A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions
Source: U.S. Energy Information Administration, U.S. liquefaction capacity database
On May 31, 2019, Sempra Energy, the majority owner of the Cameron liquefied natural gas (LNG) export facility, announced that the company had shipped its first cargo of LNG, becoming the fourth such facility in the United States to enter service since 2016. Upon completion of Phase 1 of the Cameron LNG project, U.S. baseload operational LNG-export capacity increased to about 4.8 billion cubic feet per day (Bcf/d).
Cameron LNG’s export facility is located in Hackberry, Louisiana, next to the company’s existing LNG-import terminal. Phase 1 of the project includes three liquefaction units—referred to as trains—that will export a projected 12 million tons per year of LNG exports, or about 1.7 Bcf/d.
Train 1 is currently producing LNG, and the first LNG shipment departed the facility aboard the ship Marvel Crane. The facility will continue to ship commissioning cargos until it receives approval from the Federal Energy Regulatory Commission to begin commercial shipments. Commissioning cargos refer to pre-commercial cargo loaded while export facility operations are still undergoing final testing and inspection. Trains 2 and 3 are expected to come online in the first and second quarters of 2020, according to Sempra Energy’s first-quarter 2019 earnings call.
Cameron LNG has regulatory approval to expand the facility through two additional phases, which involve the construction of two additional liquefaction units that would increase the facility’s LNG capacity to about 3.5 Bcf/d. These additional phases do not have final investment decisions.
Cameron LNG secured an authorization from the U.S. Department of Energy to export LNG to Free Trade Agreement (FTA) countries as well as to countries with which the United States does not have Free Trade Agreements (non-FTA countries). A considerable portion of the LNG shipments is expected to fulfill long-term contracts in Asian countries, similar to other LNG-export facilities located in the Gulf of Mexico region.
Cameron LNG will be the fourth U.S. LNG-export facility placed into service since February 2016. LNG exports rose steadily in 2016 and 2017 as liquefaction trains at the Sabine Pass LNG-export facility entered service, with additional increases through 2018 as units entered service at Cove Point LNG and Corpus Christi LNG. Monthly exports of LNG exports reached more than 4.0 Bcf/d for the first time in January 2019.
Source: U.S. Energy Information Administration, Natural Gas Monthly
Currently, two additional liquefaction facilities are being commissioned in the United States—the Elba Island LNG in Georgia and the Freeport LNG in Texas. Elba Island LNG consists of 10 modular liquefaction trains, each with a capacity of 0.03 Bcf/d. The first train at Elba Island is expected to be placed into service in mid-2019, and the remaining nine trains will be commissioned sequentially during the following months. Freeport LNG consists of three liquefaction trains with a combined baseload capacity of 2.0 Bcf/d. The first train is expected to be placed in service during the third quarter of 2019.
EIA’s database of liquefaction facilities contains a complete list and status of U.S. liquefaction facilities.
Headline crude prices for the week beginning 3 June 2019 – Brent: US$61/b; WTI: US$53/b
Headlines of the week
Midstream & Downstream
Isabel Fernández Fuentes, the current Executive Director, will leave the European Federation of Geologists (EFG) in autumn to head for new professional challenges. During the recent EFG Council meeting in Delft, she has informed the delegates about her wish to resign from her position at the end of September 2019. The Council members have unanimously expressed their gratitude towards Isabel for her enthusiasm and dedicated work throughout the last 17 years.
EFG therefore seeks to appoint a new Executive Director for its head office in Brussels. The deadline for applications is 21 June 2019 and the contract should ideally start at the beginning of September 2019.
The European Federation of Geologists is a non-governmental professional organisation representing more than 45,000 geoscientists all across Europe. EFG’s main aims are to contribute to a safer and more sustainable use of the natural environment, to protect and inform the public and to promote a more responsible exploitation of natural resources. EFG’s members are National Associations, NAs, whose principal objectives are based in similar aims. The guidelines to achieve these aims are the promotion of excellence in the application of geology and the creation of public awareness of the importance of geoscience for the society.
Summary of tasks (objectives and scope):
You may find the full job vacancy here.
Please send your application to: [email protected]
Possibly discontent with the (lack of) progress with China over a new trade deal, US President Donald Trump is turning its sights elsewhere. After slapping tariffs on steel from close allies in North America and the European Union and embarking on an ever-escalating trade war with China, it is now the turn of Mexico.
In a surprise move, President Trump announced that imports of all Mexican goods into the US would now be subject to a 5% tariff. And this would rise unless Mexico stops the flow of illegal immigration across the Rio Grande, with US officials confirming that the tariffs would reach to 25% by October. This came as a blindside to the market. Not only was the North American Free Trade Agreement (NAFTA) successfully renegotiated only recently, some American manufacturers had only just recalibrated their supply chains away from China to Mexico as a result of the trade war. The new tariffs on Mexico have been described as ‘very disruptive’, threatening a symbiotic relationship that has largely benefitted the USA.
Most of all in energy. US refineries along the Gulf Coast have long been geared to process heavy crude from Mexico, Venezuela and Canada. With Canadian oil sands stuck in Alberta over a lack of pipeline infrastructure and Venezuela being persona non grata, Mexican oil is increasingly prized by refineries owned by ExxonMobil, Chevron, Marathon Oil and more. Some 630,000 b/d of Mexican crude is shipped to US refineries that are too finely calibrated for those grades to be easily replaced. A back-of-the-envelope calculation suggests that the tariffs will add about US$3/b to the cost of Maya crude to the US, slashing current refining margins by half. This will be passed on to the American consumer, just ahead of the summer driving season. And these Gulf refineries also send more than a million barrels of fuels back to Mexico (which has a net fuel deficit), worth some US$20 billion in revenue. Natural gas trade will also be affected – threatening the 20 pipelines sending some 5 bcf/d across the southern border, along with new LNG projects in Mexico that are dependent on American shale gas.
While Mexico has made overtures to mitigate the flow of illegal immigration, it is not likely to just take the bullet. Reprisal tariffs are likely, mainly on US fuels and, crucially, US corn that impacts the two key America industries supporting Trump: energy and farming. Crude prices have already tumbled in response to the Mexican tariffs, with fears that it could cut the legs off already weak global energy demand.
And there’s more. President Trump has ordered that India’s status as a preferential trade partner be removed, which would result in the imposition of tariffs on a package of currently 2,000 duty-free products. While India is in a weaker bargaining position than China in capitulating to American demands, it is currently a major destination for American crude after sanctions on Iranian crude and the flourishing US LNG export industry is also banking on increased demand from India. Reprisal moves from India, where Prime Minister Narendra Modi has just won a resounding election victory, must be expected, particularly since Modi campaigned on a nationalist campaign reminiscent of a diluted Trump message.
And if it is China, India and Mexico today, who else will it be tomorrow? The US’ trade war stance may score short-term political points but it adds much more fragility to the market. In the meantime crude oil imports from Mexico will be subject to a 5% tariff, which will rise to 10% on July 1 and continue rising towards 25% in October, if the immigration issue is not resolved.
US Trade War Tariff Targets: