In the August Short-Term Energy Outlook (STEO), we forecast larger than previously expected world petroleum inventory draws in 2021 and larger inventory builds in 2022. The changes are driven mostly by forecast changes to production from OPEC and Russia as a result of the most recent OPEC+ agreement. Concerns about decreased demand because of increasing COVID-19 cases have recently driven crude oil prices down, which has offset some initial price increases due to larger inventory draws. As a result, our crude oil price forecast remains mostly unchanged from the July STEO. However, we have revised down our forecast for total world petroleum production.
In the August STEO, we forecast that total world petroleum production will average 98.9 million barrels per day (b/d) in the second half of 2021 (2H21), down from a forecast of 99.4 million b/d in the July STEO (Figure 1). We decreased our forecast for world petroleum production in 2021 because of lower forecast production from OPEC, which is only slightly offset by increased forecast production in Russia. In 2022, we forecast that global petroleum production will average 101.8 million b/d—20,000 b/d less than we forecast in the July STEO.
On July 18, OPEC+, which includes OPEC and several non-OPEC members (including Russia), agreed to increase monthly crude oil production starting in August 2021. In early July, members of OPEC+ adjourned without reaching a new crude oil production agreement. Negotiations stalled because of disagreements between Saudi Arabia and the United Arab Emirates (UAE) on the baseline levels against which the members’ production cuts should be measured. In the deal announced on July 18, OPEC+ members agreed to increase production by 400,000 b/d each month starting in August 2021. This agreement is in addition to production increases that already took place through July 2021, including the full reversal of Saudi Arabia’s voluntary production cut of an additional 1 million b/d.
The latest agreement calls for the 400,000 b/d monthly increase to continue until the previous production cuts are fully reversed, which would occur by 3Q22 if implemented at that rate. However, OPEC+ extended the production agreement to include monthly meetings through the end of 2022 so that it can adjust production targets as necessary. The most recent agreement did not specify monthly output targets, which leaves exact implementation uncertain. OPEC+ also agreed to raise the baselines for Saudi Arabia, Russia, the UAE, Iraq, and Kuwait by a combined 1.6 million b/d starting in May 2022; however, they did not specify how they would implement the new baselines. Some countries, including Nigeria and Algeria, have requested that OPEC+ review their baselines as well.
In the August STEO, we forecast that OPEC total petroleum production will average 33.0 million b/d in 2H21, down 600,000 b/d from the July forecast for the same period (Figure 2). In the July STEO, we expected that OPEC would raise production by more than the group ultimately agreed to in order to meet global demand. We expect most OPEC countries will fully comply with the agreement during 2H21.
For Russia, we forecast that petroleum production will average 11.0 million b/d in 2H21, up from forecast production of 10.8 million b/d in the July STEO. We forecast that petroleum production in Russia will average 11.6 million b/d in 2022, up by 100,000 b/d compared with the July forecast. We expect that Russia will increase production significantly as its production targets increase.
We revised our forecast for OPEC petroleum production in 2022 up by 40,000 b/d from the July STEO to average 34.2 million b/d. In 2022, we expect OPEC+ monthly production increases to total less than 400,000 b/d. This output growth is forecast to avoid oversupplying the markets and pushing down the price of crude oil. However, we expect that some countries will produce more as a result of their increased baselines starting in May 2022, including the UAE, Kuwait, and Iraq. Our forecast assumes that existing sanctions against Iran will remain in place through the end of the forecast period. However, our forecast includes rising petroleum production from Iran over that period despite sanctions remaining in place, and we assume that OPEC will not adjust production levels to accommodate this increase.
In the August STEO, we forecast that global implied inventories (the difference between world consumption and production) will draw at an average rate of 1.0 million b/d in 3Q21 and slow to 310,000 b/d in 4Q21, averaging 670,000 b/d in 2H21 compared with inventory withdrawals of 210,000 b/d forecast in the July STEO for the same period. In the August STEO, we forecast that global inventory builds will average 550,000 b/d in 2022, up from a forecast of 460,000 b/d in the July STEO (Figure 3).
Recent crude oil price activity has been mixed in response to the OPEC+ supply agreement and renewed demand concerns, resulting in increased price volatility. Our forecast price for Brent and West Texas Intermediate (WTI) crude oil remains largely unchanged from the July STEO. In the August STEO, we expect that the price of Brent will fall less than $1 per barrel (b) in 2H21 compared with the July STEO, remaining at $72/b. The price of WTI is expected to increase by less than $1/b compared with the July STEO during the same period, remaining at $69/b. Our forecast prices for Brent and WTI in 2022 were each revised down by nearly $1/b to average $66/b and $62/b, respectively (Figure 4).
U.S. average regular gasoline price increases, diesel price decreases
The U.S. average regular gasoline retail price increased more than 1 cent to $3.17 per gallon on August 9, $1.01 higher than the same time last year. The Rocky Mountain price increased more than 3 cents to $3.67 per gallon, the West Coast price increased more than 2 cents to $3.94 per gallon, the Midwest price increased nearly 2 cents to $3.06 per gallon, and the East Coast price increased more than 1 cent to $3.04 per gallon. The Gulf Coast price decreased nearly 1 cent to $2.83 per gallon.
The U.S. average diesel fuel price decreased less than 1 cent to $3.36 per gallon on August 9, 94 cents higher than a year ago. The Gulf Coast price decreased more than 1 cent to $3.08 per gallon, the Midwest price decreased nearly 1 cent to $3.27 per gallon, and the East Coast price decreased less than 1 cent, remaining virtually unchanged at $3.33 per gallon. The West Coast price increased nearly 2 cents to $4.01 per gallon, and the Rocky Mountain price increased nearly 1 cent to $3.68 per gallon.
Propane/propylene inventories decline
U.S. propane/propylene stocks decreased by 0.6 million barrels last week to 65.3 million barrels as of August 6, 2021, 14.0 million barrels (17.7%) less than the five-year (2016-2020) average inventory levels for this same time of year. Gulf Coast, Rocky Mountain/West Coast, and East Coast inventories decreased by 1.0 million barrels, 0.2 million barrels, and 0.1 million barrels, respectively. Midwest inventories increased by 0.6 million barrels.
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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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