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Last Updated: July 4, 2019
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Business Trends

Market Watch 

Headline crude prices for the week beginning 1 July 2019 – Brent: US$66/b; WTI: US$59/b

  • As the members of OPEC and the wider OPEC+ group sat down in Vienna for a delayed meeting, oil prices surged to a five-week high on optimism that a supply deal would be reached and positive developments out of the G20 Summit
  • OPEC+ was widely expected to extend the current supply deal to the end of 2019, but there was optimism that more could be expected; OPEC delivered by agreeing to extend the production cuts to March 2020
  • At the recently concluded G20 Summit in Osaka, all eyes were on US and China interactions, with President Donald Trump and Premier Xi Jinping agreeing to restart trade talks that could end a period of uncertainty of the global economy
  • Reaction to the events was mixed; the extension of the supply deal was widely expected, and the additional three months was not enough to shake up the status quo, while the US-China thaw was a mere truce but held no promise of a concrete deal being reached
  • US drillers snapped a declining streak, adding four oil rigs but dropping four gas rigs to leave the active US rig count unchanged at 967, 80 sites down from the count a year ago
  • After initial optimism, the extent of the OPEC+ supply deal extension is unlikely to be comprehensive enough to please the market and we expect crude prices will pare back gains to trade US$63-65/b for Brent and US$56-58 for WTI

Headlines of the week


  • The Kenya government has officially signed an agreement with Tullow Oil, Total and Africa Oil Corp for a 60-80 kb/d crude oil processing facility to cover crude discoveries in Blocks 10BB and 3T in the Lokichar Basin
  • ExxonMobil is reportedly looking to put its Norwegian upstream portfolio up for sale, covering some 150,000 boe/d of production, following in the footsteps of other American firms pulling back from the North Sea
  • South Africa is working on a new oil and gas policy to clearly define regulation for oil and gas resources in light of Total’s massive Brulpadda discovery


  • Saudi Aramco has announced plans to spend US$6 billion to build additional petrochemical capabilities at its South Korean refining joint venture with S-Oil, adding a steam cracker and olefins unit to the 669 kb/d site by 2024
  • Philadelphia Energy Solutions has confirmed that it will shut down its 335 kb/d US refinery that was crippled by a massive fire last month
  • Chevron Phillips Chemical and Qatar Petroleum have signed an agreement to build a 1.9 mtpa ethane cracker and two polyethylene units at the Ras Laffan Industrial City complex in Qatar
  • Vitol has started construction of a 30 kb/d small oil refinery at its Malaysian storage terminal in Tanjung Bin aimed at providing low-sulfur fuel oil for ships
  • Petronas Chemicals has announced plans to invest US$6 billion over the next 20 years to expand its specialty chemicals portfolio, primarily through acquisitions like its US$186 million takeover of the Da Vinci Group in May
  • In synergy with ExxonMobil’s planned expansion of its Singapore refining complex, industrial gas player Linde is spending US$1.4 billion to expand its facilities to supply hydrogen and synthesis gas to the ExxonMobil site
  • Turkmenistan has inaugurated the world’s first gas-to-gasoline plant in Ashgabat, with the capacity for 15,500 b/d of gasoline from natural gas
  • Petrobras has reaffirmed its intent to depart completely from fuels distribution in Brazil, aiming to sell off at least one of its 8 refineries this year and strike a deal for its LPG unit as soon as August

Natural Gas/LNG

  • BP’s gas marketing arm has signed an LNG sales and purchase agreement with Woodfibre LNG in Canada’s British Columbia, taking on 750,000 tons per annum of LNG over 15 years beginning 2024
  • Cheniere has produced first LNG from its Corpus Christi Train 2 site in Texas
  • Kufpec, the international upstream arm of Kuwait Petroleum Corp, is aiming to boost production from its gas assets in Canada and Australia, targeting a boost at its Canadian shale gas to 20,000 boe/d by end-2019 and gaining right to three new gas blocks in Australia where currently production is almost 40,000 boe/d
  • Australia’s Evol LNG has agreed to supply LNG to the Adaman Resources’ Western Australian Kirkalocka Gold mine beginning September 2019
  • American liquefaction player Venture Global has raised an additional US$675 million to fund the ongoing development of its 20 mtpa Plaquemines LNG export terminal in Louisiana
  • Sempra LNG has applied for permission to expand its Port Arthur LNG plant with two additional trains (Train 3 and Train 4) that would double production capacity to 27 million tons per annum

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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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