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Last Updated: November 29, 2019
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Headline crude prices for the week beginning 25 November 2019 – Brent: US$63/b; WTI: US$58/b

  • Oil prices have been edging upwards recently, but largely staying rangebound as data failed to overcome sentiment and the spectre of the US-China trade war
  • Trade negotiations between the USA and China got a bit more complicated with the US Congress passing a bill supported rights and autonomy in Hong Kong; signed into law by President Donald Trump, the move could jeopardise the probability of a comprehensive trade deal emerging anytime soon
  • Ahead of OPEC’s bi-annual meeting in Vienna next week, the stage has been set for a contentious round; the current OPEC+ supply pact will expire in March 2020, and a decision to either end, extend or expand the deal must be made at the meeting that begins on December 5
  • Eyes will be on Russia, which has failed to adhere to its share of the output cuts as Energy Minister Alexander Novak said that the country was ‘trying to reach the planned level’ but faced challenges in weather and geography
  • Against the backdrop, the US EIA reports that output from the seven major onshore shale formations is expected to rise by 49,000 b/d to a record 9.1 mmb/d, with the Permian hitting 4.73 mmb/d, even as the active rig count drops
  • But in California, the state has halted permits for high-pressure steam flooding following leaks at Chevron’s Cymric field, hampering the industry
  • In the UK, politicking for the upcoming general elections – aimed at providing clarity on Brexit – has led the Labour party to propose a windfall tax on all oil companies and a ‘permanent ban’ on fracking, which could hasten the decline in the UK oil and gas industry
  • The chronic declines in the US active rig count continue, with the total falling again as 3 oil rigs stopped work, bringing the active count down to 803 – or 276 fewer sites year-on-year
  • Nothing but rangebound trading is expected for crude prices, given the number of factors that still up in the air – the outcome of the OPEC December meeting and the continued ping-pong situation in the US-China trade war; Brent and WTI will, therefore, stay trading at US$60-63/b and US$56-59/b respectively


Headlines of the week

Upstream

  • Senegal’s national oil company – PETROSEN – will be launching the country’s first offshore licensing round in January 2020, with 10 exploration blocks in the prolific MSGBC basin on offer to be awarded in July 2020
  • ConocoPhillips has announced a plan to pull back from an over-dependence on US shale, focusing on morphing into a low-growth, high-cash generating company instead of an aggressive shale exploiter to preserve shareholder value
  • Shell will begin drilling its first well in Mexico – the Chibu-1EXP deepwater well within the offshore Campeche basin - by end-2020, as supermajor interest in Mexican upstream begins to translate into concrete E&P activity
  • Strikes at Canadian National Railways has halted shipments of crude-by-rail from Alberta, as the rail company prioritised movement of food goods
  • The heady optimism of Guyanese oil finds has been tempered recently, with ExxonMobil and Hess announcing that oil at the Hammerhead well is heavier than expected, a week after Tullow said the same of its crudes

Midstream/Downstream

  • US refiner HollyFrontier will be building a new biodiesel plant in New Mexico as it attempts to reduce costs by adapting to new US mandates on biofuel that require refiners to blend increasing volumes of bio-feedstocks into gasoil
  • Sinopec is aiming to launch its new 200,000 b/d refinery in Zhanjiang – fed by Kuwaiti crude – in 2Q2020, the third greenfield refinery that will enter operation in China in space of 2 years
  • India has officially launched its largest privatisation drive in a decade, offering the government’s entire stake in BPCL – among other big-ticket items – to private investors, with interest coming from Saudi Aramco and ADNOC
  • As Indonesia makes a push to introduce a new B30 biodiesel mandate nationwide over 2020, the move could display up to 165,000 b/d in volumes away from gasoil towards palm oil feedstock

Natural Gas/LNG

  • Qatar is planning to boost its LNG production capacity to 126 million tpa by 2027 – up by 64% from a current 77 million tons – as it focuses on expanding development in the massive North Field, with work on two new LNG trains with a combined capacity of 16 million tpa having recently started
  • BP has struck new gas in Trinidad & Tobago, with the Ginger exploration well yielding gas flows, extending BP’s success streak in the island nation that includes the recent Savannah and Macademia discoveries
  • The US FERC has approved four new LNG export projects – Exelon Corp’s Annova LNG, NextDecade Corp’s Rio Grande LNG and Texas LNG projects, as well Cheniere’s expansion at Corpus Christi – which would roughly double current US LNG export capacity just as the global market is hitting a glut
  • Novatek is pushing the Russian government to support and finance an LNG transhipment terminal at the Kamchatka Peninsula with capacity for 20 million million tpa to support Novatek’s expanded production in the area
  • After suffering from a severe shortage, Australia’s east coast is now facing the opposite problem, with the current oversupply in global LNG creating a low gas price environment, but supply deficits could kick in again after 2023
  • SKK Migas, Indonesia’s upstream regulator, has set a target to the upstream industry to increase natural gas production by a third to 1 mmboe/d in 2030 from a current 750,000 boe/d, targeting potential from the Masela Block

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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