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Your Weekly Update: 23 - 27 March 2020

Market Watch   

Headline crude prices for the week beginning 23 March 2020 – Brent: US$27/b; WTI: US$23/b

  • After falling to an 18-year low last week, crude oil prices have managed to recover from their lowest level since 2003… but just barely
  • A huge swathe of economic stimulus packages announced by governments worldwide, including a US$2 trillion bipartisan injection in the US economy, soothed financial markets, which in turn supported commodity prices
  • More stimulus, however, may be needed as confirmed Covid-19 cases in Italy and the USA overtake China’s total, with the pandemic increasingly containing in the latter but accelerating at a dangerous pace in Europe and North America
  • While the Covid-19 saga plays out, former allies Saudi Arabia and Russia remain at odds over crude oil prices; Russian President Vladimir Putin has accused Saudi Arabia of ‘oil price blackmail’, vowing not to cave in
  • However, various reports from Russia suggest the low crude prices are beginning to bite economically, with Russia still ‘open to cooperation’ but committed to a war of attrition
  • With Saudi Arabia unlikely to want to cave either, the USA is exercising its muscle in an attempt to intervene in the price war; the Department of Energy will be purchasing some 77 million barrels of (US) crude to bring its Strategic Petroleum Reserve to maximum capacity
  • Meanwhile, the US is reportedly also open to a joint US-Saudi Arabia alliance in a bid to stabilise prices, a scenario that was previously unthinkable but may be necessary if the US shale patch is to be saved; such an alliance, however, is likely to invite reprisals from Russia
  • The record low crude oil prices has led some traders to build up positions, hiring tankers and supertankers to store crude and fuel products at sea while betting that prices will eventually rise; the world’s largest oil trader Glencore has chartered one of the world’s two Ultra Large Crude Carriers for six months to serve as floating storage, while other traders are beginning to store jet fuel
  • As expected, the low prices have begun to bite on the US active rig count, which fell by a net 20 to 772 sites; the situation is worse in Canada, where the industry lost 77 sites over the week to fall to 98 active sites
  • While prices have managed to recover from their lows, the outlook for crude remains weak as long as the oil price war persists and the Covid-19 pandemic shows no sign of containment; expect prices to remain rangebound at US$28-30/b range for Brent and US$23-25 for WTI

Headlines of the week

Upstream

  • CNOOC has announced a new ‘large-sized’ oil discovery in the Bohai Bay, with the Kenli 6-1 structure being the first major discovery in the Laibei Lower Uplift
  • Husky has halted work on the West White Rose project offshore Newfoundland and Labrador in Canada until the Covid-19 pandemic blows over
  • MOL and its partners in the PL820S in the Norwegian North Sea have struck oil, with the Evra and Iving exploratory wells fielding oil (and gas) in multiple formations in the Balder and Ringhorne fields; the discoveries are expected to be developed as a tie-back to nearby existing installations
  • Malaysia is preparing for its 2020 licensing round – with bids due in late May – offering stakes in eight fields, which include discovered assets with more than 12 million boe of proven undeveloped resources

Midstream/Downstream

  • Brazil’s Petrobras has extended the deadline to submit binding offers for eight of its refineries in Brazil, hampered by the volatility in global oil prices
  • Shell has paused construction of its massive ethane cracker in Beaver Country, Pennsylvania to help contain the rapid spread of Covid-19 in the USA
  • A second fire in less than a year has broken out at the Petronas-Saudi Aramco 300 kb/d PRefChem refinery in Malaysia, with output likely to be further curbed by a strict lockdown on private operations instituted by the government
  • Work on upgrading the Abadan oil refinery in Iran has been halted until at least mid-April, until the Covid-19 situation in the country is under control
  • Gazprom has started up a new CDU at its Moscow refinery, adding some 140 kb/d of processing capacity to the key processing site

Natural Gas/LNG

  • After almost two decades of attempted development, the Abadi LNG project in Indonesia may be in jeopardy as Japan’s Inpex is ‘reviewing investment plans’ in light of the Covid-19 virus; a delay is very likely, although Inpex has recently secured key land permits for the project’s planned onshore LNG plant
  • Australia is planning legislation to lift the country’s current moratorium on onshore gas exploration and production in 2021, following a cautious green-light by the Victorian Gas Program task force
  • US regulators have given Cameron LNG an additional four years to complete a two-train expansion at its LNG export project in Louisiana
  • Sempra expects to delay FID on its Port Arthur LNG export project, but remains on course to sanction its Energia Costa Azul project by Q2 2020
  • The Woodfibre LNG project in Canada’s British Columbia has delayed construction until 2021, as a key contractor filed for bankruptcy
  • Total has announced a new gas/condensate discovery in the UK North Sea – with the Isabella 30/12d-11 well in license P1820 yielding ‘encouraging flows’
  • INOX India and an Indian subsidiary of Shell have signed an MoU to partner and develop LNG demand and distribution, to be sourced from Shell Energy India’s 5 million tpa LNG receiving terminal in Hazira, Gujarat
This Week in Petroleum: Oil market volatility is at an all-time high

Crude oil prices have fallen significantly since the beginning of 2020, largely driven by the economic contraction caused by the 2019 novel coronavirus disease (COVID19) and a sudden increase in crude oil supply following the suspension of agreed production cuts among the Organization of the Petroleum Exporting Countries (OPEC) and partner countries. With falling demand and increasing supply, the front-month price of the U.S. benchmark crude oil West Texas Intermediate (WTI) fell from a year-to-date high closing price of $63.27 per barrel (b) on January 6 to a year-to-date low of $20.37/b on March 18 (Figure 1), the lowest nominal crude oil price since February 2002.

Figure 1. West Texas Intermediate crude oil futures prices

WTI crude oil prices have also fallen significantly along the futures curve, which charts monthly price settlements for WTI crude oil delivery over the next several years. For example, the WTI price for December 2020 delivery declined from $56.90/b on January 2, 2020, to $32.21/b as of March 24. In addition to the sharp price decline, the shape of the futures curve has shifted from backwardation—when near-term futures prices are higher than longer-dated ones—to contango, when near-term futures prices are lower than longer-dated ones. The WTI 1st-13th spread (the difference between the WTI price in the nearest month and the price for WTI 13 months away) settled at -$10.34/b on March 18, the lowest since February 2016, exhibiting high contango. The shift from backwardation to contango reflects the significant increase in petroleum inventories. In its March 2020 Short-Term Energy Outlook (STEO), released on March 11, 2020, the U.S. Energy Information Administration (EIA) forecast that Organization for Economic Cooperation and Development (OECD) commercial petroleum inventories will rise to 2.9 billion barrels in March, an increase of 20 million barrels over the previous month and 68 million barrels over March 2019 (Figure 2). Since the release of the March STEO, changes in various oil market and macroeconomic indicators suggest that inventory builds are likely to be even greater than EIA’s March forecast.

Figure 2. Crude oil futures price spreads and inventories

Significant price volatility has accompanied both price declines and price increases. Since 1999, 69% of the time, daily WTI crude oil prices increased or decreased by less than 2% relative to the previous trading day. Daily oil price changes during March 2020 have exceeded 2% 13 times (76% of the month’s traded days) as of March 24. For example, the 10.1% decline on March 6 after the OPEC meeting was larger than 99.8% of the daily percentage price decreases since 1999. The 24.6% decline on March 9 and the 24.4% decline on March 18 were the largest and second largest percent declines, respectively, since at least 1999 (Figure 3).

Figure 3. Frequency of West Texas Intermediate (WTI) futures daily price percentage changes (January 1999 - March 2020)

On March 10, a series of government announcements indicated that emergency fiscal and monetary policy were likely to be forthcoming in various countries, which contributed to a 10.4% increase in the WTI price, the 12th-largest daily increase since 1999. During other highly volatile time periods, such as the 2008 financial crisis, both large price increases and decreases occurred in quick succession. During the 2008 financial crisis, the largest single-day increase—a 17.8% rise on September 22, 2008—was followed the next day by the largest single-day decrease, a 12.0% fall on September 23, 2008.

Market price volatility during the first quarter of 2020 has not been limited to oil markets (Figure 4). The recent volatility in oil markets has also coincided with increased volatility in equity markets because the products refined from crude oil are used in many parts of the economy and because the COVID-19-related economic slowdown affects a broad array of economic activities. This can be measured through implied volatility—an estimate of a security’s expected range of near-term price changes—which can be calculated using price movements of financial options and measured by the VIX index for the Standard and Poor’s (S&P) 500 index and the OVX index for WTI prices. Implied volatility for both the S&P 500 index and WTI are higher than the levels seen during the 2008 financial crisis, which peaked on November 20, 2008, at 80.9 and on December 11, 2008, at 100.4, respectively, compared with 61.7 for the VIX and 170.9 for the OVX as of March 24.

Figure 4. Changes in implied and historical volatility measures

Comparing implied volatility for the S&P 500 index with WTI’s suggests that although recent volatility is not limited to oil markets, oil markets are likely more volatile than equity markets at this point. The oil market’s relative volatility is not, however, in and of itself unusual. Oil markets are almost always more volatile than equity markets because crude oil demand is price inelastic—whereby price changes have relatively little effect on the quantity of crude oil demanded—and because of the relative diversity of the companies constituting the S&P 500 index. But recent oil market volatility is still historically high, even in comparison to the volatility of the larger equity market. As denoted by the red line in the bottom of Figure 4, the difference between the OVX and VIX reached an all-time high of 124.1 on March 23, compared with an average difference of 16.8 between May 2007 (the date the OVX was launched) and March 24, 2020.

Markets currently appear to expect continued and increasing market volatility, and, by extension, increasing uncertainty in the pricing of crude oil. Oil’s current level of implied volatility—a forward-looking measure for the next 30 days—is also high relative to its historical, or realized, volatility. Historical volatility can influence the market’s expectations for future price uncertainty, which contributes to higher implied volatility. Some of this difference is a structural part of the market, and implied volatility typically exceeds historical volatility as sellers of options demand a volatility risk premium to compensate them for the risk of holding a volatile security. But as the yellow line in Figure 4 shows, the current implied volatility of WTI prices is still higher than normal. The difference between implied and historical volatility reached an all-time high of 44.7 on March 20, compared with an average difference of 2.3 between 2007 and March 2020. This trend could suggest that options (prices for which increase with volatility) are relatively expensive and, by extension, that demand for financial instruments to limit oil price exposure are relatively elevated.

Increased price correlation among several asset classes also suggests that similar economic factors are driving prices in a variety of markets. For example, both the correlation between changes in the price of WTI and changes in the S&P 500 and the correlation between WTI and other non-energy commodities (as measured by the S&P Commodity Index (GSCI)) increased significantly in March. Typically, when correlations between WTI and other asset classes increase, it suggests that expectations of future economic growth—rather than issues specific to crude oil markets— tend to be the primary drivers of price formation. In this case, price declines for oil, equities, and non-energy commodities all indicate that concerns over global economic growth are likely the primary force driving price formation (Figure 5).

Figure 5. Rolling 60-day correlation between daily price changes in West Texas Intermediate (WTI) crude oil prices and other indicators

U.S. average regular gasoline and diesel prices fall

The U.S. average regular gasoline retail price fell nearly 13 cents from the previous week to $2.12 per gallon on March 23, 50 cents lower than a year ago. The Midwest price fell more than 16 cents to $1.87 per gallon, the West Coast price fell nearly 15 cents to $2.88 per gallon, the East Coast and Gulf Coast prices each fell nearly 11 cents to $2.08 per gallon and $1.86 per gallon, respectively, and the Rocky Mountain price declined more than 8 cents to $2.24 per gallon.

The U.S. average diesel fuel price fell more than 7 cents from the previous week to $2.66 per gallon on March 23, 42 cents lower than a year ago. The Midwest price fell more than 9 cents to $2.50 per gallon, the West Coast price fell more than 7 cents to $3.25 per gallon, the East Coast and Gulf Coast prices each fell nearly 7 cents to $2.72 per gallon and $2.44 per gallon, respectively, and the Rocky Mountain price fell more than 6 cents to $2.68 per gallon.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 1.8 million barrels last week to 64.9 million barrels as of March 20, 2020, 15.5 million barrels (31.3%) greater than the five-year (2015-19) average inventory levels for this same time of year. Gulf Coast inventories decreased by 1.3 million barrels, East Coast inventories decreased by 0.3 million barrels, and Rocky Mountain/West Coast inventories decrease by 0.2 million barrels. Midwest inventories increased by 0.1 million barrels. Propylene non-fuel-use inventories represented 8.5% of total propane/propylene inventories.

Residential heating fuel prices decrease

As of March 23, 2020, residential heating oil prices averaged $2.45 per gallon, almost 15 cents per gallon below last week’s price and nearly 77 cents per gallon lower than last year’s price at this time. Wholesale heating oil prices averaged more than $1.11 per gallon, almost 14 cents per gallon below last week’s price and 98 cents per gallon lower than a year ago.

Residential propane prices averaged more than $1.91 per gallon, nearly 2 cents per gallon below last week’s price and almost 49 cents per gallon below last year’s price. Wholesale propane prices averaged more than $0.42 per gallon, more than 7 cents per gallon lower than last week’s price and almost 36 cents per gallon below last year’s price.

Your Weekly Update: 16 - 20 March 2020

Market Watch   

Headline crude prices for the week beginning 16 March 2020 – Brent: US$30/b; WTI: US$28/b

  • The dark days continue, with global crude oil prices at their weakest point since 2015 as the Covid-19 pandemic deepens worldwide and the Saudi Arabia-Russia oil war heats up
  • With infections and deaths piling up in Europe and the US – and a second wave of infections threatening Asia – the number of global cases has topped 240,000 and 10,000 respectively
  • Travel lockdown are taking place worldwide; Europe has largely shut its borders, as well as the US and other major countries, resulting in airlines slashing international travel and cratering jet fuel demand
  • But of more concern for oil prices, is the standoff between Saudi Arabia and Russia, as both countries dig in their heels to engage in a protracted price war
  • Saudi Arabia is on the hunt for more supertankers, with the intention of flooding the market with oil; Saudi Aramco will supply a record 12.3 million barrels in April and is looking to raise capacity by another 1 mmb/d after
  • Russian producers are also ready to raise production, with Rosneft announcing it would lift production as soon as the current supply deal ends on March 31
  • Abu Dhabi, a close ally of Saudi Arabia, is fanning the flames as well; ADNOC is discounting its flagship Murban crude and pledging a rise of output to 4 mmb/d in April, and possibly 5 mmb/d in May, to join the race for market share
  • There is a glimmer of hope that a joint resolution could halt the price war, with OPEC+ still holding meetings – albeit virtually – to assess the situation
  • In light of the meltdown in oil prices, the US has suspended its planned sale of inventories from its Strategic Petroleum Reserve, but instead will add to it by purchasing large volumes in an attempt to prop up US shale oil producers
  • With weak oil prices, the active US rig count according to Baker Hughes is holding steady so far, down by a net one site with the loss of two gas rigs offset by a single gain in the oil rig count; however, do expect sharp drops in the near future if there is no resolution to the oil price imbroglio
  • With sentiment over the global macroeconomic situation and oil prices at near worst-case scenario levels, crude oil prices will remain depressed – Brent in the US$29-33/b range and WTI in the US$25-28/b range

 

Headlines of the week

Upstream

  • Beset by a blockade of its oilfields and ports by strongman Khalifa Haftar, Libya’s oil production fell to a new low of 97,508 b/d in early March
  • Petronas and ExxonMobil are looking to sell their stakes in the Chad-Cameroon Petroleum Development and Pipeline Project – connecting three fields in Chad to a floating facility offshore Cameroon; Petronas holds a 35% stake in the project, with ExxonMobil holding a 40% stake
  • Petronas has halted production at the Garraf area in Iraq’s Thi Qar province, evacuating all its employees as Iraq grapples with a major Covid-19 outbreak
  • Murphy Oil has announced some delays to its projects in the Gulf of Mexico as the global oil industry is hit by the Covid-19 pandemic and the price war, reducing its 2020 budget by US$500 million to US$950 million
  • As the Covid-19 pandemic rolls across the globe, licensing rounds are either being suspended or postponed: South Sudan deferring its debut round, Liberia taking its offshore round online and Bangladesh postponing indefinitely
  • Equinor has halted all work on the Martin Linge field offshore Norway, adding to the project’s delay woes as uncertainty over Covid-19 boils over
  • WPX Energy has acquired Felix Energy, expanding its footprint in the eastern part of the Permian Delaware Basin, adding 60 mboe/d of production and bringing WPX Energy’s total output to some 150,000 b/d of shale oil

Midstream/Downstream

  • Asian refiners are looking to cash in on cheap crude being offered as a result of the price war – with Chinese teapots planning to ramp out output – but are planning to curb jet fuel output by redirecting processing to gasoil, as a result of travel bans worldwide that will severely distress international travel
  • Marathon Petroleum – the largest American independent refinery – is looking to sell off its pipeline subsidiary MPLX LP for some US$15 billion
  • ExxonMobil has restarted the fourth and final CDU at its 502,500 b/d Baton Rouge refinery, after the entire plant was taken out by a fire in February 2020
  • Calumet is planning to sell its 30 kb/d refinery in Great Falls, Montana, retaining a bank to begin sales proceedings; Great Falls is the second refinery in Montana to go under the block, after ExxonMobil’s 61.5 kb/d Billings site
  • Production of very low sulfur fuel oil (VLSFO) in China is ramping up, with Jinxi Petrochemical being the latest refiner to begin exports of the marine fuel
  • Austria’s OMV will be purchasing an additional 39% in petrochemicals processor Borealis from Abu Dhabi’s Mubadala for some US$4.7 billion
  • The GTI Statia crude and refined storage terminal in the Caribbean island of St. Eustatius will undergo a US$100 million upgrade to meet growing demand

Natural Gas/LNG

  • The Alaska LNG project – which is designed to produced 3.5 bcf/d of gas in Nikiski on the Kenai Peninsula, sourced from a 1,300km pipeline from the North Slope – has been granted EIS (Environment Impact Statement) by the US FERC, the first step towards authorisation of project to go ahead
  • BP and Azerbaijan’s SOCAR are in discussion over a new Caspian Sea project that goes beyond the current deep gas scheme, called Future Gas
  • Norway’s Golar Power has announced plans to develop an LNG import terminal with the Brazilian northeastern state of Pernambuco
  • Lithuania’s Kaipedos Nafta is moving to fully acquire the Hoegh floating storage and regasification unit that is it currently leasing
Potential Outcome Scenarios for Covid-19 And Oil Markets

There are two items dominating the headlines in the energy sector at the moment: the global Covid-19 pandemic and the alarming decision of Saudi Arabia and Russia to go head-to-head in a price war. Individually, either event is disastrous. Together, they are catastrophic. 

A global rout on equities and commodities has kicked in, with capital fleeing to safe havens while country after country announces lockdowns to halt the contagion. Covid-19 and the oil price war are our current truths. But how long will they last? And what does this mean for the energy industry?

Scenario 1:
Fast Covid-19 containment, Quick resolution to the price war

Covid-19 will be with us for at least another 2 months. Taking China as an example – which enforced a total lockdown on the pandemic’s epicentre in Wuhan in late January – cases and deaths have been slowing down since the start of March. After spiking suddenly, South Korea too seems to be coming under control. All of this took a month or so. If that holds true, then the current spread in Europe could be halted by early April. Immediate resumption of normality won’t happen immediately; China took two months to restart, so the best case scenario is that the world will resume normal service in early May. That’s optimistic, but still possible; especially given how serious governments worldwide are treating the pandemic.

Saudi Arabia can be prone to grandstanding, and its opening salvo to lower the price of its crude dramatically could be seen as a shock-and-awe tactic to remind Russia of just how potent its spare capacity of 2-3 mmb/d is. Russia has alluded to the possibility of the OPEC+ alliance continuing, so talks between the two leading oil producers must still be going on in hopes of striking a deal. The current OPEC supply deal expires on 31 March 2020; there is still time for the two oil giants to agree that the industry’s needs is greater than the sum of theirs, and avoid a flood of cheap oil swamping a fragile global economy.

Brent price forecast (June 2020): US$45-50/b

Scenario 2:
Fast Covid-19 containment but slow resolution to the price war or Prolonged Covid-19 pandemic but fast resolution to the price war

World governments are panicking, particularly in Europe, where a second wave of cases emanated from Italy to the rest of the continent, sparing no one. European governments have responded by issuing travel lockdowns, reinstating border controls and funding emergency medical services to contain the pandemic. But the health system is strained, and it may already be too late. Europe has neither the authoritarian power of China or the meticulous plans that South Korea, Hong Kong, Taiwan and Singapore put in place to deny the virus traction. It may already be too late. With trouble brewing in the USA as well, where the healthcare system is even more unfriendly to pandemics like this and a second wave of infections emerging across the rest of the world, it may very well be 2021 before the virus has truly be contained.

In a war, everyone loses. In a classic instance of the Prisoner’s Dilemma and an illustration of potent Game Theory, Saudi Arabia and Russia should be working together (along with the rest of OPEC+) to keep prices steady. US$50/b oil is better than US$30/b oil, after all. The rise of the US shale patch has its limitations, so ceding some ground to US producers is still acceptable in the context of a growing market. But for various reasons, a desire to wipe out US shale, a want to power-play Saudi Arabia and Russia are at odds on how to proceed. So they may dig their heels in, choosing the path of most benefit for themselves but resulting in a sub-optimal result for the whole industry. A prolonged price war will not be pretty, and there will be many corporate casualties along the way.

Brent price forecast (June 2020): US$35-45/b

Scenario 3:
Prolonged Covid-19 pandemic and slow/no resolution to the price war

The nightmare scenario. Airlines worldwide have said that the global airline industry is at risk of bankruptcy by May, without any state or institutional support. With lockdowns, people are driving less, consuming less and productivity is way down, impacting energy and power consumption. Governments will do their best to keep the economy going, but they are at the mercy of an unsympathetic foe. Some medical experts are already suggesting that Covid-19 may never be fully contained, and could join influenza as a permanent seasonal disease. It took several years for the world to recover from the Spanish Flu in 1918; the same might apply here.

If Saudi Arabia and Russia hold true to their threats to massively increase crude output, there will be a tsunami of crude oil travelling around the world at a time when the world needs less. This is a battle for market share at the expense of profits. Many players that were banking of the cushion of US$50-60/b oil prices will be wiped out, with ramifications for LNG as well. The remaining players will be stronger for the death of competition, though their shareholders will not be happy campers, especially the shareholders of Saudi Aramco. If oil gets pumped without restraint over the rest of 2020, there is only so much that can go into strategic storage. The glut will only be erased when demand recovers. With Covid-19 still a major question mark, there is no telling what the timeline for recovery is.

Brent price forecast (June 2020): US$30-35/b

SHORT-TERM ENERGY OUTLOOK
Forecast HighlightsGlobal liquid fuels
  • EIA delayed the release of the March STEO update by one day to incorporate recent significant global oil market developments. On March 9, Brent crude oil front-month futures prices fell below $35/b, a 24% daily decline and the second largest daily price decline on record. Prices fell following the March 6 meeting between members of the Organization of the Petroleum Exporting Countries (OPEC) and its partner countries, which ended without an agreement on production levels amid market expectations for declining global oil demand growth in the coming months. In addition to the following highlights, EIA has provided a short summary of the March STEO forecast in the crude oil section of the Petroleum and Natural Gas Markets Review (PNGMR).
  • As a result of the outcome of the March 6 OPEC meeting, EIA’s forecast assumes that OPEC will target market share instead of a balanced global oil market. EIA forecasts OPEC crude oil production will average 29.2 million barrels per day (b/d) from April through December 2020, up from an average of 28.7 million b/d in the first quarter of 2020. EIA forecasts OPEC crude oil production will rise to an average of 29.4 million b/d in 2021. The OPEC production data in the March STEO include Ecuador, which finalized its withdrawal from OPEC at the March 6 meeting. Beginning with the April 2020 STEO, EIA will include Ecuador’s production volumes in non-OPEC data.
  • EIA expects global petroleum and liquid fuels consumption will average 99.1 million b/d in the first quarter of 2020, a decline of 0.9 million b/d from the same period in 2019. EIA expects global petroleum and liquid fuels demand will rise by less than 0.4 million b/d in 2020 and by 1.7 million b/d in 2021. Lower global oil demand growth for 2020 in the March STEO reflects a reduced assumption for global economic growth along with reduced expected travel globally because of the 2019 novel coronavirus disease (COVID-19).
  • EIA expects that global liquid fuels inventories will grow by an average of 1.0 million b/d in 2020 after falling by about 0.1 million b/d in 2019. EIA expects inventory builds will be largest in the first half of 2020, rising at a rate of 1.7 million b/d because of slow oil demand growth. Firmer demand growth as the global economy strengthens and slower supply growth will contribute to balanced markets in the fourth quarter of 2020 and global oil inventory draws in 2021. EIA expects global liquid fuels inventories will decline by 0.4 million b/d in 2021.
  • EIA forecasts Brent crude oil prices will average $43/b in 2020, down from an average of $64/b in 2019. For 2020, EIA expects prices will average $37/b during the second quarter and then rise to $42/b during the second half of the year. EIA forecasts that average Brent prices will rise to an average of $55/b in 2021, as declining global oil inventories put upward pressure on prices.
  • EIA forecasts U.S. crude oil production will average 13.0 million b/d in 2020, up 0.8 million b/d from 2019, but then fall to 12.7 million b/d in 2021. The forecast decline in 2021 is in response to lower oil prices and would mark the first annual U.S. crude oil production decline since 2016. EIA models show oil prices affect production after about a six-month lag. Despite forecast annual average growth of 0.8 million b/d in 2020, EIA expects monthly U.S. crude oil production to begin declining around May, with production falling from 13.2 million b/d in May to 12.8 million b/d in December 2020.
  • Based on the lower crude oil price forecast, EIA expects U.S. retail prices for regular grade gasoline to average $2.14 per gallon (gal) in 2020, down from $2.60/gal in 2019. EIA expects retail gasoline prices to fall to a monthly average of $1.97/gal in April before rising to an average of $2.13/gal from June through August.
Natural gas
  • In February, the Henry Hub natural gas spot price averaged $1.91 per million British thermal units (MMBtu). Warmer-than-normal temperatures in February reduced demand for space heating and put downward pressure on prices. EIA forecasts that prices will begin to rise in the second quarter of 2020 as U.S. natural gas production declines and natural gas use for power generation increases the demand for natural gas. EIA expects prices to average $2.22/MMBtu in the third quarter of 2020. EIA forecasts that Henry Hub natural gas spot prices will average $2.11/MMBtu in 2020. EIA expects that natural gas prices will then increase in 2021, reaching an annual average of $2.51/MMBtu.
  • U.S. dry natural gas production set a record in 2019, averaging 92.2 billion cubic feet per day (Bcf/d). Although EIA forecasts dry natural gas production will average 95.3 Bcf/d in 2020, a 3% increase from 2019, EIA expects monthly production to generally decline through 2020, falling from an estimated 96.5 Bcf/d in February to 92.3 Bcf/d in December. The falling production mostly occurs in the Appalachian and Permian regions. In the Appalachian region, low natural gas prices are discouraging producers from engaging in natural gas-directed drilling, and in the Permian region, low oil prices reduce associated gas output from oil-directed wells. In 2021, EIA forecasts dry natural gas production will rise from December 2020 levels in response to higher prices. Forecast dry natural gas production for 2021 averages 92.6 Bcf/d.
  • EIA estimates that total U.S. working natural gas in storage ended February at 2.1 trillion cubic feet (Tcf), 9% more than the five-year (2015–19) average. EIA forecasts that total working inventories will end March at 1.9 Tcf, 12% more than the five-year average. In the forecast, inventories rise by almost 2.1 Tcf during the April through October injection season to reach almost 4.0 Tcf on October 31.
Electricity, coal, renewables, and emissions
  • EIA expects the annual share of U.S. utility-scale electricity generation from natural gas-fired power plants will remain relatively steady through the forecast; it was 37% in 2019, and EIA forecasts it will average 39% in 2020 and 37% in 2021. Coal’s forecast share of electricity generation falls from 24% in 2019 to 21% in both 2020 and 2021. Electricity generation from renewable energy sources rises from a share of 17% last year to 19% in 2020 and to 21% in 2021. The increase in the renewables share is the result of additions to wind and solar generating capacity. The nuclear share of generation averaged 20% in 2019 and is expected to remain about the same in 2020 and 2021.
  • EIA forecasts that U.S. coal production will total 573 million short tons (MMst) in 2020, down 117 MMst (17%) from 2019. Lower production reflects declining demand for coal in the electric power sector and lower demand for U.S. exports. EIA forecasts that electric power sector demand for coal will fall by 86 MMst (16%) in 2020. EIA expects that U.S. coal production will stabilize in 2021 as export demand rises and U.S. power sector demand for coal increases slightly because natural gas prices increase.
  • After decreasing by 2.8% in 2019, EIA forecasts that energy-related carbon dioxide (CO2) emissions will decrease by 2.2% in 2020 and by 0.4% in 2021. Declining emissions in 2020 reflect forecast declines in total U.S. energy consumption because of energy efficiency and weather effects, particularly as a result of warmer-than-normal temperatures in January and February. A forecast return to normal temperatures in 2021 results in a slowing decline in emissions. Energy-related CO2 emissions are sensitive to changes in weather, economic growth, energy prices, and fuel mix.
Your Weekly Update: 9 - 13 March 2020

Market Watch   

Headline crude prices for the week beginning 9 March 2020 – Brent: US$31/b; WTI: US$27/b

  • A bloodbath has ensued, as the fragile-but-necessary Saudi Arabia-Russia alliance to stabilise crude oil prices shattered into an all-out price war
  • Following Russia’s refusal to participate in and extend the OPEC+ supply deal to 1.5 mmb/d and to the end of 2020 (as proposed by Saudi Arabia), the OPEC+ alliance is over; Saudi Arabia immediately announced it would raise its production to 12 mmb/d and offering steep discounts on its crude for April
  • The largest discounts offered on Arabian crude was for European markets – directly impacting one of Russia’s largest markets – and the Saudi government is planning to go even further, directing Saudi Aramco to raise output to 13 mmb/d for April, which may involve dipping into stocks
  • Saudi Arabia’s drastic move was joined by some of its OPEC allies – including the UAE – and appears to be intended to punish Russia for its reticence to shoulder responsibility, particularly after Vladimir Putin suggested that Russia was ‘content’ with oil prices at US$50/b
  • The aftermath of the price war’s start was that crude oil prices plunged by 31% in a day to their lowest levels in 3-years, triggering a global panic that caused a severe sell-off in all financial and commodity markets, exacerbating a situation already made desperate by the global Covid-19 pandemic
  • The price war between the two oil giants will claim many victims, including other OPEC members dependent on oil revenue like Iraq and Iran, as well as US shale producers that were already in dire straits due to debt; this, indeed, might be the end goal of the Saudi-Russia tiff
  • Although Russia itself is standing firm against Saudi Arabia’s opening salvo – stating that it will raise its output by 500,000 b/d as well – it also hinted that it remains open to further cooperation, although this olive branch may fall on deaf ears in the Saudi Kingdom
  • As the Covid-19 outbreak begins to accelerate in Europe and the US, the global worst case scenario keeps getting worse and worse, as the possibility of several countries going into full lockdown becomes very real
  • The price war kicked off by Saudi Arabia is poised to decimate the US active rig count; the decline is coming, but the Baker Hughes rig count managed a rare gain last week, adding 3 sites for a total of 793
  • With no sign of the price war ending, and the Covid-19 pandemic spreading far and wide, crude oil prices will remain infected with pessimism, although there will be windows for opportunistic trades; wide swings are expected, with Brent is likely to trade between US32-38/b, and WTI at US$28-34/b

 

Headlines of the week

Upstream

  • ExxonMobil announced that it would be slowing its Permian production growth by some 10% over the next two years in the face of the recent havoc on crude prices, in sharp contrast to Chevron that intends to increase Permian output to fund a planned US$80 billion programme of dividends and share buybacks
  • Spirit Energy has sold two ‘non-core’ Danish upstream assets to Ineos, which include its 40% stake in the Hejre and 27.7% stake in the Solsort discoveries
  • ConocoPhillips has sold its US Niobara and Wadell Ranch assets (in the Denver-Julesberg Basin and the Permian Basin) to undisclosed buyers
  • Santos has taken FID on the Van Gogh Infill Development Phase Two project in offshore Western Australia, ramping up production of the heavy-sweet crude produced from the WA-35-L block in the Exmouth Basin
  • Equinor has reported its first oil discovery of 2020, with two wells in the North Sea Sigrun East prospect estimated to contain 7-17 million barrels of oil
  • ExxonMobil and Shell are teaming up to explore for oil offshore Somalia, with a government-approved roadmap converting the companies’ previous concessions into new PSAs under the recently-approved Petroleum Law
  • CNOOC is moving full speed ahead with its seven-year action plan to boost upstream production in China, earmarking US$13.6 billion in CAPEX for 2020

Midstream/Downstream

  • PDVSA’s US refining arm Citgo has reached an agreement with Aruba to transfer the ownership of the 209 kb/d San Nicolas refinery to the island’s government, after failure to overhaul the site idled since 2012
  • Sinopec’s 400 kb/d Maoming refinery has exported its first shipment of low sulfur fuel oil, with Chinese refineries grappling with a fuels glut as domestic demand craters amid the shift towards cleaner marine fuels
  • As its spat with Russia over crude oil deliveries continues, Belarusian state refiner Belneftekhim is turning to Azerbaijan’s SOCAR to fuel its refineries
  • China’s largest refinery – Sinopec’s 460 kb/d Zhenhai refinery – will shut down one of its three CDUs in March for maintenance as domestic demand weakens
  • Eni is reportedly mulling closure of its 100 kb/d Milazzo refinery in Sicily as the site might fail to meet the region government’s air quality requirements
  • Liberia has suspended all fuel import licences – including those of France’s Total – for review as the country deals with severe gasoline shortages, with fears that importers had been grossly overstating their inventories
  • The planned 100,000 b/d grassroots Fort Stockton refinery in Texas – which will refine Permian shale crude – has kicked off two months ahead of schedule

Natural Gas/LNG

  • Sempra Energy’s Cameron LNG Train 2 in Louisiana has reached commercial operations, with Train 3 expected in Q3 2020 for a total of 12 mtpa of LNG
  • Cryopeak LNG Solution has completed a 18,000 gallon/29-ton shipment of LNG by truck in Canada, the largest-ever road shipment of LNG in North America as an alternative LNG distribution channel
  • Eni is reportedly the front-runner to acquire most of Chevron’s gas assets in Indonesia, including the Indonesia Deepwater Development project in the Makassar Strait that involves the Bangka, Gendalo and Gehem fields
  • Santos is poised to sell a 25% stake in Darwin LNG and its feed field Bayu-Undan for some US$390 million to SK E&S, in order to developer the offshore Barossa gas field to keep the Darwin LNG plant going