Easwaran Kanason

Co - founder of NrgEdge
Last Updated: April 14, 2020
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Business Trends

Just in case you missed the week's biggest news in the oil industry.  Here is a quick round-up of events. 

After over a month of posturing and rhetoric that brought crude oil prices to their lowest levels since the invasion of Iraq in 2003, the world’s largest crude oil producers managed to swallow their pride. Collectively, the OPEC+ group agreed to slash global production by nearly 10 mmb/d through June 2020, before allowing gradual increases through April 2022, when the deal expires. The scale of the new deal is vast. It is the single largest output cut in history, which is in response to the single largest demand destruction event in history, the Covid-19 pandemic, and runs on a huge timeline of 2 years.

For OPEC+, the deal serves two purposes. It immediately props up the current traded prices of crude oil, which were languishing in the US$25/b level before chatter of the deal emerged but it also is prescient enough to acknowledge that the negative impact of Covid-19 will linger for very long, hence the need for a long tail to the deal. The Great OPEC+ deal will not be enough to return oil prices to the US$50/b range. The greater Covid-19 crisis has ensured that. At least 18.5 mmb/d of oil demand has disappeared due to the pandemic; the current deal mitigates just over half of those volumes when it starts on May 1. But the goal was never to deliver a sustained recovery in crude prices. It was to ensure stability at current price levels, avoid oil prices possibly crashing further down into single digits, while managing supply to pave the way for eventual an price recovery as global economic activity slowly recovers post-Covid.

The goal was also to get the US involved. And involved it did. The emergency OPEC+ meeting, also attended by key countries not part of the OPEC+ alliance, was brokered through a series of furious meetings by US President Donald Trump. A more Machiavellian take on the Saudi Arabia-Russia oil price war was that it was a gambit to force the US to step in and get involved. Threatened with a meltdown of the US oil industry, particularly the shale patch, once an investor’s darling but now saddled with debt. Trump’s hand was forced in a crucial election year to advocate market control over free market economics. And it wasn’t just US oil facing an existential crisis; the massive LNG export infrastructure being built across the US was under threat as well. All of this was outlined to Trump in a feisty meeting with representatives of the US oil and gas industry, bitterly divided between those advocating intervention (the smaller players) and those protecting the free market (the majors and supermajors).

In the end, President Trump stepped in. He had to. Another Machiavellian take on the situation was that the oil price war was an excuse to allow Saudi Arabia and Russia to inflate their production levels in April, to cushion the blow from eventual production cuts. And, indeed, Saudi Arabia and Russia raised their output to record highs of some 12 mmb/d in April. Under the new supply deal, both countries would reduce their output to some 8.5 mmb/d, making up over half of the total expected cuts. But at the initial OPEC+ meeting on Thursday, protest came from an unusual quarter. Mexico, which has over-hedged its crude, balked at cutting its output by 400,000 b/d, promising only 100,000 b/d. The Mexican Standoff, as it was called, only ended by President Trump stepped in and promised to assist Mexico with its quota. This brought the OPEC+ supply deal down from an initial 10 mmb/d to 9.7 mmb/d.

Following the provisional OPEC+ deal, the G20 group of nations met a day after, promising to support intervention to stabilise prices. Out of that meeting, the US, Brazil and Canada aimed to reduce 3.7 mmb/d from their collective production, while the other G20 nations (including Argentina, Indonesia and the UK) would contribute another 1.3 mmb/d. However, these would not be actual quotas but ‘natural cuts’ as a by-products of the low price environment, as the free-market economies balked to establishing market controls. As President Trump put it, the free market would curb output in free market nations ‘automatically’, as private firms such as Equinor, ExxonMobil, Shell and Petrobras adjust their output accordingly.

On Sunday, OPEC+ finalised the details of its Great Deal after Mexico dropped its protest following Trump’s uncharacteristic offer to ‘pick up some of the slack’. With new countries in line (at least in spirit) with the supply deal, this has now been characterised as the Great OPEC++ Deal. But those expecting prices to rally on the news were disappointed. As Goldman Sachs called it, the deal is ‘too little, too late’. The market had already priced in a comprehensive supply deal when it rallied Brent prices from US$25/b to US$32/b; but the deal wasn’t large enough to placate a market fretting over the uncertain duration of the oncoming economic depression. Adherence to the supply cuts, as always, is always a huge question mark. But, as we have mentioned, that wasn’t the plan. Instead of a shock-and-awe cut to rally prices in the short-term, the Great OPEC++ Deal instead provides a gradual exit strategy from the current catastrophe. A catastrophe that OPEC++ itself partly contributed towards.

The OPEC++ deal in summary: 

  • Reduce OPEC+ production by 9.7 million barrels per day from current April 2020 production levels until end-June 2020
  • Revised cuts of 7.6 million barrels per day until December 2020
  • Revised cuts of 5.6 million barrels per day until April 2022
  • An additional production cut of 5 million barrels per day expected by non-OPEC+ nations, including the US, Canada, Brazil, Norway and other G20 nations

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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

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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