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Last Updated: November 15, 2019
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Headline crude prices for the week beginning 11 November 2019 – Brent: US$62/b; WTI: US$56/b

  • The trade war between the US and China – and its implications on the rest of the global economy – continue to weigh down on crude oil prices, as varying indications from American and Chinese authorities paint a sketchy picture of how, or when, the trade dispute could be resolved
  • Mild improvement in US and China manufacturing and job offered hope for a respite, but the broader picture is still negative, particularly in India where a worsening economy is tampering fuel demand growth and triggering a diesel glut
  • With OPEC and the OPEC+ club preparing to meet in Vienna in three weeks, words from within the group are that the largest and most influential producers are not pushing for deeper cuts but will instead emphasise greater adherence to the current supply deal that is set to expire in March 2020
  • This comes as OPEC predicts that US shale will continue to steal its market share through 2023, making the prospect of further cuts unpalatable to members who are loathed to further sacrifice volumes amid weak prices
  • In Venezuela – where tumbling output has thus far made the OPEC task of curbing output easier – production and exports seem to have steadied, with international shipments exceeding 800,000 b/d for the second month in a row in October; most volumes going to China and Rosneft under barter deals
  • In the Persian Gulf, where the Iran situation is another potential flashpoint, a US-led multinational coalition has begun patrolling the vital shipping lane to prevent attacks and threats in the critical seabourne oil distribution pathway
  • Signs that US crude output is heading for a period of tempered growth after explosive growth seem to be confirmed by the chronic deterioration in the active US rig count; 7 oil rigs stopped operation, bringing the total count to 817 – the lowest number in 31 months
  • Until there is more clarity on the US-China trade situation or the outcome of the December OPEC meeting in Vienna, crude oil prices are likely to stay rangebound at US$60-63/b for Brent and US$56-59/b for WTI – not high enough to please producers, but not low enough to prompt decisive action


Headlines of the week

Upstream

  • Adnoc is aiming to start trading of its new Murban crude futures contract on the Abu Dhabi exchange in Q2 or Q3 2020, aiming to create a new price benchmark for Middle Eastern crudes while lifting destination restrictions on the grade
  • Hungary’s MOL Group has bought out Chevron’s interests in Azerbaijan for US$1.57 billion, acquiring a 9.57% stake in the Azeri-Chirag-Gunashli (ACG) field and an 8.9% stake in the Baku-Tbilisi-Ceyhan (BTC) pipeline
  • Equinor – along with partners ExxonMobil, Idemitsu and Neptune – have announced a new oil find in the North Sea at the Echino South well in the Fram field, with recoverable resources estimated at 38-100 million boe
  • The Ivory Coast has launched a new licensing round, covering five offshore blocks located near existing discoveries and infrastructure
  • The Canadian province of Alberta is loosening its crude oil production limits once again after a severe lack of pipeline capacity strained production last year by exempting new conventional wells from current output caps; Alberta currently allows producers to exceed their limits if shipping the excess by rail
  • Kosmos Energy has announced a new offshore oil discovery in Equatorial Guinea at the S-5 well of the Santonian reservoir in the Rio Muni Basin
  • Equinor is exiting Eagle Ford, selling its 63% interest and operatorship of its onshore shale plays in the area to Spain’s Repsol for US$325 million
  • As Total’s offshore Brulpadda discovery in South Africa moves ahead, the challenging geography of the Paddavissie play may require a fixed platform

Midstream/Downstream

  • South Africa’s Central Energy Fund and Saudi Aramco are collaborating on a new 300 kb/d refinery at Richards Bay that is expected to come onstream by 2028 as the largest oil refinery in the southern Africa region
  • The Chevron-SPC Singapore Refining Co joint venture delivered its first cargo of very low sulfur fuel oil in October in Asia’s key bunkering hub, ahead of the IMO deadline for marine fuel oil sulfur content kicking in in January
  • The refurbishment of the idled St Croix refinery in the US Virgin Islands is on track for completion in early 2020, reducing capacity by a third to 210 kb/d but increasing capacity for cleaner fuels, particular for marine usage
  • Husky Energy has completed the sale of its 12 kb/d Prince George refinery in Canada’s British Columbia to Tidewater for US$215 million

Natural Gas/LNG

  • The Port Kembla LNG import terminal in Australia’s New South Wales is facing delays, as Australian Industrial Energy and Japan’s JERA struggle to lock in customers to make the project commercially viable
  • Having taken over Anadarko’s interest in the Mozambique LNG project, Total is now looking to expand the export terminal with two additional trains, which could double capacity from a current planned 12.9 million tpa
  • The OMV/ETAP Nawara gas field in Tunisia is on track to produce first natural gas by end-2019, with capacity of 2.7 mcm/d boosting the country’s gas output by 50% and slashing gas imports by some 30%
  • After years of delays, the site for Indonesia and Inpex’s 9.5 million tpa Abadi LNG project has been decided as Yamdena island in the Arafura Sea

Corporate

  • Total will be exiting a key American industrial lobby group, following in the footsteps of Shell as it claims a divergent outlook on climate change issues

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Pricing-in The Covid 19 Vaccine

In a few days, the bi-annual OPEC meeting will take place on November 30, leading into a wider OPEC+ meeting on December 30. This is what all the political jostling and negotiations currently taking place is leading up to, as the coalition of major oil producers under the OPEC+ banner decide on the next step of its historic and ambitious supply control plan. Designed to prop up global oil prices by managing supply, a postponement of the next phase in the supply deal is widely expected. But there are many cracks appearing beneath the headline.

A quick recap. After Saudi Arabia and Russia triggered a price war in March 2020 that led to a collapse in oil prices (with US crude prices briefly falling into negative territory due to the technical quirk), OPEC and its non-OPEC allies (known collectively as OPEC+) agreed to a massive supply quota deal that would throttle their production for 2 years. The initial figure was 10 mmb/d, until Mexico’s reticence brought that down to 9.7 mmb/d. This was due to fall to 7.7 mmb/d by July 2020, but soft demand forced a delay, while Saudi Arabia led the charge to ensure full compliance from laggards, which included Iraq, Nigeria and (unusually) the UAE. The next tranche will bring the supply control ceiling down to 5.7 mmb/d. But given that Covid-19 is still raging globally (despite promising vaccine results), this might be too much too soon. Yes, prices have recovered, but at US$40/b crude, this is still not sufficient to cover the oil-dependent budgets of many OPEC+ nations. So a delay is very likely.

But for how long? The OPEC+ Joint Technical Committee panel has suggested that the next step of the plan (which will effectively boost global supply by 2 mmb/d) be postponed by 3-6 months. This move, if adopted, will have been presaged by several public statements by OPEC+ leaders, including a pointed comment from OPEC Secretary General Mohammad Barkindo that producers must be ready to respond to ‘shifts in market fundamentals’.

On the surface, this is a necessary move. Crude prices have rallied recently – to as high as US$45/b – on positive news of Covid-19 vaccines. Treatments from Pfizer, Moderna and the Oxford University/AstraZeneca have touted 90%+ effectiveness in various forms, with countries such as the US, Germany and the UK ordering billions of doses and setting the stage for mass vaccinations beginning December. Life returning to a semblance of normality would lift demand, particularly in key products such as gasoline (as driving rates increase) and jet fuel (allowing a crippled aviation sector to return to life). Underpinning the rally is the understanding that OPEC+ will always act in the market’s favour, carefully supporting the price recovery. But there are already grouses among OPEC members that they are doing ‘too much’. Led by Saudi Arabia, the draconian dictates of meeting full compliance to previous quotas have ruffled feathers, although most members have reluctantly attempt to abide by them. But there is a wider existential issue that OPEC+ is merely allowing its rivals to resuscitate and leapfrog them once again; the US active oil rig count by Baker Hughes has reversed a chronic decline trend, as WTI prices are at levels above breakeven for US shale.

Complaints from Iran, Iraq and Nigeria are to be expected, as is from Libya as it seeks continued exemption from quotas due to the legacy of civil war even though it has recently returned to almost full production following a truce. But grievance is also coming from an unexpected quarter: the UAE. A major supporter in the Saudi Arabia faction of OPEC, reports suggest that the UAE (led by the largest emirate, Abu Dhabi) are privately questioning the benefit of remaining in OPEC. Beset by shrivelling oil revenue, the Emiratis have been grumbling about the fairness of their allocated quota as they seek to rebuild their trade-dependent economy. There has been suggestion that the Emiratis could even leave OPEC if decisions led to a net negative outcome for them. Unlike the Qatar exit, this will not just be a blow to OPEC as a whole, questioning its market relevance but to Saudi Arabia’s lead position, as it loses one of its main allies, reducing its negotiation power. And if the UAE leaves, Kuwait could follow, which would leave the Saudis even more isolated.

This could be a tactic to increase the volume of the UAE’s voice in OPEC+, which has been dominated by Saudi Arabia and Russia. But it could also be a genuine policy shift. Either way, it throws even more conundrums onto a delicate situation that could undermine an already fragile market. Despite the positive market news led by Covid-19 vaccines and demand recovery in Asia, American crude oil inventories in Cushing are now approaching similar high levels last seen in April (just before the WTI crash) while OPEC itself has lowered its global demand forecast for 2020 by 300,000 b/d. That’s dangerous territory to be treading in, especially if members of the OPEC+ club are threatening to exit and undermine the pack. A postponement of the plan seems inevitable on December 1 at this point, but it is what lies beyond the immediate horizon that is the true threat to OPEC+.

Market Outlook:

  • Crude price trading range: Brent – US$44-46/b, WTI – US$42-44/b
  • More positive news on Covid-19 vaccines have underpinned a crude price rally despite worrying signs of continued soft demand and inventory build-ups
  • Pfizer’s application for emergency approval of its vaccine is paving the way for mass vaccinations to begin soon, with some experts predicting that the global economy could return to normality in Q2 2021
  • Market observers are predicting a delay in the OPEC+ supply quota schedule, but the longer timeline for the club’s plan – which is set to last until April 2022 – may have to be brought forward to appease current dissent in the group

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November, 25 2020
EIA expects U.S. crude oil production to remain relatively flat through 2021

In the U.S. Energy Information Administration’s (EIA) November Short-Term Energy Outlook (STEO), EIA forecasts that U.S. crude oil production will remain near its current level through the end of 2021.

A record 12.9 million barrels per day (b/d) of crude oil was produced in the United States in November 2019 and was at 12.7 million b/d in March 2020, when the President declared a national emergency concerning the COVID-19 outbreak. Crude oil production then fell to 10.0 million b/d in May 2020, the lowest level since January 2018.

By August, the latest monthly data available in EIA’s series, production of crude oil had risen to 10.6 million b/d in the United States, and the U.S. benchmark price of West Texas Intermediate (WTI) crude oil had increased from a monthly average of $17 per barrel (b) in April to $42/b in August. EIA forecasts that the WTI price will average $43/b in the first half of 2021, up from our forecast of $40/b during the second half of 2020.

The U.S. crude oil production forecast reflects EIA’s expectations that annual global petroleum demand will not recover to pre-pandemic levels (101.5 million b/d in 2019) through at least 2021. EIA forecasts that global consumption of petroleum will average 92.9 million b/d in 2020 and 98.8 million b/d in 2021.

The gradual recovery in global demand for petroleum contributes to EIA’s forecast of higher crude oil prices in 2021. EIA expects that the Brent crude oil price will increase from its 2020 average of $41/b to $47/b in 2021.

EIA’s crude oil price forecast depends on many factors, especially changes in global production of crude oil. As of early November, members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) were considering plans to keep production at current levels, which could result in higher crude oil prices. OPEC+ had previously planned to ease production cuts in January 2021.

Other factors could result in lower-than-forecast prices, especially a slower recovery in global petroleum demand. As COVID-19 cases continue to increase, some parts of the United States are adding restrictions such as curfews and limitations on gatherings and some European countries are re-instituting lockdown measures.

EIA recently published a more detailed discussion of U.S. crude oil production in This Week in Petroleum.

November, 19 2020
OPEC members' net oil export revenue in 2020 expected to drop to lowest level since 2002

The U.S. Energy Information Administration (EIA) forecasts that members of the Organization of the Petroleum Exporting Countries (OPEC) will earn about $323 billion in net oil export revenues in 2020. If realized, this forecast revenue would be the lowest in 18 years. Lower crude oil prices and lower export volumes drive this expected decrease in export revenues.

Crude oil prices have fallen as a result of lower global demand for petroleum products because of responses to COVID-19. Export volumes have also decreased under OPEC agreements limiting crude oil output that were made in response to low crude oil prices and record-high production disruptions in Libya, Iran, and to a lesser extent, Venezuela.

OPEC earned an estimated $595 billion in net oil export revenues in 2019, less than half of the estimated record high of $1.2 trillion, which was earned in 2012. Continued declines in revenue in 2020 could be detrimental to member countries’ fiscal budgets, which rely heavily on revenues from oil sales to import goods, fund social programs, and support public services. EIA expects a decline in net oil export revenue for OPEC in 2020 because of continued voluntary curtailments and low crude oil prices.

The benchmark Brent crude oil spot price fell from an annual average of $71 per barrel (b) in 2018 to $64/b in 2019. EIA expects Brent to average $41/b in 2020, based on forecasts in EIA’s October 2020 Short-Term Energy Outlook (STEO). OPEC petroleum production averaged 36.6 million barrels per day (b/d) in 2018 and fell to 34.5 million b/d in 2019; EIA expects OPEC production to decline a further 3.9 million b/d to average 30.7 million b/d in 2020.

EIA based its OPEC revenues estimate on forecast petroleum liquids production—including crude oil, condensate, and natural gas plant liquids—and forecast values of OPEC petroleum consumption and crude oil prices.

EIA recently published a more detailed discussion of OPEC revenue in This Week in Petroleum.

November, 16 2020