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Last Updated: January 17, 2020
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Market Watch   

Headline crude prices for the week beginning 13 January 2020 – Brent: US$64/b; WTI: US$59/b

  • Tensions in the Persian Gulf have abated, but not disappeared, as both the US and Iran stepped back from going to war; the buck, so far, has stopped with Tehran’s retaliation to the US assassination of its top general with a barrage of missile strikes at US bases in Iraq
  • The underlying situation is still fragile, with the Iranian population swinging from supporting the government to protesting its accidental downing of a commercial Ukraine Airlines plane; with the risk of war easing, crude prices have fallen back to their pre-crisis levels
  • However, American and foreign oil companies have pulled their staff from crude fields in northern Iraq and Kurdistan, including Chevron, as the oil industry in Iraq monitors the risk – and consequences – of military action
  • In precaution, oil tankers have begun boosting their rates once again to haul crude through the Persian Gulf, with quoted rates now at their highest level since the 2019 attacks on ships passing through the narrow straight
  • Although political tensions remain fresh, Saudi Arabia said that OPEC and the OPEC+ club were instead focused on using their window of production cuts to reduce excess oil stockpiles to levels ‘within the contours of 2010-2014’
  • In the US, not only is shale output staying strong, but production in the US Gulf of Mexico also made history, exceeding 2 mmb/d for the first time ever in 2019, beating the previous high recorded in 2018
  • Worries about the health of global oil demand persist… although the US and China signed a Phase 1 trade deal, the agreement is more about halting escalation of the trade war than repairing inflicted damage; a slowdown in Chinese economic growth could lead to oil demand growth halving in 2020 in China according to CNPC
  • The US active rig count fell for a second consecutive week, losing 15 rigs – 11 oil and 4 gas – for the 17th weekly decline of the past 20 weeks; losses in the Permian were once again high, shedding a total of 6 rigs
  • Crude oil prices should remain rangebound with Brent at US$63-65/b and WTI at US$57-59/b, as the market retreats back to its ever-present worries about demand while geopolitical risk premiums scale back


Headlines of the week

Upstream

  • Guyana’s success is now extending to its neighbours, with Total and Apache announcing a ‘significant’ oil discovery at their Maka Central-1 well in Suriname’s Block 58, which lies adjacent to the prolific Stabroek Block
  • BP has agreed to sell its operating interest in the UK North Sea’s Andrew assets – including the Andrew platform as well as the Andrew, Arundel, Cyrus, Farragon, and Kinnoull fields – along with its 27.5% non-operating interest in the Shearwater field to Premier Oil for some US$625 million
  • Liberia will kick start its next offshore licensing round in April 2020, offering nine blocks in the Harper basin, one of the few offshore regions in West Africa that remains unexplored and undrilled
  • Equinor has extended the life of its Statfjord assets beyond 2030, with plans to commission up to 100 new wells over the next decade, deferring decommissioning with a goal of maintaining current output levels beyond 2025
  • After Murphy Oil, Petrofac and ExxonMobil, Repsol is the latest major considering an upstream exit from Malaysia, covering assets that include six development blocks and the major Kinabalu oilfield in Sabah
  • Senegal’s government has approved Woodside’s offshore Sangomar Field Development, which will involve the drilling of 23 subsea wells and a FPSO with the capacity to process up to 100,000 b/d of crude
  • Equinor has announced plans to reduce greenhouse gas emissions from its offshore fields and onshore plants in Norway by 40% by 2030, 70% by 2040 and to near zero by 2050 from 2019 levels

Midstream/Downstream

  • Shell is reportedly seeking buyers for its 144 kb/d Anacortes refinery in Washington state, which would be its third North American sale in two years after divesting its Martinez refinery in California and Sarnia refinery in Ontario
  • Shell has announced plans to increase its share of the Mexican fuel market to 15%, which would require considerable growth in its network of 200 fuel stations in 12 states that currently represent 1% of the market
  • Occidental Petroleum plans to reduce its holdings in Western Midstream Partners – acquired as part of its controversial takeover of Anadarko – to less than 50%, potentially removing up to US$7.8 billion of debt

Natural Gas/LNG

  • Sempra Energy and Saudi Aramco have signed an agreement that will see the Saudi giant play a bigger part in the planned 22 million tpa Port Arthurt LNG project, following an existing agreement to purchase 5 mtpa signed in May 2019
  • Kuwait Petroleum Corp has agreed to purchase 3 million tpa of LNG from Qatar Petroleum for 15 years beginning 2022, with Kuwait remaining one of the few countries in the Middle East that remain neutral to the Saudi-Qatar standoff
  • ExxonMobil has signed an agreement with midstream company Outrigger Energy II to build a 250 mmscf/d cryogenic gas processing, gathering and pipeline system in the Bakken’s Williston Basin in North Dakota
  • The Larak gas field in Sarawak has achieved first gas, operated by SapuraOMV Upstream as part of the SK408 PSC that includes the Gorek and Bakong fields, with output planned to be processed into LNG at Petronas’ Bintulu complex
  • Russia’s TurkStream natural gas pipeline – connecting Russia, Turkey, Bulgaria and eventually Serbia and Hungary - has officially begun operations, delivering up to 13 bcm of Russian gas that can be rerouted from the Ukraine route

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Natural gas prices fall to lowest level since 2016, the lowest February prices in 20 years

This winter, natural gas prices have been at their lowest levels in decades. On Monday, February 10, the near-month natural gas futures price at the New York Mercantile Exchange (NYMEX) closed at $1.77 per million British thermal units (MMBtu). This price was the lowest February closing price for the near-month contract since at least 2001, in real terms, and the lowest near-month futures price in any month since March 8, 2016, according to Bloomberg, L.P. and FRED data.

In addition, according to Natural Gas Intelligence data, the daily spot price at the Henry Hub national benchmark was $1.81/MMBtu on February 10, 2020, the lowest price in real terms since March 9, 2016. Henry Hub spot prices have ranged between $1.81/MMBtu and $2.84/MMBtu this winter heating season (since November 1, 2019), generally because relatively warm winter weather has reduced demand for natural gas for heating. Natural gas production growth has outpaced demand growth, reducing the need to withdraw natural gas from underground storage.

Dry natural gas production in January 2020 averaged about 95.0 billion cubic feet per day (Bcf/d), according to IHS Markit data. IHS Markit also estimates that in January 2020 the United States saw the third-highest monthly U.S. natural gas production on record, down slightly from the previous two months.

IHS Markit estimates that U.S. natural gas consumption by residential, commercial, industrial, and electric power sectors averaged 96 Bcf/d for January, which was about 4.4 Bcf/d less than the average for January 2019, largely because of decreases in residential and commercial consumption as a result of warmer temperatures.

However, IHS Markit estimates that overall consumption of natural gas (including feed gas to liquefied natural gas (LNG) export facilities, pipeline fuel losses, and net exports by pipeline to Mexico) averaged about 117.5 Bcf/d in January 2020, an increase of about 0.2 Bcf/d from last year. This overall increase is largely a result of an almost doubling of LNG feed gas to about 8.5 Bcf/d.

Because supply growth has outpaced demand growth, less natural gas has been withdrawn from storage withdrawals this winter. Despite starting the 2019–20 heating season with the third-lowest level of natural gas inventory since 2009, by January 17, 2020, working natural gas inventories reached relatively high levels for mid-winter. The U.S. Energy Information Administration’s (EIA) data on natural gas inventories for the Lower 48 states as of February 7, 2020, reflect a 215 Bcf surplus to the five-year average. In EIA’s latest short-term forecast, more natural gas remains in storage levels than the previous five-year average through the remainder of the winter.

lower 48 states working natural gas in storage

Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report and Short-Term Energy Outlook

According to the National Oceanic and Atmospheric Administration (NOAA), January 2020 was the fifth-warmest in its 126-year climate record. Heating degree days (HDDs), a temperature-based metric for heating demand, have been relatively low this winter, which is consistent with a warmer winter. During some weeks in late December and early January, the United States saw 25% to 30% fewer HDDs than the 30-year average. This winter, through February 8, residential natural gas customers in the United States have seen 11% fewer HDDs than the 30-year average.

U.S. natural gas customer-weighted heating degree days

Source: U.S. Energy Information Administration, based on National Oceanic and Atmospheric Administration Climate Prediction Center data

February, 17 2020
Your Weekly Update: 10 -14 February 2020

Market Watch   

Headline crude prices for the week beginning 10 February 2020 – Brent: US$53/b; WTI: US$49/b

  • The demand destruction caused by the Covid-19 pandemic – also known as the Wuhan coronavirus – has dragged crude prices to fresh lows, with OPEC+ struggling to present a united front to respond to the demand crisis
  • Earlier indications that OPEC+ was preparing to call for an emergency meeting mid-February to discuss the pandemic’s impact on the oil market were dashed, hinting at divisions within the oil club
  • Reportedly, OPEC’s technical committee was proposing to extend the club’s supply quota agreement through June 2020; Saudi Arabia – along with Iran and Bahrain – were the strongest supporters, but Russia remains reticent to commit
  • A group of key Russian oil producers are in support of extending the OPEC+ cuts, with Gazprom, Lukoil and Rosneft indicating that it ‘made sense’
  • In the face of the huge impact of Covid-19, the so-called Brent red spread sank into contango, indicating an intensely bear-ish market
  • Although the fatality rate of the new coronavirus is much lower than SARS, the spread has been far more severe and wider, with confirmed cases nearing 70,000 and deaths nearing 1,500
  • After being on lockdown for weeks, Chinese factories and businesses have gradually returned to work at a glacial pace, impacting gasoline, gasoil and - most significantly – jet fuel demand, causing Chinese refineries to slash output
  • News that China and the US would both implement tariff cuts on the pre-Phase 1 trade deal levies on February 14 failed to calm the market, supporting the floor for prices rather than raising the ceiling
  • Amid that chaos, the US active rig count dropped four rigs, falling down to 790 total and down 255 sites y-o-y; however, the relationship between this proxy and actual production has diminished over the past two years, as the US continues to produce more oil from less rigs
  • Hopes that the outbreak might have peaked has supported crude oil prices this year, although a major spike in confirmed cases from a wider diagnosis tool nipped that in the bud; expect crude oil prices to continue hovering around the US$50/b mark, at US$51-53/b for Brent and US$49-51/b for WTI


Headlines of the week

Upstream

  • Chevron and Petrobras will be selling their stakes in the heavy oil Papa-terra field in the Campos Basin, seeking new operatorship for the BC-20 concession asset that is currently split 62.5/37.5 between Petrobras and Chevron
  • Shell plans to boost its output in the Permian Basin to some 250,000 b/d by end-2020, up from a current production level of 100,000 b/d as it announced plans to invest up to US$3 billion per year in the prolific US shale area
  • Eni’s oil production in Libya has halved to 160,000 b/d, as the country continues to grapple with a blockade started by military strongman Khalifa Haftar
  • Disappointing results in Africa have forced Tullow Oil to reduce its headcount in Kenya by 40%, with operations in Kenya, Uganda and Ghana all yielding either poor results or in danger of significant delays
  • BP and Shell have brought the Alligin field in the UK West of Shetlands region online, with initial output at a better-than-expected 12,000 b/d
  • Guyana’s oil riches keep increasing; after ExxonMobil upped estimates at the Stabroek block last month, Eco Atlantic (together with Tullow Oil and Total) have upped reserves in the Orinduik block from 3.98 mmboe/d to 5.14 mmboe/d

Midstream/Downstream

  • Reports suggest that Chinese independent teapot refineries in Shandong have slashed their utilisation rates by 30-50%, scaling down in response to severely diminished fuel and petrochemicals demand due to the Covid-19 pandemic
  • Chinese state refiners are following suit with slashing output, with CNOOC, Sinopec and PetroChina all lowering their throughput rates by 10-15%
  • Shell has finalised the sale of its Martinez refinery in California, selling it to PBF Energy for some US$1.2 billion, including its supply/offtake agreements
  • Botswana is accelerating its US$4 billion coal-to-liquids refinery project, now expecting to complete the site by 2025, with the aim of tapping into the country’s major coal reserves that are some of the largest in Africa
  • The UK has extended its goal to end the sale of all gasoline- and diesel-powered vehicles in the UK by 2035 to include hybrid vehicles, which would move transport fuel demand entirely to electric vehicles then

Natural Gas/LNG

  • Abu Dhabi and Dubai report that they have made a major natural gas find, with the Jebel Ali reservoir located between the two largest sheikhdoms in the UAE holding some 80 tcf of resources - the world’s largest gas find in 15 years
  • The government of Papua New Guinea has walked away from talks over the P’nyang gas field, impacting the planned expansion of ExxonMobil’s PNG LNG project; the government had previously tried a similar tactic with Total
  • The EU has imposed sanctions on Turkey, in retaliation for its continued exploration of gas resources in the disputed waters off Cyprus that Turkey claims is part of the breakaway Turkish province in the north of the island
  • CNOOC has declared force majeure on some LNG contracts due to the ongoing impact of the Covid-19 outbreak, but two of the world’s largest LNG traders – Shell and Total – have rejected the Chinese attempt to nullify contractual terms
  • Centrica will take a major write-down on its gas assets in Europe, continuing a trend of the global natural gas glut eroding the value of gas assets worldwide
  • GeoPark has made a new natural gas discovery in Chile, with the Jauke Oeste field in the Fell block of the Magallanese Basin yielding small-but-significant gas flows of some 4.4 mscf/d
February, 14 2020
SHORT-TERM ENERGY OUTLOOK

Forecast Highlights

Global liquid fuels

  • EIA expects global petroleum and liquid fuels demand will average 100.3 million barrels per day (b/d) in the first quarter of 2020. This demand level is 0.9 million b/d less than forecast in the January STEO and reflects both the effects of the coronavirus and warmer-than-normal January temperatures across much of the northern hemisphere. EIA now expects global petroleum and liquid fuels demand will rise by 1.0 million b/d in 2020, which is lower than the forecast increase in the January STEO of 1.3 million b/d in 2020, and by 1.5 million b/d in 2021.
  • EIA’s global petroleum and liquid fuels supply forecast assumes that the Organization of the Petroleum Exporting Countries (OPEC) will reduce crude oil production by 0.5 million b/d from March through May because of lower expected global oil demand in early 2020. This OPEC reduction is in addition to the cuts announced at the group’s December 2019 meeting. EIA now forecasts OPEC crude oil production will average 28.9 million b/d in 2020, which is 0.3 million less than forecast in the January STEO. In addition to these production cuts, EIA’s lower forecast OPEC production reflects ongoing crude oil production outages in Libya during the first quarter. In general, EIA assumes that OPEC will limit production through all of 2020 and 2021 to target relatively balanced global oil markets.
  • Global liquid fuels inventories fell by roughly 0.1 million b/d in 2019, and EIA expects they will grow by 0.2 million b/d in 2020. Although EIA expects inventories to rise overall in 2020, EIA forecasts inventories will build by 0.6 million b/d in the first half of the year because of slow oil demand growth and strong non-OPEC oil supply growth. Firmer demand growth as the global economy strengthens and slower supply growth later in the year contribute to forecast inventory draws of 0.1 million b/d in the second half of 2020. EIA expects global liquid fuels inventories will decline by 0.2 million b/d in 2021.
  • Brent crude oil spot prices averaged $64 per barrel (b) in January, down $4/b from December. Brent prices fell steadily through January and into the first week of February, closing at less than $54/b on February 4, the lowest price since December 2018, reflecting market concerns about oil demand. EIA forecasts Brent prices will average $61/b in 2020; with prices averaging $58/b during the first half of the year and $64/b during the second half of the year. EIA forecasts the average Brent prices will rise to an average of $68/b in 2021.

Natural gas

  • In January, the Henry Hub natural gas spot price averaged $2.02 per million British thermal units (MMBtu), as warm weather contributed to below-average inventory withdrawals and put downward pressure on natural gas prices. As of February 6, the Henry Hub spot price had fallen to $1.86/MMBtu, and EIA expects prices will remain below $2.00/MMBtu in February and March. EIA forecasts that prices will rise in the second quarter of 2020, as U.S. natural gas production declines and natural gas use for power generation increases the demand for gas. EIA expects prices to average $2.36/MMBtu in the third quarter of 2020. EIA forecasts that Henry Hub natural gas spot prices will average $2.21/MMBtu in 2020. EIA expects that natural gas prices will then increase in 2021, reaching an annual average of $2.53/MMBtu.
  • U.S. dry natural gas production set a record in 2019, averaging 92.1 billion cubic feet per day (Bcf/d). Although EIA forecasts dry natural gas production will average 94.2 Bcf/d in 2020, a 2% increase from 2019, EIA expects monthly production to generally decline through 2020, falling from an estimated 95.4 Bcf/d in January to 92.5 Bcf/d in December. The falling production mostly occurs in the Appalachian and Permian regions. In the Appalachia region, low natural gas prices are discouraging natural gas-directed drilling, and in the Permian, low oil prices are expected to reduce associated gas output from oil-directed wells. In 2021, EIA forecasts dry natural gas production to stabilize near December 2020 levels at an annual average of 92.6 Bcf/d, a 2% decline from 2020, which would be the first decline in annual average natural gas production since 2016.
  • EIA estimates that U.S. working natural gas inventories ended January at more than 2.6 trillion cubic feet (Tcf), 9% higher than the five-year (2015–19) average. EIA forecasts that total working inventories will end March at almost 2.0 Tcf, 14% higher than the five-year average. In the forecast, inventories rise by a total of 2.1 Tcf during the April through October injection season to reach almost 4.1 Tcf on October 31, which would be the highest end-of-October inventory level on record.

Electricity, coal, renewables, and emissions

  • EIA expects the share of U.S. utility-scale electricity generation from natural gas-fired power plants will remain relatively steady; it was 37% in 2019, and EIA forecasts it will be 38% in 2020 and 37% in 2021. Electricity generation from renewable energy sources will rise from a share of 17% last year to 20% in 2020 and 21% in 2021. The increase in the renewables share is the result of expected use of additions to wind and solar generating capacity. Coal’s forecast share of electricity generation will fall from 24% in 2019 to 21% in both 2020 and 2021. The nuclear share of generation, which averaged slightly more than 20% in 2019 will be slightly lower than 20% by 2021, consistent with upcoming reactor retirements.
  • EIA forecasts that U.S. coal production will total 595 million short tons (MMst) in 2020, down 95 MMst (14%) from 2019. Lower production reflects declining demand for coal in the electric power sector and lower demand for U.S. exports. EIA forecasts that electric power sector demand for coal will fall by 81 MMst (15%) in 2020. EIA expects that coal production will stabilize in 2021 as export demand stabilizes and U.S. power sector demand for coal increases because of rising natural gas prices.
  • After decreasing by 2.3% in 2019, EIA forecasts that energy-related carbon dioxide (CO2) emissions will decrease by 2.7% in 2020 and by 0.5% in 2021. Declining emissions in 2020 reflect forecast declines in total U.S. energy consumption because of increases in energy efficiency and weather effects, particularly as a result of warmer-than-normal January temperatures. A forecast return to normal temperatures in 2021 results in a slowing decline in emissions. Energy-related CO2 emissions are sensitive to changes in weather, economic growth, energy prices, and fuel mix.
February, 12 2020