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Last Updated: April 13, 2020
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Headline crude prices for the week beginning 30 March 2020 – Brent: US$33/b; WTI: US$26/b

  • Unprecedented times call for unprecedented measures, as crude oil prices got a boost from an unlikely source: President Donald Trump, and his proclamation that Saudi Arabia and Russia would agree on a new supply deal
  • The magic number touted by Trump was a massive cut of 10 mmb/d in production – which triggered the largest ever single-day jump in crude oil prices – as Saudi Arabia called for an emergency OPEC+ meeting to discuss the issue
  • The OPEC+ meeting, which took place on Thursday, yielded a historic agreement to reduce production by 10 mmb/d; the cuts will be at the maximum level of 10 mmb/d until June 2020, before tapering down to 8 mmb/d until December 2020, and then 6 mmb/d until April 2022
  • The scale of the new cuts is unprecedented, and did not include any pledges from non-OPEC+ countries – particularly the USA and Brazil – beyond a call to such countries to respond with equivalent cuts
  • Unusually, Mexico was the lone hold-out on the deal, refusing to agree to a requested cut of 400,000 b/d, but it seems that the deal will go ahead
  • Oil prices didn’t budget upon the announcement of the agreement; partially because the market had already priced in the announcement after it was telegraphed by President Trump but also because the cut will not be enough to offset the expected fall in oil demand, which some analysts are predicting could reach 35 mmb/d in 2020
  • Much will now depend on President Trump’s next meeting with American drillers – set for April 10 – and if he can cajole them into accepting a pact to reduce US output; it is a tough proposition in a free-market industry, and even if a deal is reached, adherence will be tough to achieve…. as it already is within OPEC+
  • Supporting oil prices was an announcement by China that it had begun purchasing crude to fill its strategic reserves, one of many measures by governments worldwide have been taking to capitalise on cheap crude
  • While the new OPEC+ announcement should provide a more stable environment for drilling soon, the US active rig count remains decimated, losing a net 64 sites (62 oil and 2 gas), bringing the total operational number to 664
  • The OPEC+ deal has kicked crude oil prices to new plateau, but the demand side is still too weak to push prices higher; unless something miraculous comes out of the US regarding a crude supply pact, crude oil prices will continue to trade in the range of US$30-33/b for Brent and US$22-24/b for WTI


Headlines of the week

Upstream

  • Bakken shale giant Whiting Petroleum has filed for bankruptcy, the first of many former shale darlings that are expected to go into administration as the US shale industry faces a dire reckoning from Covid-19 and the oil price war
  • In an unusual move, Pioneer Natural Resources and Parsley Energy have backed a plan for the Texas Railroad Commission – the state oil regulator – to implement a state cap on crude output to ‘set reasonable market demand’
  • Siccar Point Energy and Shell have deferred the planned sanction date for their Cambo project in the UK Continental Shelf from Q3 2020 to 2H 2021
  • Petrobras has struck new oil at its pioneer well in the pre-salt Santos Basin’s Uirapuru Block, which it shares with ExxonMobil, Equinor and Petrogal
  • The latest giant oil field to enter production, Equinor’s John Sverdrup field in the North Sea will reach peak plateau production for its first phase earlier than expected, hitting some 470,000 boe/d by early May
  • TC Energy has confirmed that it will be proceeding with the construction of the controversial Canada-US Keystone XL Pipeline Project after receiving some US$8 billion in financial support from the provincial government of Alberta
  • Total is gearing up to start drilling at its Luiperd wildcat in South Africa in June 2020, close to its recent giant Brulpadda discovery in Block 11B/12B

Midstream/Downstream

  • Chinese refineries have gone on a buying spree for US crude oil, tempted by huge discounts offered at a time when China is preparing to resume normal economic activity after emerging from the Covid-19 lockdown and after the country waved import tariffs on US crude as part of the Phase 1 trade deal
  • India’s HPCL has invoked force majeure on two cargoes of crude oil from Iraq’s SOMO, citing dramatic fuel demand destruction due to India’s lockdown
  • Shell has opted to restart refining units at its 404 kb/d Pernis refinery in the Netherlands – Europe’s largest – following a brief power outage
  • Meanwhile North Atlantic Refining’s 130 kb/d Come-by-Chance refinery in Canada’s Newfoundland and Labrador province has become the first site in North America to halt all operations due to the Covid-19 pandemic
  • Saudi Aramco is reportedly mulling the sale of a stake in its pipeline unit in order to raise cash as the Kingdom faces off with Russia over oil prices; Aramco’s move would be in line with a similar recent proposal by Adnoc
  • China will begin to grant export quotas for refined fuel products to non-state refineries in the Zhejiang province as part of a pilot free trade zone, with the aim to promoting the zone as an international hub for clean marine fuels

Natural Gas/LNG

  • US LNG giant Cheniere has made the unusual step of tendering to buy 6 shipments of LNG for delivery to Europe later in 2020, seen as a sign that it may intend to throttle back production on a global glut and seeking (cheaper) existing cargoes to fulfil its contractual commitments
  • Cryopeak LNG Solutions Corp has broken ground on its planned LNG production facility in Fort Nelson, British Columbia, which is expected to serve demand markets in northern Canada and Alaska
  • India’s ONGC has produced first gas at Block 98/2 in the offshore Krishna Godavari Basin, which will be tied back to the existing Vashishta facility and potentially reduce the country’s LNG imports by 10% alone

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China’s Strategic Petroleum Reserves

After the OPEC+ club met on September 1st,  and confirmed that it would be sticking to its plan of increasing its crude supply by 400,000 b/d a month through December, China made a rather unusual announcement. It announced that it was going to release some crude oil from its strategic petroleum reserves, selling it to domestic refiners that were grappling with crude’s heady price rise over 2021. The release of strategic oil reserves isn’t news in itself. What is news is that the usually secretive China did it and did it publicly.

And it did it to send a message to OPEC+: attempts to create artificial scarcity to maintain crude prices will not be tolerated. China has a right to feel that way. Even though great strides have been made to ease the effects of the Covid-19 pandemic worldwide, the virus is still exerting major effects on the global economy. Not least a massive ripple through the health of global supply chains that has seen the price of almost everything – plastics, semiconductors, agricultural commodity, lumber, steel – spike due to supply issues. In some cases, the prices of raw materials are at historic highs. Crude oil is still nowhere near its peak of above US$100/b, but it is high enough to be concerning, especially since it is happening within a major inflationary environment. And for a manufacturing-heavy economy like China, that matters. That matters a lot. So China’s National Food and Strategic Reserves announced that it would be releasing some of the country’s crude stocks to ‘better stabilise domestic market supply and demand, and effectively guarantee the country’s energy security’, a month after the country’s producer price inflation – ie. the cost of manufacturing – hit a 13-year high.

China made good on that promise, releasing 7.38 million barrels from its stockpile to domestic bidders on September 24 with more tranches expected. This was the first ever recorded release from China’s Strategic Petroleum Reserves (SPR), which began back in 2009 in serendipitous response to crude oil prices exceeding the US$100/b mark for the first time in 2008. But curiously, it may not have been the first ever release. So secretive is the SPR that China does not reveal the size of the reserve, although analysts have estimated it at some 300-400 million barrels with total capacity of 500 million barrels using satellite imaging. It has been speculated that batches of crude from the SPR have been released before on the quiet. But this is the first time China has gone public. Compared to the country’s overall oil consumption, 7.38 million barrels is small, almost tiny. And even if additional supplies are released, it will not make a major impact on China’s oil balances. But the message is what is important.

It is a message that China is not alone in sending. US President Joe Biden has already called on OPEC+ to accelerate its supply easing plans, given indications that the crude glut built up over 2020 has been all but erased. It is a notion that would be supported by some OPEC+ members – Russia, Mexico, the UAE – but so far, the discipline advocated by Saudi Arabia has held. The US too has attempted to release of its own crude reserve stocks – the largest in the world with a capacity of 727 million barrels – but this was also in response to the devastating impact of Hurricane Ida. India, China’s closest analogue to size and stage, has been complaining too. As a major oil importer and with a shakier economic situation, India is particularly sensitive to oil price swings. US$70/b is way above what New Delhi is comfortable with. But since India’s appeals to OPEC+ have fallen on deaf ears, it is attempting domestic directives instead. India’s state refiners have been ordered to reduce crude purchases from the Middle East, but with supply tight, there aren’t many other people to buy from. India has also been selling oil from its strategic reserve – officially stated to be for clearing space to lease storage capacity to refiners – although since India is more transparent about these announcements, the announcement isn’t as surprising.

Will it work? At least immediately, no. Crude prices did come under pressure in the wake of China’s announcement, but then recovered with Brent hitting US$75/b. But the fact that China timed the announcement of the September 24 auction to coincide with peak global trading time and with a lot of details (again an unusual move) shows that Beijing is serious about wielding its strategic reserves as weapons. If not to moderate crude prices, then to at least stabilise it. But this is a war of attrition. China may very well have a planned schedule to release more crude reserves over 2021 and 2022 if prices remain high, but its supplies are finite. And they will have to eventually be replenished, possibly at an even higher cost if the attempt to quell crude price inflation fails. Thus far, the details of the SPR release hint that this is a tentative dip in the pool: the volume of 7.38 million barrels was far lower than the 35-70 million barrels predicted by some market participants. And because successful bidders can lift the oil up to December 10, it seems unlikely that a second auction for 2021 is in concrete plans at this point.

But, at the very least, the message has been sent. Beijing has a tool that it can wield if crude prices get out of hand, and it is not afraid to use it. The first step might have been small, and it is a giant leap in what mechanics are available to influence crude prices. And as history has proven, China can be very quick to scale up and very single-minded in its approach. Over to you, OPEC+.

End of Article

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Market Outlook:

  • Crude price trading range: Brent – US$73-76/b, WTI – US$71-74/b
  • Global crude benchmarks retain their strength, with Brent zipping past US$75/b, as supply-side issues and healthy demand continue to reverberate
  • After Hurricane Ida, US upstream players have gradually brought back some 70% of Gulf of Mexico production, easing some supply concerns, but a standoff between Libya’s Ministry of Oil and National Oil Corp could disrupt Libyan output

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September, 23 2021
Chicago Cubs Shirts: Wear Style with Ultimate Comfort!

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September, 16 2021
The New Wave of Renewable Fuels

In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

End of Article

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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September, 16 2021