Easwaran Kanason

Co - founder of NrgEdge
Last Updated: January 14, 2020
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Business Trends
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Just as quickly as they spiked, crude oil prices have now fallen back to their lowest levels in 6 weeks, trading at the subdued levels seen in late November before the OPEC+ club announced its renewed oil supply deal. Despite assassinations, embassy stormings and ballistic missile retaliations, the US-Iran situation has returned to an uneasy calm, and crude prices with it.

At the height of the recent crisis – in the immediate aftermath of a targeted US drone strike on Iranian general Qaseem Soleimani in Iraq – Brent prices jumped to almost US$71/b as it looked like war was imminent. Iran vowed revenge. And they got it, launching over a dozen missiles on January 7 against US military assets in northern Iraq. However, in the process, the Iranian attack also downed a Ukraine Airlines plane that had just taken off from Tehran, killing all 176 passengers. No American casualties were recorded in the ballistic missile attack – named Operation Martyr Soleimani by the Islamic Revolutionary Guard Corps – and instead, Iran had a diplomatic crisis on its hand. The Iranian population swung from being united against the US for the Soleimani assassination to protesting its own government over the ‘accidental’ downing of the commercial flight. On the other hand, the US surprisingly took a tamer line after threatening to ‘go ballistic’ on Iran if it retaliated for Soleimani’s assassination. Yet, President Donald Trump merely said that Iran was ‘standing down’ after it launched the barrage of missiles, walking back from the brink of war. Perhaps the White House was stung by criticism of overstepping boundaries – including not officially informing Congress of the military action and possibly contravening UN war conventions – but the net result is that both countries are both in a position to favour a tense stalemate instead of outright belligerence.

And, therefore, the price risk associated with war has dissipated. Brent crude is now trading at US$64/b and WTI further back at US$58/b. Oil has other things to worry about other than the US-Iran face-off. Expectations of a growing glut of crude oil and oil products globally are now translating into hard data. The EIA reports that crude and gasoline stocks in the US rose over December 2019, while global refinery crack spreads – which calculate the profit margins per barrel of crude for refiners – are narrowing. Against steady crude prices, that’s usually a sign of weakening demand. The IEA said that it expects oil demand growth to be ‘weak’ in 2020 against historical levels, suggesting that the market will be ‘well supplied’ with an implied surplus of 1 mmb/d. Demand is also muted at a time when crude supply is cresting a rising tide, as big volumes of additional supply from Norway, Guyana, Brazil and (of course) the US are sloshing around trying to find buyers.

Much of this situation was already predicted. And it is the reason why the OPEC+ club chose to extend its supply quota to the end of March 2020, in hope of stemming the glut. The latest data from OPEC shows that the club’s production fell to 29.5 mmb/d – a 50,000 b/d decrease m-o-m – with Saudi Arabia leading compliance, while Nigeria and Iraq remain above their quotas. Adherence was stressed as a key point in the December OPEC+ decision, and output over the next two months will be keenly watched ahead of a scheduled extraordinary OPEC meeting in March that will decide the fate of the quotas. Meanwhile, Russia’s production of crude and condensate reached a new post-Soviet high of 11.25 mmb/d in December, although it may still yet meet its OPEC+ target to reduce crude by 300,000 b/d through the exclusion of condensate from the quotas. The threat of war provided a brief distraction from the current woes in keeping crude prices steady, but as that abates, the same problems are persisting and it is these same problems that will keep a firm lid on crude prices in the first half of 2020.

Recent Brent Crude Prices:

  • 3 December 2019 (pre-OPEC meeting): US$61/b
  • 6 December 2019 (post-OPEC meeting): US$64/b
  • 6 January 2019 (post-assassination of Qaseem Soleimani): US$70/b
  • 10 January 2019 (post-Iranian missile strikes): US$65/b

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Royal Dutch Shell Poised To Become Just Shell

On 10 December 2021, if all goes to plan Royal Dutch Shell will become just Shell. The energy supermajor will move its headquarters from The Hague in The Netherlands to London, UK. At least three-quarters of the company’s shareholders must vote in favour of the change at the upcoming general meeting, which has been sold by Shell as a means of simplifying its corporate structure and better return value to shareholders, as well as be ‘better positioned to seize opportunities and play a leading role in the energy transition’. In doing so, it will no longer meet Dutch conditions for ‘royal’ designation, dropping a moniker that has defined the company through decades of evolution since 1907.

But why this and why now?

There is a complex web of reasons why, some internal and some external but the ultimate reason boils down to improving growth sustainability. Royal Dutch Shell was born through the merger of Shell Transport and Trading Company (based in the UK) and Royal Dutch (based in The Netherlands) in 1907, with both companies engaging in exploration activities ranging from seashells to crude oil. Unified across international borders, Royal Dutch Shell emerged as Europe’s answer to John D Rockefeller’s Standard Oil empire, as the race to exploit oil (and later natural gas) reserves spilled out over the world. Along the way, Royal Dutch Shell chalked up a number of achievements including establishing the iconic Brent field in the North Sea to striking the first commercial oil in Nigeria. Unlike Standard Oil which was dissolved into 34 smaller companies in 1911, Royal Dutch Shell remained intact, operating as two entities until 2005, when they were finally combined in a dual-nationality structure: incorporated in the UK, but residing in the Netherlands. This managed to satisfy the national claims both countries make on the supermajor, second only to ExxonMobil in revenue and profits but proved to be costly to maintain. In 2020, fellow Anglo-Dutch conglomerate Unilever also ditched its dual structure, opting to be based fully out of the City of London. In that sense, Shell is following the direction of the wind, as forces in its (soon to be former) home country turn sour.

There is a specific grievance that Royal Dutch Shell has with the Dutch government, the 15% dividend tax collected for Dutch-domiciled companies. It is the reason why Unilever abandoned Rotterdam and is now the reason why Shell is abandoning The Hague. And this point is particularly existentialist for Shell, since its share prices has been battered in recent years following the industry downturn since 2015, the global pandemic and being in the crosshairs of climate change activists as an emblem of why the world’s average temperatures are going haywire. The latter has already caused the largest Dutch state pension fund ABP to stop investing in fossil fuels, thereby divesting itself of Royal Dutch Shell. This was largely a symbolic move, but as religious figures will know, symbols themselves carry much power. To combat this, Shell has done two things. First, it has positioned itself to be at the forefront of energy transition, announcing ambitious emissions reductions plans in line with its European counterparts to become carbon neutral by 2050. Second, it is looking to bump up its dividend payouts after slashing them through the depths of the Covid-19 pandemic and accelerating share buybacks to remain the bluest of blue-chip stocks. But then, earlier this year, a Dutch court ruled that Shell’s emissions targets were ‘not ambitious enough’, ordering a stricter aim within a tighter timeframe. And the 15% dividend tax remains – even though Prime Minister Mark Rutte’s coalition government has been attempting to scrap it, with (it is presumed) some lobbying from Royal Dutch Shell and Unilever.

As simplistic it is to think that Shell is leaving for London believes the citizens of the Netherlands has turned its back on the company, the ultimate reason was the dividend tax. Reportedly, CEO Ben van Buerden called up Mark Rutte on Sunday informing him of the planned move. Rutte’s reaction, it is said was of dismay. And he embarked on a last-ditch effort to persuade Royal Dutch Shell to change its mind, by immediately lobbying his government’s coalition partners to back an abolition of the dividend tax. The reaction was perhaps not what he expected, with left-wing and green parties calling Shell’s threat ‘blackmail’. With democracy drawing a line, Shell decided to walk; or at least present an exit plan endorsed by its Board to be voted by shareholders. Many in the Netherlands see Shell’s exit and the loss of the moniker Royal Dutch – as a blow to national pride, especially since the country has been basking in the glow of expanded reputation as a result of post-Brexit migration of financial activities to Amsterdam from London. The UK, on the other hand, sees Shell’s decision and Unilever’s – as an endorsement of the country’s post-Brexit potential.

The move, if passed and in its initial stages, will be mainly structural, transferring the tax residence of Shell to London. Just ten top executives including van Buerden and CFO Jessica Uhl will be making the move to London. Three major arms – Projects and Technology, Global Upstream and Integrated Gas and Renewable Energies – will remain in The Hague. As will Shell’s massive physical reach on Dutch soil: the huge integrated refinery in Pernis, the biofuels hub in Rotterdam, the country’s first offshore wind farm and the mammoth Porthos carbon capture project that will funnel emissions from Rotterdam to be stored in empty North Sea gas fields. And Shell’s troubles with activists will still continue. British climate change activists are as, if not more aggressive as their Dutch counterpart, this being the country where Extinction Rebellion was born. Perhaps more of a threat is activist investor Third Point, which recently acquired a chunk of Shell shares and has been advocating splitting the company into two – a legacy business for fossil fuels and a futures-focused business for renewables.

So Shell’s business remains, even though its address has changed. In the grand scheme of things, never mind the small matter of Dutch national pride – Royal Dutch Shell’s roadmap to remain an investment icon and a major driver of energy transition will continue in its current form. This is a quibble about money or rather, tax – that will have little to no impact on Shell’s operations or on its ambitions. Royal Dutch Shell is poised to become just Shell. Different name and a different house, but the same contents. Unless, of course, Queen Elizabeth II decides to provide royal assent, in which case, Shell might one day become Royal British Shell.

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