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Last Updated: December 19, 2019
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Headline crude prices for the week beginning 16 December 2019 – Brent: US$65/b; WTI: US$60/b

  • Oil prices have stayed their recent gains, as cautious hope from the new OPEC+ deal mingles with the announcement of a phase 1 trade deal between the US and China, providing some optimism for the immediate future
  • The partial trade deal – which has not yet been signed – does not reverse any of the existing tariffs placed on US and Chinese goods by either country, but it did prevent new tariffs from kicking in on December 15; tariffs on US crude and LNG entering China, however, still remain in place
  • The deal is expected to be signed in January, provided an armistice to the trade war, but a more comprehensive trade deal probably remains further off as there are key disagreements between the two countries left unresolved
  • In response, the EIA raised its crude price forecast for the second time in a row, averaging at around US$60/b in 2020, but warns of increases in global oil inventories ‘particularly in the first half of 2020’
  • In Saudi Arabia, the Aramco IPO has proven to be a wild success; the first day of trading valued the world’s most profitable oil firm at a record US$18.8 trillion, bursting past the target US$2 trillion mark on its second day of trading
  • The valuation will underscore Saudi Arabia’s more aggressive stance at the recent OPEC meeting, balancing a need to ensure compliance with the group’s targets with keeping oil prices at an acceptable level
  • The US active rig count broke a long streak of declines, staying flat last week as a gain of 4 oil rigs was offset by the loss of 4 gas rigs; the overall rig count remained at a 32-month low at 799
  • Optimism over the trade deal will keep crude prices firm, although a lack of details on the deal’s specifics may hold back the market; Brent will remain in the US$64-66/b range, while WTI will trade at US$60-62/b levels

 

Headlines of the week

Upstream

  • Total is deepening its foothold in Libya, with the National Oil Corp approving the French supermajor’s acquisition of Marathon Oil’s assets – including a minority stake in the Waha concessions – for some US$450 million
  • Mexico’s Quesqui deposit – touted as Pemex’s most important find in three decades – might be smaller than expected, with estimates of 500 million barrels of light oil, condensate and gas in place, and output levels of 69,000 b/d
  • Ghana National Petroleum Company and Springfield E&P have announced a ‘significant’ oil discovery offshore Ghana, at the Afina-1 well in the West Cape Three Points Block 2, with some 1.5 billion barrels of oil in place
  • Chevron has sanctioned development on its US$5.7 billion Anchor project in the US Gulf of Mexico – the first deepwater high-pressure development in the industry, capable of handling pressures of up to 20,000 psi – with capacity for 75,000 b/d of crude and 28 mcf/d of natural gas
  • Guyana’s first crude oil exports are expected to begin in January or February 2020, a remarkable turnaround for a country where first oil was only discovered in 2015, with discoveries indicating a potential for 750,000 b/d of production
  • Talos Energy has acquired a portfolio of US Gulf of Mexico assets – from ILX Holdings, Castex Energy and Venari Resources – for some US$640 million, with a current production rate of 19,000 boe/d
  • Malaysian state giant Petronas has raised some US$1.4 billion through block trading of stakes in its subsidiaries Petronas Dagangan, Petronas Gas and MISC in order to raise capital to fund further overseas expansion in the Americas
  • ExxonMobil’s exit from Norwegian upstream is now official, with Var Energi confirming that its acquisition of ExxonMobil’s NCS assets has been completed
  • Equinor has started up its third UK crude project in 2019, with the Barnacle field starting up recently with estimated peak production levels of 4,300 b/d

Midstream/Downstream

  • China has announced the creation of a national oil and gas pipeline company, which will merge the pipeline networks of PetroChina, Sinopec and CNPC into a single firm that aims to streamline infrastructure and drive demand
  • China’s Zhejiang Petroleum & Chemical has launched its 3.8 million tpa reformer unit at its 200,000 b/d Zhoushan refinery, processing naphtha into aromatics alongside existing 1.4 mtpa ethylene and 4 mtpa paraxylene plants
  • Indonesia’s beleaguered drive to improve its refineries might clinch a concrete deal soon, as Pertamina and Saudi Aramco are reportedly ready to sign a deal to upgrade capacity at the Cilacap refinery by 50 kb/d to 400 kb/d in Q1 2020
  • Even as it is finalising the sale of four refineries in Brazil, Petrobras is looking to expand its Comperj refinery with a lubricant plant that will raise blending capacity there to 225,000 cubic metres through a US$400 million investment

Natural Gas/LNG

  • Milestone after milestone is being hit in the US Gulf LNG sector, with Freeport LNG’s Train 1 in Texas starting up commercial production; Freeport LNG Train 2 is expected in January 2020 and Train 3 in May for a total of 15 mtpa
  • Pakistan Energas is aiming to start up the country’s largest LNG import terminal in 2021 pending regulatory approval, with ExxonMobil supporting the project
  • Shell and Husky Energy have reached separate deals with CNOOC to take significant stakes in the giant Lingshui deepwater gas play near Hainan

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The Impact of COVID 19 In The Downstream Oil & Gas Sector

Recent headlines on the oil industry have focused squarely on the upstream side: the amount of crude oil that is being produced and the resulting effect on oil prices, against a backdrop of the Covid-19 pandemic. But that is just one part of the supply chain. To be sold as final products, crude oil needs to be refined into its constituent fuels, each of which is facing its own crisis because of the overall demand destruction caused by the virus. And once the dust settles, the global refining industry will look very different.

Because even before the pandemic broke out, there was a surplus of refining capacity worldwide. According to the BP Statistical Review of World Energy 2019, global oil demand was some 99.85 mmb/d. However, this consumption figure includes substitute fuels – ethanol blended into US gasoline and biodiesel in Europe and parts of Asia – as well as chemical additives added on to fuels. While by no means an exact science, extrapolating oil demand to exclude this results in a global oil demand figure of some 95.44 mmb/d. In comparison, global refining capacity was just over 100 mmb/d. This overcapacity is intentional; since most refineries do not run at 100% utilisation all the time and many will shut down for scheduled maintenance periodically, global refining utilisation rates stand at about 85%.

Based on this, even accounting for differences in definitions and calculations, global oil demand and global oil refining supply is relatively evenly matched. However, demand is a fluid beast, while refineries are static. With the Covid-19 pandemic entering into its sixth month, the impact on fuels demand has been dramatic. Estimates suggest that global oil demand fell by as much as 20 mmb/d at its peak. In the early days of the crisis, refiners responded by slashing the production of jet fuel towards gasoline and diesel, as international air travel was one of the first victims of the virus. As national and sub-national lockdowns were introduced, demand destruction extended to transport fuels (gasoline, diesel, fuel oil), petrochemicals (naphtha, LPG) and  power generation (gasoil, fuel oil). Just as shutting down an oil rig can take weeks to complete, shutting down an entire oil refinery can take a similar timeframe – while still producing fuels that there is no demand for.

Refineries responded by slashing utilisation rates, and prioritising certain fuel types. In China, state oil refiners moved from running their sites at 90% to 40-50% at the peak of the Chinese outbreak; similar moves were made by key refiners in South Korea and Japan. With the lockdowns easing across most of Asia, refining runs have now increased, stimulating demand for crude oil. In Europe, where the virus hit hard and fast, refinery utilisation rates dropped as low as 10% in some cases, with some countries (Portugal, Italy) halting refining activities altogether. In the USA, now the hardest-hit country in the world, several refineries have been shuttered, with no timeline on if and when production will resume. But with lockdowns easing, and the summer driving season up ahead, refinery production is gradually increasing.

But even if the end of the Covid-19 crisis is near, it still doesn’t change the fundamental issue facing the refining industry – there is still too much capacity. The supply/demand balance shows that most regions are quite even in terms of consumption and refining capacity, with the exception of overcapacity in Europe and the former Soviet Union bloc. The regional balances do hide some interesting stories; Chinese refining capacity exceeds its consumption by over 2 mmb/d, and with the addition of 3 new mega-refineries in 2019, that gap increases even further. The only reason why the balance in Asia looks relatively even is because of oil demand ‘sinks’ such as Indonesia, Vietnam and Pakistan. Even in the US, the wealth of refining capacity on the Gulf Coast makes smaller refineries on the East and West coasts increasingly redundant.

Given this, the aftermath of the Covid-19 crisis will be the inevitable hastening of the current trend in the refining industry, the closure of small, simpler refineries in favour of large, complex and more modern refineries. On the chopping block will be many of the sub-50 kb/d refineries in Europe; because why run a loss-making refinery when the product can be imported for cheaper, even accounting for shipping costs from the Middle East or Asia? Smaller US refineries are at risk as well, along with legacy sites in the Middle East and Russia. Based on current trends, Europe alone could lose some 2 mmb/d of refining capacity by 2025. Rising oil prices and improvements in refining margins could ensure the continued survival of some vulnerable refineries, but that will only be a temporary measure. The trend is clear; out with the small, in with the big. Covid-19 will only amplify that. It may be a painful process, but in the grand scheme of things, it is also a necessary one.

Infographic: Global oil consumption and refining capacity (BP Statistical Review of World Energy 2019)

Region
Consumption (mmb/d)*
Refining Capacity (mmb/d)
North America

22.71

22.33

Latin America

6.5

5.98

Europe

14.27

15.68

CIS

4.0

8.16

Middle East

9.0

9.7

Africa

3.96

3.4

Asia-Pacific

35

34.75

Total

95.44

100.05

*Extrapolated to exclude additives and substitute fuels (ethanol, biodiesel)

Market Outlook:

  • Crude price trading range: Brent – US$33-37/b, WTI – US$30-33/b
  • Crude oil prices hold their recent gains, staying rangebound with demand gradually improving as lockdown slowly ease
  • Worries that global oil supply would increase after June - when the OPEC+ supply deal eases and higher prices bring back some free-market production - kept prices in check
  • Russia has signalled that it intends to ease back immediately in line with the supply deal, but Saudi Arabia and its allies are pushing for the 9.7 mmb/d cut to be extended to end-2020, putting the two oil producers on another collision course that previously resulted in a price war
  • Morgan Stanley expects Brent prices to rise to US$40/b by 4Q 2020, but cautioned that a full recovery was only likely to materialise in 2021

End of Article

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May, 31 2020
North American crude oil prices are closely, but not perfectly, connected

selected North American crude oil prices

Source: U.S. Energy Information Administration, based on Bloomberg L.P. data
Note: All prices except West Texas Intermediate (Cushing) are spot prices.

The New York Mercantile Exchange (NYMEX) front-month futures contract for West Texas Intermediate (WTI), the most heavily used crude oil price benchmark in North America, saw its largest and swiftest decline ever on April 20, 2020, dropping as low as -$40.32 per barrel (b) during intraday trading before closing at -$37.63/b. Prices have since recovered, and even though the market event proved short-lived, the incident is useful for highlighting the interconnectedness of the wider North American crude oil market.

Changes in the NYMEX WTI price can affect other price markers across North America because of physical market linkages such as pipelines—as with the WTI Midland price—or because a specific price is based on a formula—as with the Maya crude oil price. This interconnectedness led other North American crude oil spot price markers to also fall below zero on April 20, including WTI Midland, Mars, West Texas Sour (WTS), and Bakken Clearbrook. However, the usefulness of the NYMEX WTI to crude oil market participants as a reference price is limited by several factors.

pricing locations of selected North American crudes

Source: U.S. Energy Information Administration

First, NYMEX WTI is geographically specific because it is physically redeemed (or settled) at storage facilities located in Cushing, Oklahoma, and so it is influenced by events that may not reflect the wider market. The April 20 WTI price decline was driven in part by a local deficit of uncommitted crude oil storage capacity in Cushing. Similarly, while the price of the Bakken Guernsey marker declined to -$38.63/b, the price of Louisiana Light Sweet—a chemically comparable crude oil—decreased to $13.37/b.

Second, NYMEX WTI is chemically specific, meaning to be graded as WTI by NYMEX, a crude oil must fall within the acceptable ranges of 12 different physical characteristics such as density, sulfur content, acidity, and purity. NYMEX WTI can therefore be unsuitable as a price for crude oils with characteristics outside these specific ranges.

Finally, NYMEX WTI is time specific. As a futures contract, the price of a NYMEX WTI contract is the price to deliver 1,000 barrels of crude oil within a specific month in the future (typically at least 10 days). The last day of trading for the May 2020 contract, for instance, was April 21, with physical delivery occurring between May 1 and May 31. Some market participants, however, may prefer more immediate delivery than a NYMEX WTI futures contract provides. Consequently, these market participants will instead turn to shorter-term spot price alternatives.

Taken together, these attributes help to explain the variety of prices used in the North American crude oil market. These markers price most of the crude oils commonly used by U.S. buyers and cover a wide geographic area.

Principal contributor: Jesse Barnett

May, 28 2020
Financial Review: 2019

Key findings

  • Brent crude oil daily average prices were $64.16 per barrel in 2019—11% lower than 2018 levels
  • The 102 companies analyzed in this study increased their combined liquids and natural gas production 2% from 2018 to 2019
  • Proved reserves additions in 2019 were about the same as the 2010–18 annual average
  • Finding plus lifting costs increased 13% from 2018 to 2019
  • Occidental Petroleum’s acquisition of Anadarko Petroleum contributed to the largest reserve acquisition costs incurred for the group of companies since 2016
  • Refiners’ earnings per barrel declined slightly from 2018 to 2019

See entire annual review

May, 26 2020