NrgEdge Editor

Sharing content and articles for users
Last Updated: April 13, 2020
1 view
Business Trends
image

Market Watch   

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

Oil oil and gas news oil and gas industry LNG oil and gas companies news weekly update market watch market trends latest oil and gas trends
3
2 0

Something interesting to share?
Join NrgEdge and create your own NrgBuzz today

Latest NrgBuzz

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

In this time of COVID-19, we have had to relook at the way we approach workplace learning. We understand that businesses can’t afford to push the pause button on capability building, as employee safety comes in first and mistakes can be very costly. That’s why we have put together a series of Virtual Instructor Led Training or VILT to ensure that there is no disruption to your workplace learning and progression.

Find courses available for Virtual Instructor Led Training through latest video conferencing technology.

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