Easwaran Kanason

Co - founder of NrgEdge
Last Updated: July 20, 2020
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Business Trends

With just over two weeks to go before the largest coordinated crude oil supply cut in the world is set to expire, the 23-nation club that is OPEC+ gathered to discuss that very issue. It had two choices: extend the 9.7 mmb/d cuts by another month (having already provided a single month extension from the original expiration in June) or adhere to the schedule of quota trenches agreed back in April. With rumbles of discontent within the club and signs that global oil demand had turned a corner as economies recovered, the club chose the latter.

This means that beginning 1 August 2020, the nations that comprised OPEC+ will taper their drastic supply cuts to the next level – overall cuts of 7.7 mmb/d that are scheduled to remain in place until 31 December 2020. That’s a return of 2 mmb/d of crude to the market; but the net effect will be even higher as recovering crude oil prices have also prompted market-driven producer nations, such as the US, Brazil and Norway to restore curtailed production as well.

This gradual return to a ‘normal’ level of crude production is necessary. But some are questioning whether the haste is presumptive. It is certainly true that demand has recovered. Led by China, which is largely back to full capacity, and the re-opening of key economies in Europe and Asia, the EIA estimates that global fuels consumption had recovered by 10 mmb/d from April levels. OPEC itself predicts that world oil demand by rebound by 7 mmb/d in 2021 from an average of 90 mmb/d in 2020, with demand for OPEC crude surging by 25% in 2021 to an average of 29.8 mmb/d. That’s a bullish projection, but it is certainly backed up by consumer behaviour and business sentiment, eager to move back into the full swing of commerce to reclaim the few months that were lost entirely to Covid-19.

But that recovery is fragile. There are fears that countries have re-opened too fast and too soon. In Australia, a state-wide lockdown was re-imposed in Victoria as Covid-10 cases spiked. In Europe, where EU border controls were removed, there have been clusters of cases discovered in Spain, in Germany and elsewhere, prompting regional lockdowns. While nowhere near the full-scale lockdowns seen in April, this does showcase the ever-present threat of the virulent virus. In Asia, re-openings have been more gradual and cautious, but Covid-19 is still rampaging in India, where cases are spiking. And the situation in the Americas is still dire: spiralling out of control in the USA, and reaching critical levels in key parts of Latin America like Brazil, Mexico and Colombia. The asymmetrical regional situation of the pandemic means that restoring full global connectivity is at least 6 months from even being considered, and that the possibility of another wave of severe lockdowns is high.

For now, OPEC is sanguine, betting that most countries will be able to keep the situation under control. The move to taper the cuts was widely expected already, but crude prices still fell in response. However, OPEC+ has made a strong show of prioritising adherence, demanding firm commitments from errant members, countries like Iraq, Nigeria, Kazakhstan and Angola to compensate for their overproduction in May and June with cuts in August and September. All four have, in principle agreed to these, including laggard Angola, with Saudi Arabia even commending Iraq for implementing 90% of its cuts in June. The OPEC+ technical committee has directed the countries to make an additional 842,000 b/d of cuts, which would be able to blunt the net rise in OPEC+ production to just over 1 mmb/d instead of a full 2 mmb/d.

Will this be enough to keep the market buoyant and confident? For now, it seems so. Although crude prices fell in response to the announcement on July 15, the decline was still within the trading range, indicating that it was nowhere near a shock to the marketplace. OPEC+ did also offer an olive branch by stating that it would continue to closer monitor the demand recovery and will not hesitate to act if the situation turns, which are words that will mollify a jittery market. The oil world is itching to return to some semblance of normality, as is the rest of the global economy. The signs so far are promising. China, for example, saw its economy return to growth, expanding more than expected in Q2 2020. These green shoots of hope have been taken by OPEC+ that its approach is working and it can relax a little. One would have to hope that those assumptions hold true, and the long road to recovering from the worst crisis the oil world has possibly ever seen can begin to accelerate into higher gear.

Market Outlook:

  • Crude price trading range: Brent – US$42-44/b, WTI – US$40-42/b
  • Recovering oil demand kept crude prices steady, but OPEC+’s move to taper its supply cuts to the next tranche caused prices to skirt the lower part of their range
  • Crude oil prices were also supported by US data showing American crude and fuel inventories had continue to fall – indicating demand recovery amid constrained supply
  • Libya’s NOC was forced to redeclare force majeure on all oil exports, just two days after it lifted the previous force majeure, after militant action blockaded key oil ports; this does prevent an unexpected return to crude supply to an already nervous market

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Royal Dutch Shell Poised To Become Just Shell

On 10 December 2021, if all goes to plan Royal Dutch Shell will become just Shell. The energy supermajor will move its headquarters from The Hague in The Netherlands to London, UK. At least three-quarters of the company’s shareholders must vote in favour of the change at the upcoming general meeting, which has been sold by Shell as a means of simplifying its corporate structure and better return value to shareholders, as well as be ‘better positioned to seize opportunities and play a leading role in the energy transition’. In doing so, it will no longer meet Dutch conditions for ‘royal’ designation, dropping a moniker that has defined the company through decades of evolution since 1907.

But why this and why now?

There is a complex web of reasons why, some internal and some external but the ultimate reason boils down to improving growth sustainability. Royal Dutch Shell was born through the merger of Shell Transport and Trading Company (based in the UK) and Royal Dutch (based in The Netherlands) in 1907, with both companies engaging in exploration activities ranging from seashells to crude oil. Unified across international borders, Royal Dutch Shell emerged as Europe’s answer to John D Rockefeller’s Standard Oil empire, as the race to exploit oil (and later natural gas) reserves spilled out over the world. Along the way, Royal Dutch Shell chalked up a number of achievements including establishing the iconic Brent field in the North Sea to striking the first commercial oil in Nigeria. Unlike Standard Oil which was dissolved into 34 smaller companies in 1911, Royal Dutch Shell remained intact, operating as two entities until 2005, when they were finally combined in a dual-nationality structure: incorporated in the UK, but residing in the Netherlands. This managed to satisfy the national claims both countries make on the supermajor, second only to ExxonMobil in revenue and profits but proved to be costly to maintain. In 2020, fellow Anglo-Dutch conglomerate Unilever also ditched its dual structure, opting to be based fully out of the City of London. In that sense, Shell is following the direction of the wind, as forces in its (soon to be former) home country turn sour.

There is a specific grievance that Royal Dutch Shell has with the Dutch government, the 15% dividend tax collected for Dutch-domiciled companies. It is the reason why Unilever abandoned Rotterdam and is now the reason why Shell is abandoning The Hague. And this point is particularly existentialist for Shell, since its share prices has been battered in recent years following the industry downturn since 2015, the global pandemic and being in the crosshairs of climate change activists as an emblem of why the world’s average temperatures are going haywire. The latter has already caused the largest Dutch state pension fund ABP to stop investing in fossil fuels, thereby divesting itself of Royal Dutch Shell. This was largely a symbolic move, but as religious figures will know, symbols themselves carry much power. To combat this, Shell has done two things. First, it has positioned itself to be at the forefront of energy transition, announcing ambitious emissions reductions plans in line with its European counterparts to become carbon neutral by 2050. Second, it is looking to bump up its dividend payouts after slashing them through the depths of the Covid-19 pandemic and accelerating share buybacks to remain the bluest of blue-chip stocks. But then, earlier this year, a Dutch court ruled that Shell’s emissions targets were ‘not ambitious enough’, ordering a stricter aim within a tighter timeframe. And the 15% dividend tax remains – even though Prime Minister Mark Rutte’s coalition government has been attempting to scrap it, with (it is presumed) some lobbying from Royal Dutch Shell and Unilever.

As simplistic it is to think that Shell is leaving for London believes the citizens of the Netherlands has turned its back on the company, the ultimate reason was the dividend tax. Reportedly, CEO Ben van Buerden called up Mark Rutte on Sunday informing him of the planned move. Rutte’s reaction, it is said was of dismay. And he embarked on a last-ditch effort to persuade Royal Dutch Shell to change its mind, by immediately lobbying his government’s coalition partners to back an abolition of the dividend tax. The reaction was perhaps not what he expected, with left-wing and green parties calling Shell’s threat ‘blackmail’. With democracy drawing a line, Shell decided to walk; or at least present an exit plan endorsed by its Board to be voted by shareholders. Many in the Netherlands see Shell’s exit and the loss of the moniker Royal Dutch – as a blow to national pride, especially since the country has been basking in the glow of expanded reputation as a result of post-Brexit migration of financial activities to Amsterdam from London. The UK, on the other hand, sees Shell’s decision and Unilever’s – as an endorsement of the country’s post-Brexit potential.

The move, if passed and in its initial stages, will be mainly structural, transferring the tax residence of Shell to London. Just ten top executives including van Buerden and CFO Jessica Uhl will be making the move to London. Three major arms – Projects and Technology, Global Upstream and Integrated Gas and Renewable Energies – will remain in The Hague. As will Shell’s massive physical reach on Dutch soil: the huge integrated refinery in Pernis, the biofuels hub in Rotterdam, the country’s first offshore wind farm and the mammoth Porthos carbon capture project that will funnel emissions from Rotterdam to be stored in empty North Sea gas fields. And Shell’s troubles with activists will still continue. British climate change activists are as, if not more aggressive as their Dutch counterpart, this being the country where Extinction Rebellion was born. Perhaps more of a threat is activist investor Third Point, which recently acquired a chunk of Shell shares and has been advocating splitting the company into two – a legacy business for fossil fuels and a futures-focused business for renewables.

So Shell’s business remains, even though its address has changed. In the grand scheme of things, never mind the small matter of Dutch national pride – Royal Dutch Shell’s roadmap to remain an investment icon and a major driver of energy transition will continue in its current form. This is a quibble about money or rather, tax – that will have little to no impact on Shell’s operations or on its ambitions. Royal Dutch Shell is poised to become just Shell. Different name and a different house, but the same contents. Unless, of course, Queen Elizabeth II decides to provide royal assent, in which case, Shell might one day become Royal British Shell.

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