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Last Updated: August 29, 2019
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Market Watch 

Headline crude prices for the week beginning 26 August 2019 – Brent: US$59/b; WTI: US$54/b

  • Having traded mixed for most of last week as the trade tit-for-tat table tennis match between the US and China continued, crude prices started on a higher note this week as President Trump signals a move to restart trade talks
  • Of course, this has happened before, so Trump’s comments at the G7 Summit in Biarritz might not amount to anything but were still taken by the market to be a positive step
  • This comes as China placed tariffs on US crude oil for the first time since the trade war began, embroiling a key growing export market for American producers in the turmoil
  • Chinese tariffs on US crude oil were imposed up until last year when they were removed, but the re-imposition of a 5% tariff could choke off a burgeoning business and further damage global oil demand
  • The news comes as the American Petroleum Institute (API) stated that it believes the escalating US-China trade dispute ‘hurts’ American energy leadership, directly impacting jobs within the sector
  • US crude stockpiles fell more than expected, which managed to prop up prices somewhat, capping off a stronger summer for fuel demand, particularly gasoline, and refineries ran at near full capacity
  • On the supply side, reports suggest that almost half of all active rigs in Venezuela will shut down by end October 2019 if the Trump administration does not extend a 90-day waiver on sanctions for American producers
  • After a gain last week broke a streak of losses, the US active rig count fell once again by a significant 19 sites, led by the loss of 7 rigs in the Permian; the total active rig count is now at its lowest in almost 18 months at 916 sites
  • Rangebound trading is the best the crude market can hope for now; the ebb and flow between the US and China on trade issues shows no end – depending on who you talk to – and crude prices will remain firmly in the US$58-60/b range for Brent and the US$54-56/b range for WTI


Headlines of the week

Upstream

  • Equinor and YPF have signed a joint exploration agreement for the CAN 100 offshore block in the North Argentinian Basin, with Equinor taking a 50% share
  • Husky Energy will resume production at the North Amethyst and South White Rose drill centres after operations were halted following the November 2018 oil spill off Canada’s Newfoundland and Labrador province
  • Equinor has struck oil at the Sputnik exploration well in Norway’s Barents Sea, with recoverable assets estimated at an initial 20-65 million barrels
  • Alberta will be extending its province output cuts to the end of 2020 to allow more time for the current oversupply to be eased by delayed pipeline projects
  • After being restarted just earlier this month, the Hibernia platform in Canada’s Newfoundland and Labrador has been halted once again after another incident
  • South Sudan has made a new crude discovery in the northern Adar oilfields, with ambitious plans to start production by the end of 2019
  • Pembina Pipeline Corp will be purchasing Kinder Morgan’s Canadian unit for US$3.3 billion, aiming to capitalise on Western Canadian oil sands
  • Lundin Petroleum AB has made a new oil discovery in Norway, with oil struck at Well 16/5-8s in the Goddo prospect under the PL81 license

Midstream/Downstream

  • Petrobras has received three binding offers for its LPG unit Liquigas Distribuidora, with the sale expected to be concluded by November
  • Petronas will be restarting the shut CDU at the Pengerang Refining and Petrochemical (PrefChem) Complex, after the plant was shut down in April following a fire that damaged the AR desulfurisation unit
  • The fire-damaged Philadelphia Energy Solutions refinery may have found a buyer in SG Preston, a biofuels producer that intends to convert the 350 kb/d complex into a renewable diesel production complex
  • Saudi Aramco’s US refining arm Motiva Enterprises has acquired full ownership of the Flint Hills Resource Port Arthur petrochemicals plant
  • Despite stating earlier that it would not be able to meet the new IMO rules of sulfur levels, Indonesia has now said that it will be able to meet the 2020 deadline for Indonesian-flagged vessels operating internationally and locally
  • Nigeria’s NNPC has awarded a tranche of crude-for-product swap deals to firms such as Vitol, Trafigura, and BP in an attempt to alleviate a domestic fuels deficit stemming from underperformance of NNPC’s refineries

Natural Gas/LNG

  • After a bombshell attempt by the government of Papua New Guinea to renegotiate the Papua LNG gas deal, Total is now looking to finalise terms by the end of August, sticking with the original deal signed in April
  • Natural gas production at the giant Zohr field in Egypt has now reached 2.7 bcf/d, up from a production level of 2 bcf/d in September 2018
  • Commercial LNG production has begun at the Cameron LNG Train 1 in Louisiana, with two additional trains planned for a total capacity of 12 mtpa
  • Total has re-confirmed its commitment to develop the US$23 billion Mozambique LNG project after it takes over Anadarko’s African assets following the acquisition of the latter by Occidental Petroleum
  • First liquids output has been produced at the Freeport LNG Train 1 project in Texas, with Trains 2 and 3 on course for completion by Q1 2020

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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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