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Last Updated: October 8, 2019
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Market Watch  

Headline crude prices for the week beginning 30 September 2019 – Brent: US$59/b; WTI: US$54/b

  • News that Saudi production was ‘fully back online’ dropped global benchmarks back to their pre-attack range, moving the oil markets back to the question of how to ‘manage supply’ in the face of the inexorable rises in US output
  • Saudi Aramco stated that its production capacity has risen back to 11.3 mmb/d and will hit 12 mmb/d by November; output for October was expected to rise back to 9.89 mmb/d after falling to 5 mmb/d in the aftermath of the attacks
  • However, there have been some signs of the outage causes some kinks in the Saudi system – JXTG Nippon Oil reports that its scheduled cargos were switched from light crude to heavy and medium for October
  • A week after the UK-flagged ship was released by Iran, there are more shipping woes surrounding Iran as the US imposed penalties on four Chinese shipping companies for carrying Iranian crude post-waiver
  • There was also a new (unwelcome) development in the US trade war with China, as the US mulls capping the amount of American money that can flow into China; coupled with a sputtering Indian economy, the health of the global economy and global oil demand is in peril
  • Despite the unstoppable rise of US crude production, it appears that this has been mainly on the back of improved productivity, as the active US rig count fell once again by 8 sites (6 oil and 2 gas), bringing the total count down to 860, down 194 sites y-o-y
  • With no upside in sight, there is little room for oil prices to go but sideways or down; we expect that crude prices should be able to at least stay in their current range with Brent at US$58-60/b and WTI and US$53-55/b

Headlines of the week

Upstream

  • As rumoured, ExxonMobil is looking to exit Norwegian upstream, selling its non-operating assets to Var Energi AS for some US$4.5 billion, covering over 20 fields with a combined production of 150,000 boe/d
  • Reports suggest that ExxonMobil may be selling its 64% stake in the Ca Voi Xanh (Blue Whale) offshore project in Vietnam on fears that it taps into the same basin claimed by China as part of its Southeast Asia nine-dashed line
  • Sudan has urged international firms operating there to speed up exploration and production operations, despite ongoing grouses over unpaid liftings
  • Equinor’s plans for the Great Australian Bight – with some 1.9 billion potential barrels of oil – will be decided by the offshore regulator by mid-November
  • Kazakhstan is seeking an additional US$1 billion from the partners of the 425,000 b/d Karachaganak oil and gas project – including Shell, Eni and Chevron – the latest in a long line of spats over taxes and costs beginning 2012
  • A Canadian federal court has halted plans by the Alberta province to cut off crude oil pipeline flows to British Columbia, which came about due to disagreements over the planned expansion of the Trans Mountain Pipeline
  • The first ever onshore drilling campaign in Timor-Leste in nearly 50 years will begin as Timor Resources starts a campaign in the Viqueque formation
  • Indonesia’s PT Medco Energi has announced plans to almost triple its output from 120,000 b/d to 300,000 b/d over the next 5-10 years, betting on higher prices and supporting that goal by acquiring existing onshore wells
  • An underwater leak at the YYA-1 well in the Offshore North West Java block operated by Pertamina has finally been fixed after two months

Midstream/Downstream

  • While many major refineries are already producing low sulfur fuel oil to comply with the new IMO standards, some light crude from the UK and West Africa is being marketed as a straight replacement, requiring only minor blending
  • Sinopec continues to make strides in meeting the IMO requirements, with its Qilu refinery in Shandong expected to begin producing LSFO this month
  • A key shareholder of Marathon Petroleum – hedge fund Elliot Management Corp – has called for the company to be spun off into three businesses, covering its current retail, refining and midstream operations
  • Efforts to improve the chronic underperformance of Mexican refineries appear to be paying off, with utilisation rising to 50% from 38% in August
  • A shortfall of LPG from Saudi Arabia – where refining runs were lowered after recent attacks – has led India to turn to UAE to make up the shortfall

Natural Gas/LNG

  • Kinder Morgan’s Gulf Coast Express Pipeline has begun commercial service, delivering natural gas from Waha area in the Permian Basin to Agua Dulce near Corpus Christi on the Texas Gulf Coast, with a capacity for 2 bcf/d
  • Kosmos Energy hopes that its new Yakaar-2 well offshore Senegal is a ‘world-class’ discovery that will support the Yakaar-Teranga LNG project
  • Equinor has struck new gas in the Orn well near the Marulk field in the Norwegian Sea, with initial estimates suggesting 50-88 million boe in place

Corporate

  • Saudi Aramco will launch its IPO around October 20 – estimated at an initial US$2 trillion – a short timeline that has left investors scrambling

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Natural gas inventories surpass five-year average for the first time in two years

Working natural gas inventories in the Lower 48 states totaled 3,519 billion cubic feet (Bcf) for the week ending October 11, 2019, according to the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report (WNGSR). This is the first week that Lower 48 states’ working gas inventories have exceeded the previous five-year average since September 22, 2017. Weekly injections in three of the past four weeks each surpassed 100 Bcf, or about 27% more than typical injections for that time of year.

Working natural gas capacity at underground storage facilities helps market participants balance the supply and consumption of natural gas. Inventories in each of the five regions are based on varying commercial, risk management, and reliability goals.

When determining whether natural gas inventories are relatively high or low, EIA uses the average inventories for that same week in each of the previous five years. Relatively low inventories heading into winter months can put upward pressure on natural gas prices. Conversely, relatively high inventories can put downward pressure on natural gas prices.

This week’s inventory level ends a 106-week streak of lower-than-normal natural gas inventories. Natural gas inventories in the Lower 48 states entered the winter of 2017–18 lower than the previous average. Episodes of relatively cold temperatures in the winter of 2017–18—including a bomb cyclone—resulted in record withdrawals from storage, increasing the deficit to the five-year average.

In the subsequent refill season (typically April through October), sustained warmer-than-normal temperatures increased electricity demand for natural gas. Increased demand slowed natural gas storage injection activity through the summer and fall of 2018. By November 30, 2018, the deficit to the five-year average had grown to 725 Bcf. Inventories in that week were 20% lower than the previous five-year average for that time of year. Throughout the 2019 refill season, record levels of U.S. natural gas production led to relatively high injections of natural gas into storage and reduced the deficit to the previous five-year average.

The deficit was also decreased as last year’s low inventory levels are rolled into the previous five-year average. For this week in 2019, the preceding five-year average is about 124 Bcf lower than it was for the same week last year. Consequently, the gap has closed in part based on a lower five-year average.

Lower 48 natural gas inventories, difference to five-year average

Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report

The level of working natural gas inventories relative to the previous five-year average tends to be inversely correlated with natural gas prices. Front-month futures prices at the Henry Hub, the main price benchmark for natural gas in the United States, were as low as $1.67 per million British thermal units (MMBtu) in early 2016. At about that same time, natural gas inventories were 874 Bcf more than the previous five-year average.

By the winter of 2018–19, natural gas front-month futures prices reached their highest level in several years. Natural gas inventories fell to 725 Bcf less than the previous five-year average on November 30, 2018. In recent weeks, increasing the Lower 48 states’ natural gas storage levels have contributed to lower natural gas futures prices.

Lower 48 natural gas inventories and Henry Hub futures prices

Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report and front-month futures prices from New York Mercantile Exchange (NYMEX)

October, 21 2019
Your Weekly Update: 14 - 18 October 2019

Market Watch  

Headline crude prices for the week beginning 14 October 2019 – Brent: US$59/b; WTI: US$53/b

  • Crude oil prices remain stubbornly stuck in their range, despite several key issues that could potentially move the market occurring over the week
  • The sudden thawing of the icy trade relations between the US and China last week – announcing a partial trade deal where new tariffs would be halted – was a positive for the waning health of the global economy; this, however, failed to send prices any higher as previous optimism has always been dashed
  • The trade spat has already caused fears of an economic recession and tumbling global oil demand, with the IEA projecting yet another drop in the demand that has neutralised another possible ‘geopolitical premium’ on prices
  • That geopolitical premium focuses on the fragile situation in the Middle East, with risk spiking up as Iran announced that one of its tankers in the Red Sea – far away from the Persian Gulf - had been struck by missiles; an initial accusation that Saudi Arabia was behind the attack was later withdrawn
  • Meanwhile, news emerged that Nigeria had been quietly handed an increased quota under the OPEC+ supply deal, from 1.685 mmb/d to 1.774 mmb/d, in July, which would help it meet compliance under the deal
  • After more than two months of continuous declines, the US active rig count increased for the first time, but not by much; two oil rigs were added, offset by the loss of a gas rig, but a net gain of 1 to a total of 856
  • We expect prices to remain entrenched as it displays resilience against political and economic factors, with Brent hovering in the US$58-60/b area and WTI at the US$52-54/b range


Headlines of the week

Upstream

  • The US Department of the Interior will be opening up 722,000 acres of federal land along California’s central coast near Fresno, San Benito and Monterey for oil and gas leasing – the first sale in the state since 2013
  • Alongside the lease sale in California, the US will also be opening up some 78 million acres in Gulf of Mexico federal waters for sale in 2020, covering all available unleased areas not subject to Congressional moratorium
  • Santos has confirmed oil flows at the Dorado-3 well in the Bedout Basin offshore Western Australia, with some 11,1000 b/d in place
  • After having exited Norway, ExxonMobil is now reportedly looking into selling its Malaysian offshore upstream assets as part of its divestiture programme, fetching up to US$3 billion for assets including the Tapis Blend operations
  • Equinor has won a new exploration permit – WA-542-P – in the offshore Western Australia Northern Carnarvon Basin, located new the Dorado well
  • Nigeria is looking to settle a US$62 billion income-sharing dispute with international oil firms such as ExxonMobil, Shell, Chevron, Total and Eni operating in the country, with hopes of reaching a settlement
  • Barbados is looking to emulate its nearby neighbour Guyana as it gears up for its third offshore bid round that will launch in early 2020
  • Petroecuador has been forced to declare force majeure on its crude exports, as widespread protests over the removal of fuel subsidies have led to the shutdown of some oilfields
  • Abu Dhabi is looking to create a new benchmark price for Middle Eastern crude based on its Murban grade that could compete with Brent and WTI

Midstream/Downstream

  • Aruba has ended its contract with Citgo – PDVSA’s US refining arm – to operate its 209,000 b/d refinery that is currently idled; a new operator is being sought, paralleling the situation over Curacao’s Isla refinery and PDVSA
  • Poland’s crude pipeline operator expects to only be able to clear its system of contaminated Russian oil from the Druzhba incident by July 2020
  • Gunvor’s Rotterdam refinery will only be able to produce low sulfur fuel oil by March 2020, part of a larger planned overhaul of the 88,000 b/d site

Natural Gas/LNG

  • After Total’s departure, it is now the turn of CNPC to quit the South Pars Phase 11 project in Iran, leaving Iran to go ahead alone its largest natural gas project ever as the threat of US sanctions bites down
  • CNPC has taken over operation of the Chuandongbei sour gas field in China’s Sichuan basin from Chevron, and will kick of Phase 2 development soon
  • Qatar has invited ExxonMobil, Shell, Total, ConocoPhillips and some other ‘big players’ to assist in the North Field expansion that will underpin its ambitions to boost gas output to 110 million tpa from a current 77 million tpa
  • The FID on the Rovuma LNG project in Mozambique has been pushed back by a year, with first production now expected by 2025 at the earliest
  • Pakistan has cancelled a ‘huge’ 10-year tender covering 240 LNG cargoes to its second LNG terminal, turning instead to spot cargoes due to inadequate demand
  • Inpex has formally received a 35-year extension for the PSC covering the Abadi LNG project in Indonesia, extending its operation of the Masela block to 2055
October, 18 2019
Ecuador Exits OPEC

Amid ongoing political unrest, Ecuador has chosen to withdraw from OPEC in January 2020. Citing a need to boost oil revenues by being ‘honest about its ability to endure further cuts’, Ecuador is prioritising crude production and welcoming new oil investment (free from production constraints) as President Lenin Moreno pursues more market-friendly economic policies. But his decisions have caused unrest; the removal of fuel subsidies – which effectively double domestic fuel prices – have triggered an ongoing widespread protests after 40 years of low prices. To balance its fiscal books, Ecuador’s priorities have changed.

The departure is symbolic. Ecuador’s production amounts to some 540,000 b/d of crude oil. It has historically exceeded its allocated quota within the wider OPEC supply deal, but given its smaller volumes, does not have a major impact on OPEC’s total output. The divorce is also not acrimonious, with Ecuador promising to continue supporting OPEC’s efforts to stabilise the oil market where it can. 

This isn’t the first time, or the last time, that a country will quit OPEC. Ecuador itself has already done so once, withdrawing in December 1992. Back then, Quito cited fiscal problems, balking at the high membership fee – US$2 million per year – and that it needed to prioritise increasing production over output discipline. Ecuador rejoined in October 2007. Similar circumstances over supply constraints also prompted Gabon to withdraw in January 1995, returning only in July 2016. The likelihood of Ecuador returning is high, given this history, but there are also two OPEC members that have departed seemingly permanently.

The first is Indonesia, which exited OPEC in 2008 after 46 years of membership. Chronic mismanagement of its upstream resources had led Indonesia to become a net importer of crude oil since the early 2000s and therefore unable to meet its production quota. Indonesia did rejoin OPEC briefly in January 2016 after managing to (slightly) improve its crude balance, but was forced to withdraw once again in December 2016 when OPEC began requesting more comprehensive production cuts to stabilise prices. But while Indonesia may return, Qatar is likely gone permanently. Officially, Qatar exited OPEC in January 2019 after 48 years of continuous membership to focus on natural gas production, which dwarfs its crude output. Unofficially, geopolitical tensions between Qatar and Saudi Arabia – which has resulted in an ongoing blockade and boycott – contributed to the split.

The exit of Ecuador will not make much material difference to OPEC’s current goal of controlling supply to stabilise prices. With Saudi production back at full capacity – and showing the willingness to turn its taps on or off to control the market – gains in Ecuador’s crude production can be offset elsewhere. What matters is optics. The exit leaves the impression that OPEC’s power is weakening, limiting its ability to influence the market by controlling supply. There are also ongoing tensions brewing within OPEC, specifically between Iran and Saudi Arabia. The continued implosion of the Venezuelan economy is also an issue. OPEC will survive the exit of Ecuador; but if Iran or Venezuela choose to go, then it will face a full-blown existential crisis. 

Current OPEC membership:

  • Middle East: Iran, Iraq, Kuwait, Saudi Arabia, UAE
  • Africa: Algeria, Angola, Equatorial Guinea, Gabon, Libya, Nigeria, Republic of Congo
  • Latin America: Venezuela
  • Total: 13
  • Withdrawing: Ecuador (January 2020)
  • Membership under consideration: Sudan (October 2015)
October, 18 2019