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Last Updated: April 17, 2020
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Headline crude prices for the week beginning 13 April 2020 – Brent: US$31/b; WTI: US$22/b

  • In the face of a landmark OPEC+ deal to slash production by nearly 10 million barrels a day, crude oil prices did not stage a recovery, but instead lost ground as the size of the supply deal failed to impress a market concerned about the scale of demand destruction from the Covid-19 pandemic
  • Despite a last-minute threat by Mexico to scupper the deal, the OPEC+ club agreed to cut 9.7 mmb/d of output through June 2020; an additional 5 mmb/d of cuts would come as an ‘automatic’ process of low crude prices for non-OPEC+ countries including the US, Norway, Canada and Brazil, but this still pales in comparison to a fall of 18.5 mmb/d of oil demand expected for the year
  • The unprecedented situation has led to a curious situation of many free-market economics supporting supply controls, as the G20 group of countries met virtually to support the OPEC+ deal; the US even offered to ‘pick up some of Mexico’s slack’ to save the OPEC+ deal
  • Adherence to the OPEC+ supply deal, which will last for two years until June 2022, is also up in the air; there is already evidence that both Saudi Arabia and Russia are still pumping oil at full volume in a bid to secure market share before the new deal kicks in May 1
  • However large the deal, it failed to impress the trading market; at a minimum, oil demand is expected to decline by 18.5 mmb/d in 2020, with some models predicting a loss of up to 35 mmb/d in a worst-case scenario, which would leave a huge oversupply in the market
  • While countries and companies are scrambling to fill up reserves and infrastructure – from train cars to pipelines to cargo ships – with spare crude, this will not be enough to absorb the huge amount of excess oil expected
  • Dynamics have also widened the spread between the two global oil benchmarks, with WTI sinking to a near-US$10/b discount to Brent as shale producers are caught in an existential crisis of continuing to pump or ceasing to exist
  • The depressed price environment is still wreaking havoc with the US rig count, which lost another 62 sites (58 oil, 4 gas) to sink to a 3-year low of 602 active sites according to Baker Hughes
  • After OPEC+ did all it could to enforce a new supply deal, crude oil prices are still reeling from the Covid-19 pandemic and the damage done by the Saudi-Russia oil price war; expect crude oil prices to remain soft, with Brent in the US$28-30/b range and WTI at US$24-26/b


Headlines of the week

Upstream

  • The US Department of Energy will made 77 million barrels of storage space in the federal Strategic Petroleum Reserve available to US producers in two tranches of 30 million barrels and 47 million barrels, respectively
  • Total has divested some US$400 million of non-core assets from its portfolio, with the main upstream portion being the sale of its Brunei E&P subsidiary (and 86.95% interest in Block CA1) to Shell
  • India is looking to purchase 15 million barrels of crude to fill up its three strategic reserves to take advantage of low prices, aiming at 5.5 million barrels of the UAE’s Upper Zakum grade for Mangalore, 9.2 million barrels of Saudi grades for Padur, and Iraqi Basrah Light grades for Visakhapatnam
  • Despite the global oil route and countries racing the cut production, Pemex is going to opposite route, continuing on its path to double drilling to 423 wells in 2020 and accelerate development of 15 recent upstream developments
  • Equinor has announced a new oil discovery in the US Gulf of Mexico, with the Monument well striking ‘good’ flows of crude oil
  • Wintershall DEA has made a new oil discovery at Well 6406/3-110 in the Bergknapp prospect’s Garn and Tilje formations in the Norwegian Sea
  • The Covid-19 devastation of global oil demand has forced the Middle East’s largest crude terminal in Fujairah to stop accepting storage requests by traders and refiners, having reached its capacity ceiling of 14 million barrels
  • INEOS will postpone planned summer shutdown for the UK’s Forties Pipeline system to spring 2021 in response to the ongoing Covid-19 lockdown
  • Norway has approved plans to build the Hywind Tampen floating wind farm that will power five oil and gas production platforms in the North Sea, with 11 wind turbines supporting the Snorre A and B, and Gullfaks A, B and C sites
  • Saudi Arabia has delayed the kick-off to develop its US$10 billion offshore Zuluf field until 2H 2020 amid major uncertainty in the industry

Midstream/Downstream

  • Nigeria’s NNPC will shut down its entire refining infrastructure in the country, in a bid to complete a comprehensive upgrade plan while avoid haemorrhaging money from the current low crude and refined price environment
  • As part of Total’s US$400 million non-core asset divestment, the French supermajor has sold its fuels import, distribution and marketing businesses in Liberia and Sierra Leone to Conex Oil & Gas, including 63 service stations
  • Marathon Petroleum has idled its 26,000 b/d refinery in Gallup, New Mexico – becoming the second North American refinery to shut down amid the pandemic
  • The Belarus-Russia oil supply spat seems to be ending, with Russian pipeline operator Transneft resuming supplies of Russian crude to Belarusian refineries

Natural Gas/LNG

  • Total has chartered its first LNG-powered VLCCs, while each of the two vessels owned by Malaysia’s AET aiming to enter service in 2022; the LNG for the vessels will be provided by Total’s own marine bunkering fuels arm
  • BP has declared force majeure on receiving the Gimi 2.5 million tpa FLNG facility from Golar LNG in 2022, after delaying its Greater Tortue Ahmeyim LNG project offshore Mauritania and Senegal
  • SDX has announced a new commercial gas discovery at its Sobhi well in Egypt, with some 24 bcf of recoverable gas and condensate that is expected to be tied back to the Yunus-1X pipeline tied back to the South Disouq processing facility

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Pricing-in The Covid 19 Vaccine

In a few days, the bi-annual OPEC meeting will take place on November 30, leading into a wider OPEC+ meeting on December 30. This is what all the political jostling and negotiations currently taking place is leading up to, as the coalition of major oil producers under the OPEC+ banner decide on the next step of its historic and ambitious supply control plan. Designed to prop up global oil prices by managing supply, a postponement of the next phase in the supply deal is widely expected. But there are many cracks appearing beneath the headline.

A quick recap. After Saudi Arabia and Russia triggered a price war in March 2020 that led to a collapse in oil prices (with US crude prices briefly falling into negative territory due to the technical quirk), OPEC and its non-OPEC allies (known collectively as OPEC+) agreed to a massive supply quota deal that would throttle their production for 2 years. The initial figure was 10 mmb/d, until Mexico’s reticence brought that down to 9.7 mmb/d. This was due to fall to 7.7 mmb/d by July 2020, but soft demand forced a delay, while Saudi Arabia led the charge to ensure full compliance from laggards, which included Iraq, Nigeria and (unusually) the UAE. The next tranche will bring the supply control ceiling down to 5.7 mmb/d. But given that Covid-19 is still raging globally (despite promising vaccine results), this might be too much too soon. Yes, prices have recovered, but at US$40/b crude, this is still not sufficient to cover the oil-dependent budgets of many OPEC+ nations. So a delay is very likely.

But for how long? The OPEC+ Joint Technical Committee panel has suggested that the next step of the plan (which will effectively boost global supply by 2 mmb/d) be postponed by 3-6 months. This move, if adopted, will have been presaged by several public statements by OPEC+ leaders, including a pointed comment from OPEC Secretary General Mohammad Barkindo that producers must be ready to respond to ‘shifts in market fundamentals’.

On the surface, this is a necessary move. Crude prices have rallied recently – to as high as US$45/b – on positive news of Covid-19 vaccines. Treatments from Pfizer, Moderna and the Oxford University/AstraZeneca have touted 90%+ effectiveness in various forms, with countries such as the US, Germany and the UK ordering billions of doses and setting the stage for mass vaccinations beginning December. Life returning to a semblance of normality would lift demand, particularly in key products such as gasoline (as driving rates increase) and jet fuel (allowing a crippled aviation sector to return to life). Underpinning the rally is the understanding that OPEC+ will always act in the market’s favour, carefully supporting the price recovery. But there are already grouses among OPEC members that they are doing ‘too much’. Led by Saudi Arabia, the draconian dictates of meeting full compliance to previous quotas have ruffled feathers, although most members have reluctantly attempt to abide by them. But there is a wider existential issue that OPEC+ is merely allowing its rivals to resuscitate and leapfrog them once again; the US active oil rig count by Baker Hughes has reversed a chronic decline trend, as WTI prices are at levels above breakeven for US shale.

Complaints from Iran, Iraq and Nigeria are to be expected, as is from Libya as it seeks continued exemption from quotas due to the legacy of civil war even though it has recently returned to almost full production following a truce. But grievance is also coming from an unexpected quarter: the UAE. A major supporter in the Saudi Arabia faction of OPEC, reports suggest that the UAE (led by the largest emirate, Abu Dhabi) are privately questioning the benefit of remaining in OPEC. Beset by shrivelling oil revenue, the Emiratis have been grumbling about the fairness of their allocated quota as they seek to rebuild their trade-dependent economy. There has been suggestion that the Emiratis could even leave OPEC if decisions led to a net negative outcome for them. Unlike the Qatar exit, this will not just be a blow to OPEC as a whole, questioning its market relevance but to Saudi Arabia’s lead position, as it loses one of its main allies, reducing its negotiation power. And if the UAE leaves, Kuwait could follow, which would leave the Saudis even more isolated.

This could be a tactic to increase the volume of the UAE’s voice in OPEC+, which has been dominated by Saudi Arabia and Russia. But it could also be a genuine policy shift. Either way, it throws even more conundrums onto a delicate situation that could undermine an already fragile market. Despite the positive market news led by Covid-19 vaccines and demand recovery in Asia, American crude oil inventories in Cushing are now approaching similar high levels last seen in April (just before the WTI crash) while OPEC itself has lowered its global demand forecast for 2020 by 300,000 b/d. That’s dangerous territory to be treading in, especially if members of the OPEC+ club are threatening to exit and undermine the pack. A postponement of the plan seems inevitable on December 1 at this point, but it is what lies beyond the immediate horizon that is the true threat to OPEC+.

Market Outlook:

  • Crude price trading range: Brent – US$44-46/b, WTI – US$42-44/b
  • More positive news on Covid-19 vaccines have underpinned a crude price rally despite worrying signs of continued soft demand and inventory build-ups
  • Pfizer’s application for emergency approval of its vaccine is paving the way for mass vaccinations to begin soon, with some experts predicting that the global economy could return to normality in Q2 2021
  • Market observers are predicting a delay in the OPEC+ supply quota schedule, but the longer timeline for the club’s plan – which is set to last until April 2022 – may have to be brought forward to appease current dissent in the group

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November, 25 2020
EIA expects U.S. crude oil production to remain relatively flat through 2021

In the U.S. Energy Information Administration’s (EIA) November Short-Term Energy Outlook (STEO), EIA forecasts that U.S. crude oil production will remain near its current level through the end of 2021.

A record 12.9 million barrels per day (b/d) of crude oil was produced in the United States in November 2019 and was at 12.7 million b/d in March 2020, when the President declared a national emergency concerning the COVID-19 outbreak. Crude oil production then fell to 10.0 million b/d in May 2020, the lowest level since January 2018.

By August, the latest monthly data available in EIA’s series, production of crude oil had risen to 10.6 million b/d in the United States, and the U.S. benchmark price of West Texas Intermediate (WTI) crude oil had increased from a monthly average of $17 per barrel (b) in April to $42/b in August. EIA forecasts that the WTI price will average $43/b in the first half of 2021, up from our forecast of $40/b during the second half of 2020.

The U.S. crude oil production forecast reflects EIA’s expectations that annual global petroleum demand will not recover to pre-pandemic levels (101.5 million b/d in 2019) through at least 2021. EIA forecasts that global consumption of petroleum will average 92.9 million b/d in 2020 and 98.8 million b/d in 2021.

The gradual recovery in global demand for petroleum contributes to EIA’s forecast of higher crude oil prices in 2021. EIA expects that the Brent crude oil price will increase from its 2020 average of $41/b to $47/b in 2021.

EIA’s crude oil price forecast depends on many factors, especially changes in global production of crude oil. As of early November, members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) were considering plans to keep production at current levels, which could result in higher crude oil prices. OPEC+ had previously planned to ease production cuts in January 2021.

Other factors could result in lower-than-forecast prices, especially a slower recovery in global petroleum demand. As COVID-19 cases continue to increase, some parts of the United States are adding restrictions such as curfews and limitations on gatherings and some European countries are re-instituting lockdown measures.

EIA recently published a more detailed discussion of U.S. crude oil production in This Week in Petroleum.

November, 19 2020
OPEC members' net oil export revenue in 2020 expected to drop to lowest level since 2002

The U.S. Energy Information Administration (EIA) forecasts that members of the Organization of the Petroleum Exporting Countries (OPEC) will earn about $323 billion in net oil export revenues in 2020. If realized, this forecast revenue would be the lowest in 18 years. Lower crude oil prices and lower export volumes drive this expected decrease in export revenues.

Crude oil prices have fallen as a result of lower global demand for petroleum products because of responses to COVID-19. Export volumes have also decreased under OPEC agreements limiting crude oil output that were made in response to low crude oil prices and record-high production disruptions in Libya, Iran, and to a lesser extent, Venezuela.

OPEC earned an estimated $595 billion in net oil export revenues in 2019, less than half of the estimated record high of $1.2 trillion, which was earned in 2012. Continued declines in revenue in 2020 could be detrimental to member countries’ fiscal budgets, which rely heavily on revenues from oil sales to import goods, fund social programs, and support public services. EIA expects a decline in net oil export revenue for OPEC in 2020 because of continued voluntary curtailments and low crude oil prices.

The benchmark Brent crude oil spot price fell from an annual average of $71 per barrel (b) in 2018 to $64/b in 2019. EIA expects Brent to average $41/b in 2020, based on forecasts in EIA’s October 2020 Short-Term Energy Outlook (STEO). OPEC petroleum production averaged 36.6 million barrels per day (b/d) in 2018 and fell to 34.5 million b/d in 2019; EIA expects OPEC production to decline a further 3.9 million b/d to average 30.7 million b/d in 2020.

EIA based its OPEC revenues estimate on forecast petroleum liquids production—including crude oil, condensate, and natural gas plant liquids—and forecast values of OPEC petroleum consumption and crude oil prices.

EIA recently published a more detailed discussion of OPEC revenue in This Week in Petroleum.

November, 16 2020