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Last Updated: March 27, 2020
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Headline crude prices for the week beginning 23 March 2020 – Brent: US$27/b; WTI: US$23/b

  • After falling to an 18-year low last week, crude oil prices have managed to recover from their lowest level since 2003… but just barely
  • A huge swathe of economic stimulus packages announced by governments worldwide, including a US$2 trillion bipartisan injection in the US economy, soothed financial markets, which in turn supported commodity prices
  • More stimulus, however, may be needed as confirmed Covid-19 cases in Italy and the USA overtake China’s total, with the pandemic increasingly containing in the latter but accelerating at a dangerous pace in Europe and North America
  • While the Covid-19 saga plays out, former allies Saudi Arabia and Russia remain at odds over crude oil prices; Russian President Vladimir Putin has accused Saudi Arabia of ‘oil price blackmail’, vowing not to cave in
  • However, various reports from Russia suggest the low crude prices are beginning to bite economically, with Russia still ‘open to cooperation’ but committed to a war of attrition
  • With Saudi Arabia unlikely to want to cave either, the USA is exercising its muscle in an attempt to intervene in the price war; the Department of Energy will be purchasing some 77 million barrels of (US) crude to bring its Strategic Petroleum Reserve to maximum capacity
  • Meanwhile, the US is reportedly also open to a joint US-Saudi Arabia alliance in a bid to stabilise prices, a scenario that was previously unthinkable but may be necessary if the US shale patch is to be saved; such an alliance, however, is likely to invite reprisals from Russia
  • The record low crude oil prices has led some traders to build up positions, hiring tankers and supertankers to store crude and fuel products at sea while betting that prices will eventually rise; the world’s largest oil trader Glencore has chartered one of the world’s two Ultra Large Crude Carriers for six months to serve as floating storage, while other traders are beginning to store jet fuel
  • As expected, the low prices have begun to bite on the US active rig count, which fell by a net 20 to 772 sites; the situation is worse in Canada, where the industry lost 77 sites over the week to fall to 98 active sites
  • While prices have managed to recover from their lows, the outlook for crude remains weak as long as the oil price war persists and the Covid-19 pandemic shows no sign of containment; expect prices to remain rangebound at US$28-30/b range for Brent and US$23-25 for WTI

Headlines of the week

Upstream

  • CNOOC has announced a new ‘large-sized’ oil discovery in the Bohai Bay, with the Kenli 6-1 structure being the first major discovery in the Laibei Lower Uplift
  • Husky has halted work on the West White Rose project offshore Newfoundland and Labrador in Canada until the Covid-19 pandemic blows over
  • MOL and its partners in the PL820S in the Norwegian North Sea have struck oil, with the Evra and Iving exploratory wells fielding oil (and gas) in multiple formations in the Balder and Ringhorne fields; the discoveries are expected to be developed as a tie-back to nearby existing installations
  • Malaysia is preparing for its 2020 licensing round – with bids due in late May – offering stakes in eight fields, which include discovered assets with more than 12 million boe of proven undeveloped resources

Midstream/Downstream

  • Brazil’s Petrobras has extended the deadline to submit binding offers for eight of its refineries in Brazil, hampered by the volatility in global oil prices
  • Shell has paused construction of its massive ethane cracker in Beaver Country, Pennsylvania to help contain the rapid spread of Covid-19 in the USA
  • A second fire in less than a year has broken out at the Petronas-Saudi Aramco 300 kb/d PRefChem refinery in Malaysia, with output likely to be further curbed by a strict lockdown on private operations instituted by the government
  • Work on upgrading the Abadan oil refinery in Iran has been halted until at least mid-April, until the Covid-19 situation in the country is under control
  • Gazprom has started up a new CDU at its Moscow refinery, adding some 140 kb/d of processing capacity to the key processing site

Natural Gas/LNG

  • After almost two decades of attempted development, the Abadi LNG project in Indonesia may be in jeopardy as Japan’s Inpex is ‘reviewing investment plans’ in light of the Covid-19 virus; a delay is very likely, although Inpex has recently secured key land permits for the project’s planned onshore LNG plant
  • Australia is planning legislation to lift the country’s current moratorium on onshore gas exploration and production in 2021, following a cautious green-light by the Victorian Gas Program task force
  • US regulators have given Cameron LNG an additional four years to complete a two-train expansion at its LNG export project in Louisiana
  • Sempra expects to delay FID on its Port Arthur LNG export project, but remains on course to sanction its Energia Costa Azul project by Q2 2020
  • The Woodfibre LNG project in Canada’s British Columbia has delayed construction until 2021, as a key contractor filed for bankruptcy
  • Total has announced a new gas/condensate discovery in the UK North Sea – with the Isabella 30/12d-11 well in license P1820 yielding ‘encouraging flows’
  • INOX India and an Indian subsidiary of Shell have signed an MoU to partner and develop LNG demand and distribution, to be sourced from Shell Energy India’s 5 million tpa LNG receiving terminal in Hazira, Gujarat

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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