEC+ group is adamant about controlling supply over the remainder of 2019; but while the Middle Eastern members are adhering, Russia is lagging and has seen sales of its crude to the USA increase dramatically
  • Also on the supply side, the chronic political turmoil has taken its toll on Venezuela, where production fell to 740,000 b/d in March, making the founding member of OPEC only the fourth current largest Latin American oil producer behind Brazil, Mexico and Colombia
  • But while the oil world frets about the health of global demand, American drillers reduced active rigs for the third consecutive week, cutting five oil rigs and starting up one gas rig for a net loss of 4 to a total of 983
  • With trouble brewing on the horizon on several macro-economic fronts – and seemingly happily fanned by US belligerence – the trend for crude oil price is downwards; we expect Brent to drop down to a trading range of US$63-65/b and WTI to US$55/57/b while the situations (attempts) to calm down


Headlines of the week

Upstream

  • Shell has started up its Appomattox floating production system in deepwater US Gulf of Mexico several months ahead of schedule, with expected production of 175,000 boe/d from the Norphlet formation
  • Ukraine will be launching a third licensing round for 2019 in June, covering nine blocks across three regions for a period of 20 years, as well as a public tender for nine onshore and one offshore block for 50 years
  • Canada’s controversial Trans Mountain pipeline expansion that will move oil sands from Alberta to British Columbia has been given a boost as a BC Appeals Court ruled that the province does not have the jurisdiction to restrict the project
  • Shell has announced a small upstream success in Albania, with the Shpirag 4 onshore well showing flow of ‘several thousand barrels per day’ of light oil
  • A consortium led by Italy’s Eni has won the offshore block MLO 124 in Argentina’s Malvinas Basin near Tierra del Fuego
  • Polish refiner Lotos is reportedly looking at purchasing upstream assets to reduce its dependence on Russian crude given the recent toxic crude situation
  • There might be turmoil in Guyana, as its anti-corruption agency is investigating how exploration rights were awarded to ExxonMobil and Tullow

Midstream & Downstream

  • China’s Jinling refinery exported its first cargo of gasoline from Nanjing, shipping it to Singapore as Chinese players expand their export operations on swollen domestic inventories and a new round of higher export quotas
  • A month after South Africa’s Strategic Fuel Fund acquired 90% of the B2 Block in South Sudan, the state-backed fund is looking to expand its scope to include midstream facilities and a possible 60 kb/d refinery in Pagak
  • The toxic crude situation across Russia’s Druzhba pipeline appears to have been mostly rectified, with refineries in Poland and Slovakia now receiving clean oil
  • Russia’s 180 kb/d Antipinsky refinery has officially filed for bankruptcy, with a London court ordering its assets to be frozen in favour of VTB Trading
  • Despite being a major crude producer, Angola has been facing severe fuel shortages domestically and has signed Trafigura and Total to supply gasoline, diesel and marine gas oil by tender through May 2019

Natural Gas/LNG

  • Gazprom has confirmed its recent giant gas discoveries in Russia’s Yamal peninsula, with the Dinkov and Nyarmeyskoye fields in the Kara Sea estimated to hold up to a collective 17.9 tcf of recoverable resources
  • Russia’s Novatek has unveiled plans to build the new Ob LNG plant near the port of Sabetta in the Yamal Peninsula, which is planned to have capacity for 4.8 million tons per year and come into operation in 2023 for US$5 billion
  • The US$20 billion Abadi LNG project in the Arafura Sea might actually be progressing as Japan’s Inpex has reportedly reached an agreement with the new Widodo government on the development plan for the giant gas field
  • Australia’s Woodside is on the hunt to expand its LNG portfolio with a particular focus on foreign opportunities along with domestic brownfield assets
  • The little known Cynergy Group from Cyprus has announced plans to spend up to US$10 billion to buy and unite under-utilised gas assets in the East Mediterranean with the intent of cutting through bureaucratic red tape

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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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