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Headline crude prices for the week beginning 3 June 2019 – Brent: US$61/b; WTI: US$53/b

  • With the US opening up new fronts in its trade war – now featuring Mexico, India and Turkey – crude oil prices have tumbled over fears that President Donald Trump’s moves will spark a significant economic slowdown
  • Worldwide manufacturing indices and consumer sentiment have turned negative recently, bringing back the spectre of a global recession that was first raised earlier this year, but abated as trade talks between the US and China appeared to progress
  • Those talks have now collapsed, with the US and China trading barbs; and now the US is slapping a 5% duty on all Mexican imports that will rise to a maximum of 25% in October if the flow of illegal immigration continues
  • This has major implications on the US refining industry, which takes up to 800,000 b/d of Mexican crude for processing along the Gulf Coast
  • The US also removed preferential trading status for India; although the total number of Indian imports involved is far smaller than China or Mexico, the threat of reprisals is high, particularly targeting US energy and soybeans
  • On the supply side, US temporary waivers on Iranian crude export sanctions expired, although in practice the 8 countries that received waivers had already stopped purchases of Iranian crude in April
  • Iran’s loss is Saudi Arabia’s benefit, as the Kingdom ramped up crude production in May to fill the vacuum left by Iranian crude – leaving the overall output across OPEC members unchanged month-to-month
  • Russia’s adherence to the current OPEC+ supply pact reached expected levels in May, not through intention but because of contaminated crude flowing through a Baltic pipeline that triggered a regional oil crisis
  • After declining for three consecutive weeks, US drillers added a modest three new rigs in the past week, with the loss of two gas sites offset by a gain of three oil rigs; the total US active rig count now stands at 984
  • Expect oil prices to remain depressed, as traders worry about the state of the global economy over American belligerence; crude oil prices should steady up in the US$62-64/b range for Brent and the US$53-55/b range for WTI

Headlines of the week

Upstream

  • After Total’s major discovery at Brulpadda, upstream focus in Africa is now on South Africa with Shell looking to acquire a stake in OK Energy’s deepwater licence off the west coast Orange Basin that would complement its existing deepwater Blocks 5, 6 and 7 offshore Cape Town in the Atlantic
  • Ithaca Energy Limited will be acquiring Chevron’s UK North Sea assets for some US$2 billion, adding ten fields to its current portfolio
  • Israel has expressed its willingness to enter into US-mediated talks with Lebanon on a permanent maritime border, which would provide delineation on competing claims over a disputed area thought to be rich in oil and gas
  • Although oil sands are out-of-vogue, Canadian Natural Resources has purchased Devon Energy’s Canadian operations for US$2.8 billion, gaining heavy oil assets in Alberta that have synergistic locations with CNR’s own areas
  • Sierra Leone has re-opened its 4th Licensing Round and extended the deadline to September 20, providing acreage in little-explored offshore regions
  • Total is pulling out of exploration in the Democratic Republic of Congo, with search efforts in Block 3 since 2011 turning up empty in discoveries
  • Marathon Oil is exiting Iraq fully, following the sale of its 15% interest in the Atrush Block in Kurdistan that is part of a wider pullback for the company
  • Eni’s chief upstream officer Antonio Vella, who oversaw a dramatic surge in the Italian major’s upstream fortunes, has been succeeded by Alessandro Puliti
  • Eni’s Africa push continues as Eni Mozambico acquires rights to three offshore blocks (A5-B, Z5-C and Z5-D) in Mozambique’s Angoche and Zambezi basins

Midstream & Downstream

  • As the dirty oil fiasco at Russia’s Druzhba pipeline winds down – with Total joining the chorus of clients demanding compensation – deals have been struck with refineries including Germany’s Leuna, as well as Poland’s Plock, Gdansk and PCK, to process the contaminated crude after blending with clean oil
  • Russia is also looking to ship the contaminated crude from the Belarus portion of the Druzhba pipeline to be processed by Russian refineries after dilution with clean oil to reduce the organic chloride down from unusable 300ppm levels
  • Following the start-up of its 400,000 b/d refinery in Dalian, Hengli Petrochemical is aiming to become China’s first private exporter of jet fuel, a move that will require a litany of red-tape bureaucracy, licensing and approvals
  • State oil firm Petroperu is looking at selling off units in its 95,000 b/d Talara refinery to raise up to US$1 billion to finance a massive planned expansion
  • Despite protests from farmers, Total’s 500,000 tpa palm oil-based biodiesel refinery will be starting up in early June, completing the turnaround for the La Mede site from loss-making oil refinery to a competitive biodiesel plant
  • Azerbaijan’s SOCAR is looking to list its Turkish subsidiary and the 215 kb/d STAR refinery in the London, Hong Kong and Istanbul stock exchanges in 2021

Natural Gas/LNG

  • Venture Global LNG’s Calcasieu Pass export project in Louisiana’s 10 mtpa Cameron Parish has received a US$1.3 billion equity injection from Stonepeak Infrastructure Partners
  • Argentina’s first LNG shipment is reading for loading, with state oil firm YPG preparing the first 30,000 cbm shipment from the Vaca Muerta shale play
  • American LNG is going places, with Bulgaria agreeing to take two US LNG cargoes this year – one from Cheniere and one from BP’s US trading unit

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Renewables became the second-most prevalent U.S. electricity source in 2020

In 2020, renewable energy sources (including wind, hydroelectric, solar, biomass, and geothermal energy) generated a record 834 billion kilowatthours (kWh) of electricity, or about 21% of all the electricity generated in the United States. Only natural gas (1,617 billion kWh) produced more electricity than renewables in the United States in 2020. Renewables surpassed both nuclear (790 billion kWh) and coal (774 billion kWh) for the first time on record. This outcome in 2020 was due mostly to significantly less coal use in U.S. electricity generation and steadily increased use of wind and solar.

In 2020, U.S. electricity generation from coal in all sectors declined 20% from 2019, while renewables, including small-scale solar, increased 9%. Wind, currently the most prevalent source of renewable electricity in the United States, grew 14% in 2020 from 2019. Utility-scale solar generation (from projects greater than 1 megawatt) increased 26%, and small-scale solar, such as grid-connected rooftop solar panels, increased 19%.

Coal-fired electricity generation in the United States peaked at 2,016 billion kWh in 2007 and much of that capacity has been replaced by or converted to natural gas-fired generation since then. Coal was the largest source of electricity in the United States until 2016, and 2020 was the first year that more electricity was generated by renewables and by nuclear power than by coal (according to our data series that dates back to 1949). Nuclear electric power declined 2% from 2019 to 2020 because several nuclear power plants retired and other nuclear plants experienced slightly more maintenance-related outages.

We expect coal-fired electricity generation to increase in the United States during 2021 as natural gas prices continue to rise and as coal becomes more economically competitive. Based on forecasts in our Short-Term Energy Outlook (STEO), we expect coal-fired electricity generation in all sectors in 2021 to increase 18% from 2020 levels before falling 2% in 2022. We expect U.S. renewable generation across all sectors to increase 7% in 2021 and 10% in 2022. As a result, we forecast coal will be the second-most prevalent electricity source in 2021, and renewables will be the second-most prevalent source in 2022. We expect nuclear electric power to decline 2% in 2021 and 3% in 2022 as operators retire several generators.

monthly U.S electricity generation from all sectors, selected sources

Source: U.S. Energy Information Administration, Monthly Energy Review and Short-Term Energy Outlook (STEO)
Note: This graph shows electricity net generation in all sectors (electric power, industrial, commercial, and residential) and includes both utility-scale and small-scale (customer-sited, less than 1 megawatt) solar.

July, 29 2021
PRODUCTION DATA ANALYSIS AND NODAL ANALYSIS

Kindly join this webinar on production data and nodal analysis on the 4yh of August 2021 via the link below

https://www.linkedin.com/events/productiondataanalysis-nodalana6810976295401467904/

July, 28 2021
Abu Dhabi Lifts The Tide For OPEC+

The tizzy that OPEC+ threw the world into in early July has been settled, with a confirmed pathway forward to restore production for the rest of 2021 and an extension of the deal further into 2022. The lone holdout from the early July meetings – the UAE – appears to have been satisfied with the concessions offered, paving the way for the crude oil producer group to begin increasing its crude oil production in monthly increments from August onwards. However, this deal comes at another difficult time; where the market had been fretting about a shortage of oil a month ago due to resurgent demand, a new blast of Covid-19 infections driven by the delta variant threatens to upend the equation once again. And so Brent crude futures settled below US$70/b for the first time since late May even as the argument at OPEC+ appeared to be settled.

How the argument settled? Well, on the surface, Riyadh and Moscow capitulated to Abu Dhabi’s demands that its baseline quota be adjusted in order to extend the deal. But since that demand would result in all other members asking for a similar adjustment, Saudi Arabia and Russia worked in a rise for all, and in the process, awarded themselves the largest increases.

The net result of this won’t be that apparent in the short- and mid-term. The original proposal at the early July meetings, backed by OPEC+’s technical committee was to raise crude production collectively by 400,000 b/d per month from August through December. The resulting 2 mmb/d increase in crude oil, it was predicted, would still lag behind expected gains in consumption, but would be sufficient to keep prices steady around the US$70/b range, especially when factoring in production increases from non-OPEC+ countries. The longer term view was that the supply deal needed to be extended from its initial expiration in April 2022, since global recovery was still ‘fragile’ and the bloc needed to exercise some control over supply to prevent ‘wild market fluctuations’. All members agreed to this, but the UAE had a caveat – that the extension must be accompanied by a review of its ‘unfair’ baseline quota.

The fix to this issue that was engineered by OPEC+’s twin giants Saudi Arabia and Russia was to raise quotas for all members from May 2022 through to the new expiration date for the supply deal in September 2022. So the UAE will see its baseline quota, the number by which its output compliance is calculated, rise by 330,000 b/d to 3.5 mmb/d. That’s a 10% increase, which will assuage Abu Dhabi’s itchiness to put the expensive crude output infrastructure it has invested billions in since 2016 to good use. But while the UAE’s hike was greater than some others, Saudi Arabia and Russia took the opportunity to award themselves (at least in terms of absolute numbers) by raising their own quotas by 500,000 b/d to 11.5 mmb/d each.

On the surface, that seems academic. Saudi Arabia has only pumped that much oil on a handful of occasions, while Russia’s true capacity is pegged at some 10.4 mmb/d. But the additional generous headroom offered by these larger numbers means that Riyadh and Moscow will have more leeway to react to market fluctuations in 2022, which at this point remains murky. Because while there is consensus that more crude oil will be needed in 2022, there is no consensus on what that number should be. The US EIA is predicting that OPEC+ should be pumping an additional 4 million barrels collectively from June 2021 levels in order to meet demand in the first half of 2022. However, OPEC itself is looking at a figure of some 3 mmb/d, forecasting a period of relative weakness that could possibly require a brief tightening of quotas if the new delta-driven Covid surge erupts into another series of crippling lockdowns. The IEA forecast is aligned with OPEC’s, with an even more cautious bent.

But at some point with the supply pathway from August to December set in stone, although OPEC+ has been careful to say that it may continue to make adjustments to this as the market develops, the issues of headline quota numbers fades away, while compliance rises to prominence. Because the success of the OPEC+ deal was not just based on its huge scale, but also the willingness of its 23 members to comply to their quotas. And that compliance, which has been the source of major frustrations in the past, has been surprisingly high throughout the pandemic. Even in May 2021, the average OPEC+ compliance was 85%. Only a handful of countries – Malaysia, Bahrain, Mexico and Equatorial Guinea – were estimated to have exceeded their quotas, and even then not by much. But compliance is easier to achieve in an environment where demand is weak. You can’t pump what you can’t sell after all. But as crude balances rapidly shift from glut to gluttony, the imperative to maintain compliance dissipates.

For now, OPEC+ has managed to placate the market with its ability to corral its members together to set some certainty for the immediate future of crude. Brent crude prices have now been restored above US$70/b, with WTI also climbing. The spat between Saudi Arabia and the UAE may have surprised and shocked market observers, but there is still unity in the club. However, that unity is set to be tested. By the end of 2021, the focus of the OPEC+ supply deal will have shifted from theoretical quotas to actual compliance. Abu Dhabi has managed to lift the tide for all OPEC+ members, offering them more room to manoeuvre in a recovering market, but discipline will not be uniform. And that’s when the fireworks will really begin.

End of Article 

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Market Outlook:

  • Crude price trading range: Brent – US$72-74/b, WTI – US$70-72/b
  • Worries about new Covid-19 infections worldwide dragging down demand just as OPEC+ announced that it would be raising production by 400,000 b/d a month from August onward triggered a slide in Brent and WTI crude prices below US$70/b
  • However, that slide was short lived as near-term demand indications showed the consumption remained relatively resilient, which lifted crude prices back to their previous range in the low US$70/b level, although the longer-term effects of the Covid-19 delta variants are still unknown at this moment
  • Clarity over supply and demand will continue to be lacking given the fragility of the situation, which suggests that crude prices will remain broadly rangebound for now

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July, 26 2021