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Last Updated: February 21, 2020
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Headline crude prices for the week beginning 17 February 2020 – Brent: US$53/b; WTI: US$49/b

  • As the Covid-19 pandemic seems to be coming increasingly under control, crude oil prices are recovering some ground as the market moves into speculative mode given the availability of cheap crude cargoes
  • Case in point, while the fear was of widespread demand destruction in China, a sudden buying spree by Chinese independent teapot refineries – attracted by cheap spot cargoes – surprised the market, being a sign that Chinese private refiners are anticipating a rebound in demand sooner rather than later
  • Despite this, the pandemic is still recalibrating Chinese energy demand in a dramatic way, with reports of four LNG tanker bound for northern China from Oman and Qatar diverted as CNOOC invoked force majeure on its contracts
  • China’s pain is also India’s gain, with so-called ‘distressed cargoes’ originally intended for China now offered to India at attractive terms from all over the world, including grades from the Caspian Sea to Latin America and West Africa
  • Based on the situation in China, the IEA is forecasting the first annual decline in quarterly global oil demand for the first time in over a decade, and dragging overall 2020 growth down by 30% to 825,000 b/d; the EIA followed suit as well, cutting its Brent price forecast for 2020 from US$64.83 to US$61.25
  • China and key Asian hubs impacted by the virus like Hong Kong and Singapore have pledged to provide extra fiscal stimulus to counteract the impact of the pandemic, possibly setting the stage for a rebound in Q2 2020
  • Saudi Arabia’s attempt to cajole the OPEC+ club into extending its supply cuts until June 2020 through an emergency February meeting has faded, with Russia being the main holdout
  • Amid the turmoil in the markets, the US active rig count remained unchanged for the week, adding two oil sites but losing gas and miscellaneous sites for a total of 790
  • Oil prices gained over the week as the Covid-19 pandemic looks to be contained; Brent should trade in a higher US$57-59/b range and WTI at US$43-55/b


Headlines of the week

Upstream

  • Saudi Arabia and Kuwait have officially restarted production from their shared Wafra field in the Neutral after five years of halted output
  • Despite being hampered by quarterly waivers that are subject to renewals by the US government, Chevron has ramped up production at its Petropiar crude upgrader plant in Venezuela to 130,000 b/d after being closed for most of 2019
  • Canada’s Alberta province’s plan to ease its crude glut through rail shipments has hit a snag, as protestors blocked train lines and the provincial government ordered trains to reduce speeds after a major derailment and fire
  • Tullow Oil reports that it has received approval from Ghana to flare gas ‘when necessary’ from its offshore fields, which should help the beleaguered company support production levels after a set of disappointing results for 2019
  • Somalia has passed a new petroleum bill into law, with the aim of setting up a regulatory framework to attract foreign upstream investment; Somalia currently does not produce any oil but estimates suggest significant reserves
  • As Uganda prepares to start producing oil for the first time, distribution and transport infrastructure remain an issue, with the state recently tapping a Chinese lender to build three roads to connect to its western oilfields
  • After a challenging few years of scandals and a subsequent refocusing on upstream, Petrobras has now hit a new upstream production record, with the ramp-up in pre-salt basins contributing to 3.025 mmboe/d in Q4 2019
  • CNOOC has commenced production at the offshore Bozhong 34-9 field in the Bohai Sea, with peak output expected at 22,500 b/d of crude by 2022

Midstream/Downstream

  • The Covid-19 Wuhan outbreak has claimed a few more refinery scalps, with ChemChina shutting down its 100 kb/d Zhenghe refinery in Shandong and reducing processing at its Changyi and Huaxing refineries by 10%; Hengli Petrochemical has cut utilisation rates at its new 400 kb/d Dalian refinery by some 17% as well, as petchem demand dries up
  • The 120,000 b/d Azzawiya Oil Refining Company refinery in Libya has been forced to halt all operations, as a prolonged conflict in the country has dried up the availability of crude for export or local refining
  • Egypt has given the go-ahead for a US$2.5 billion, 65 kb/d oil refinery in the Upper Egypt region, focusing on hydrocracking mazut – heavy, low quality fuel oil typically used for power generation – into high-value fuels
  • The Bangladesh Petroleum Corp has awarded a tender to supply some 1.06 million tons of gasoil, jet fuel, fuel oil and gasoline to Unipec and Vitol
  • Vietnam’s Nghi Son refining has offered a cargo of gasoil for export for the first time – an indication of slowing domestic demand from the Covid-19 outbreak that is hitting most major East and Southeast Asian economies

Natural Gas/LNG

  • NextDecade Corp’s US$15 billion, 26 million tons per annum Rio Grande LNG facility in Texas has been cleared for LNG exports by the US DoE
  • Portugal’s Sines port is being eyed by US energy companies as a strategic landing point for US LNG exports to Europe, as American LNG exporters race to lock down customers amid a supply glut that could last for years
  • Shell has acquired a 50% stake in Ecopetrol’s Fuerte Sur, Purple Angel and COL-5 gas blocks located in Colombia’s Caribbean deepwater region

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Renewables became the second-most prevalent U.S. electricity source in 2020

In 2020, renewable energy sources (including wind, hydroelectric, solar, biomass, and geothermal energy) generated a record 834 billion kilowatthours (kWh) of electricity, or about 21% of all the electricity generated in the United States. Only natural gas (1,617 billion kWh) produced more electricity than renewables in the United States in 2020. Renewables surpassed both nuclear (790 billion kWh) and coal (774 billion kWh) for the first time on record. This outcome in 2020 was due mostly to significantly less coal use in U.S. electricity generation and steadily increased use of wind and solar.

In 2020, U.S. electricity generation from coal in all sectors declined 20% from 2019, while renewables, including small-scale solar, increased 9%. Wind, currently the most prevalent source of renewable electricity in the United States, grew 14% in 2020 from 2019. Utility-scale solar generation (from projects greater than 1 megawatt) increased 26%, and small-scale solar, such as grid-connected rooftop solar panels, increased 19%.

Coal-fired electricity generation in the United States peaked at 2,016 billion kWh in 2007 and much of that capacity has been replaced by or converted to natural gas-fired generation since then. Coal was the largest source of electricity in the United States until 2016, and 2020 was the first year that more electricity was generated by renewables and by nuclear power than by coal (according to our data series that dates back to 1949). Nuclear electric power declined 2% from 2019 to 2020 because several nuclear power plants retired and other nuclear plants experienced slightly more maintenance-related outages.

We expect coal-fired electricity generation to increase in the United States during 2021 as natural gas prices continue to rise and as coal becomes more economically competitive. Based on forecasts in our Short-Term Energy Outlook (STEO), we expect coal-fired electricity generation in all sectors in 2021 to increase 18% from 2020 levels before falling 2% in 2022. We expect U.S. renewable generation across all sectors to increase 7% in 2021 and 10% in 2022. As a result, we forecast coal will be the second-most prevalent electricity source in 2021, and renewables will be the second-most prevalent source in 2022. We expect nuclear electric power to decline 2% in 2021 and 3% in 2022 as operators retire several generators.

monthly U.S electricity generation from all sectors, selected sources

Source: U.S. Energy Information Administration, Monthly Energy Review and Short-Term Energy Outlook (STEO)
Note: This graph shows electricity net generation in all sectors (electric power, industrial, commercial, and residential) and includes both utility-scale and small-scale (customer-sited, less than 1 megawatt) solar.

July, 29 2021
PRODUCTION DATA ANALYSIS AND NODAL ANALYSIS

Kindly join this webinar on production data and nodal analysis on the 4yh of August 2021 via the link below

https://www.linkedin.com/events/productiondataanalysis-nodalana6810976295401467904/

July, 28 2021
Abu Dhabi Lifts The Tide For OPEC+

The tizzy that OPEC+ threw the world into in early July has been settled, with a confirmed pathway forward to restore production for the rest of 2021 and an extension of the deal further into 2022. The lone holdout from the early July meetings – the UAE – appears to have been satisfied with the concessions offered, paving the way for the crude oil producer group to begin increasing its crude oil production in monthly increments from August onwards. However, this deal comes at another difficult time; where the market had been fretting about a shortage of oil a month ago due to resurgent demand, a new blast of Covid-19 infections driven by the delta variant threatens to upend the equation once again. And so Brent crude futures settled below US$70/b for the first time since late May even as the argument at OPEC+ appeared to be settled.

How the argument settled? Well, on the surface, Riyadh and Moscow capitulated to Abu Dhabi’s demands that its baseline quota be adjusted in order to extend the deal. But since that demand would result in all other members asking for a similar adjustment, Saudi Arabia and Russia worked in a rise for all, and in the process, awarded themselves the largest increases.

The net result of this won’t be that apparent in the short- and mid-term. The original proposal at the early July meetings, backed by OPEC+’s technical committee was to raise crude production collectively by 400,000 b/d per month from August through December. The resulting 2 mmb/d increase in crude oil, it was predicted, would still lag behind expected gains in consumption, but would be sufficient to keep prices steady around the US$70/b range, especially when factoring in production increases from non-OPEC+ countries. The longer term view was that the supply deal needed to be extended from its initial expiration in April 2022, since global recovery was still ‘fragile’ and the bloc needed to exercise some control over supply to prevent ‘wild market fluctuations’. All members agreed to this, but the UAE had a caveat – that the extension must be accompanied by a review of its ‘unfair’ baseline quota.

The fix to this issue that was engineered by OPEC+’s twin giants Saudi Arabia and Russia was to raise quotas for all members from May 2022 through to the new expiration date for the supply deal in September 2022. So the UAE will see its baseline quota, the number by which its output compliance is calculated, rise by 330,000 b/d to 3.5 mmb/d. That’s a 10% increase, which will assuage Abu Dhabi’s itchiness to put the expensive crude output infrastructure it has invested billions in since 2016 to good use. But while the UAE’s hike was greater than some others, Saudi Arabia and Russia took the opportunity to award themselves (at least in terms of absolute numbers) by raising their own quotas by 500,000 b/d to 11.5 mmb/d each.

On the surface, that seems academic. Saudi Arabia has only pumped that much oil on a handful of occasions, while Russia’s true capacity is pegged at some 10.4 mmb/d. But the additional generous headroom offered by these larger numbers means that Riyadh and Moscow will have more leeway to react to market fluctuations in 2022, which at this point remains murky. Because while there is consensus that more crude oil will be needed in 2022, there is no consensus on what that number should be. The US EIA is predicting that OPEC+ should be pumping an additional 4 million barrels collectively from June 2021 levels in order to meet demand in the first half of 2022. However, OPEC itself is looking at a figure of some 3 mmb/d, forecasting a period of relative weakness that could possibly require a brief tightening of quotas if the new delta-driven Covid surge erupts into another series of crippling lockdowns. The IEA forecast is aligned with OPEC’s, with an even more cautious bent.

But at some point with the supply pathway from August to December set in stone, although OPEC+ has been careful to say that it may continue to make adjustments to this as the market develops, the issues of headline quota numbers fades away, while compliance rises to prominence. Because the success of the OPEC+ deal was not just based on its huge scale, but also the willingness of its 23 members to comply to their quotas. And that compliance, which has been the source of major frustrations in the past, has been surprisingly high throughout the pandemic. Even in May 2021, the average OPEC+ compliance was 85%. Only a handful of countries – Malaysia, Bahrain, Mexico and Equatorial Guinea – were estimated to have exceeded their quotas, and even then not by much. But compliance is easier to achieve in an environment where demand is weak. You can’t pump what you can’t sell after all. But as crude balances rapidly shift from glut to gluttony, the imperative to maintain compliance dissipates.

For now, OPEC+ has managed to placate the market with its ability to corral its members together to set some certainty for the immediate future of crude. Brent crude prices have now been restored above US$70/b, with WTI also climbing. The spat between Saudi Arabia and the UAE may have surprised and shocked market observers, but there is still unity in the club. However, that unity is set to be tested. By the end of 2021, the focus of the OPEC+ supply deal will have shifted from theoretical quotas to actual compliance. Abu Dhabi has managed to lift the tide for all OPEC+ members, offering them more room to manoeuvre in a recovering market, but discipline will not be uniform. And that’s when the fireworks will really begin.

End of Article 

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Market Outlook:

  • Crude price trading range: Brent – US$72-74/b, WTI – US$70-72/b
  • Worries about new Covid-19 infections worldwide dragging down demand just as OPEC+ announced that it would be raising production by 400,000 b/d a month from August onward triggered a slide in Brent and WTI crude prices below US$70/b
  • However, that slide was short lived as near-term demand indications showed the consumption remained relatively resilient, which lifted crude prices back to their previous range in the low US$70/b level, although the longer-term effects of the Covid-19 delta variants are still unknown at this moment
  • Clarity over supply and demand will continue to be lacking given the fragility of the situation, which suggests that crude prices will remain broadly rangebound for now

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July, 26 2021