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Upcoming OPEC Meeting: What to Expect

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

  • 25 June 2019, Vienna, Austria
  • Extension of current OPEC+ supply deal from end-June 2019 to end-December 2019
SHORT-TERM ENERGY OUTLOOK

Forecast Highlights

Global liquid fuels

  • Brent crude oil spot prices averaged $71 per barrel (b) in May, largely unchanged from April 2019 and almost $6/b lower than the price in May of last year. However, Brent prices fell sharply in recent weeks, reaching $62/b on June 5. EIA forecasts Brent spot prices will average $67/b in 2019, $3/b lower than the forecast in last month’s STEO, and remain at $67/b in 2020. EIA’s lower 2019 Brent price path reflects rising uncertainty about global oil demand growth.
  • EIA forecasts global oil inventories will decline by 0.3 million barrels per day (b/d) in 2019 and then increase by 0.3 million b/d in 2020. Although global liquid fuels demand outpaces supply in 2019 in EIA’s forecast, global liquid fuels supply is forecast to rise by 2.0 million b/d in 2020, with 1.4 million of that growth coming from the United States. Global oil demand rises by 1.4 million b/d in 2020 in the forecast, up from expected growth of 1.2 million b/d in 2019.
  • Annual U.S. crude oil production reached a record 11.0 million b/d in 2018. EIA forecasts that U.S. production will increase by 1.4 million b/d in 2019 and by 0.9 million b/d in 2020, with 2020 production averaging 13.3 million b/d. Despite EIA’s expectation for slowing growth, the 2019 forecast would be the second-largest annual growth on record (following 1.6 million b/d in 2018), and the 2020 forecast would be the fifth-largest growth on record.
  • For the 2019 summer driving season, which runs from April through September, EIA forecasts that U.S. regular gasoline retail prices will average $2.76 per gallon (gal), down from an average of $2.85/gal last summer. The lower forecast gasoline prices primarily reflect EIA’s expectation of lower crude oil prices this summer.

U.S. residential electricity price

West Texas Intermediate (WTI) crude oil price

World liquid fuels production and consumption balance


Natural gas

  • The Henry Hub natural gas spot price averaged $2.64/million British thermal units (MMBtu) in May, almost unchanged from April. EIA expects strong growth in U.S. natural gas production to put downward pressure on prices in 2019. EIA expects Henry Hub natural gas spot prices will average $2.77/MMBtu in 2019, down 38 cents/MMBtu from 2018. EIA expects natural gas prices in 2020 will again average $2.77/MMBtu.
  • EIA forecasts that U.S. dry natural gas production will average 90.6 billion cubic feet per day (Bcf/d) in 2019, up 7.2 Bcf/d from 2018. EIA expects natural gas production will continue to grow in 2020, albeit at a slower rate, averaging 91.8 Bcf/d next year.
  • U.S. natural gas exports averaged 9.9 Bcf/d in 2018, and EIA forecasts that they will rise by 2.5 Bcf/d in 2019 and by 2.9 Bcf/d in 2020. Rising exports reflect increases in liquefied natural gas exports as new facilities come online. Rising natural gas exports are also the result of an expected increase in pipeline exports to Mexico.
  • EIA estimates that natural gas inventories ended March at 1.2 trillion cubic feet (Tcf), 15% lower than levels from a year earlier and 28% lower than the five-year (2014–18) average. EIA forecasts that natural gas storage injections will outpace the previous five-year average during the 2019 April-through-October injection season and that inventories will reach almost 3.8 Tcf at the end of October, which would be 17% higher than October 2018 levels and about equal to the five-year average.

Electricity, coal, renewables, and emissions

  • EIA expects the share of U.S. total utility-scale electricity generation from natural gas-fired power plants to rise from 35% in 2018 to 37% in 2019 and to 38% in 2020. EIA forecasts that the share of generation from coal will average 24% in 2019 and 23% in 2020, down from 27% in 2018. The forecast nuclear share of generation falls from 20% in 2019 to 19% in 2020, reflecting the retirement of some nuclear reactors. Hydropower averages a 7% share of total generation in the forecast for 2019 and 2020, similar to 2018. Wind, solar, and other nonhydropower renewables together provided 10% of U.S. generation in 2018. EIA expects they will provide 11% in 2019 and 13% in 2020.
  • EIA forecasts that renewable fuels, including wind, solar, and hydropower, will collectively produce 18% of U.S. electricity in 2019 and almost 20% in 2020. EIA expects that annual generation from wind will surpass hydropower generation for the first time in 2019 to become the leading source of renewable electricity generation and maintain that position in 2020.
  • EIA forecasts that U.S. coal consumption, which reached a 39-year low of 687 million metric tons (MMst) in 2018, will fall to 602 MMst in 2019 and to 567 MMst in 2020. The falling consumption reflects lower demand for coal in the electric power sector.
  • After rising by 2.7% in 2018, EIA forecasts that U.S. energy-related carbon dioxide (CO2) emissions will decline by 2.0% in 2019 and by 0.9% in 2020. EIA expects U.S. CO2 emissions will fall in 2019 and in 2020 because its forecast assumes that temperatures will return to near normal, and because the forecast share of electricity generated from natural gas and renewables increases while the forecast share generated from coal, which produces more CO2 emissions, decreases. Energy-related CO2 emissions are sensitive to weather, economic growth, energy prices, and fuel mix.

U.S. natural gas prices


U.S. residential electricity price

West Texas Intermediate (WTI) crude oil price

Sempra Energy ships first liquefied natural gas cargo from Cameron LNG export facility

U.S. LNG export capacity

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.

U.S. LNG exports

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.

Your Weekly Update: 3 - 7 June 2019

Market Watch

Headline crude prices for the week beginning 3 June 2019 – Brent: US$61/b; WTI: US$53/b

  • With the US opening up new fronts in its trade war – now featuring Mexico, India and Turkey – crude oil prices have tumbled over fears that President Donald Trump’s moves will spark a significant economic slowdown
  • Worldwide manufacturing indices and consumer sentiment have turned negative recently, bringing back the spectre of a global recession that was first raised earlier this year, but abated as trade talks between the US and China appeared to progress
  • Those talks have now collapsed, with the US and China trading barbs; and now the US is slapping a 5% duty on all Mexican imports that will rise to a maximum of 25% in October if the flow of illegal immigration continues
  • This has major implications on the US refining industry, which takes up to 800,000 b/d of Mexican crude for processing along the Gulf Coast
  • The US also removed preferential trading status for India; although the total number of Indian imports involved is far smaller than China or Mexico, the threat of reprisals is high, particularly targeting US energy and soybeans
  • On the supply side, US temporary waivers on Iranian crude export sanctions expired, although in practice the 8 countries that received waivers had already stopped purchases of Iranian crude in April
  • Iran’s loss is Saudi Arabia’s benefit, as the Kingdom ramped up crude production in May to fill the vacuum left by Iranian crude – leaving the overall output across OPEC members unchanged month-to-month
  • Russia’s adherence to the current OPEC+ supply pact reached expected levels in May, not through intention but because of contaminated crude flowing through a Baltic pipeline that triggered a regional oil crisis
  • After declining for three consecutive weeks, US drillers added a modest three new rigs in the past week, with the loss of two gas sites offset by a gain of three oil rigs; the total US active rig count now stands at 984
  • Expect oil prices to remain depressed, as traders worry about the state of the global economy over American belligerence; crude oil prices should steady up in the US$62-64/b range for Brent and the US$53-55/b range for WTI

Headlines of the week

Upstream

  • After Total’s major discovery at Brulpadda, upstream focus in Africa is now on South Africa with Shell looking to acquire a stake in OK Energy’s deepwater licence off the west coast Orange Basin that would complement its existing deepwater Blocks 5, 6 and 7 offshore Cape Town in the Atlantic
  • Ithaca Energy Limited will be acquiring Chevron’s UK North Sea assets for some US$2 billion, adding ten fields to its current portfolio
  • Israel has expressed its willingness to enter into US-mediated talks with Lebanon on a permanent maritime border, which would provide delineation on competing claims over a disputed area thought to be rich in oil and gas
  • Although oil sands are out-of-vogue, Canadian Natural Resources has purchased Devon Energy’s Canadian operations for US$2.8 billion, gaining heavy oil assets in Alberta that have synergistic locations with CNR’s own areas
  • Sierra Leone has re-opened its 4th Licensing Round and extended the deadline to September 20, providing acreage in little-explored offshore regions
  • Total is pulling out of exploration in the Democratic Republic of Congo, with search efforts in Block 3 since 2011 turning up empty in discoveries
  • Marathon Oil is exiting Iraq fully, following the sale of its 15% interest in the Atrush Block in Kurdistan that is part of a wider pullback for the company
  • Eni’s chief upstream officer Antonio Vella, who oversaw a dramatic surge in the Italian major’s upstream fortunes, has been succeeded by Alessandro Puliti
  • Eni’s Africa push continues as Eni Mozambico acquires rights to three offshore blocks (A5-B, Z5-C and Z5-D) in Mozambique’s Angoche and Zambezi basins

Midstream & Downstream

  • As the dirty oil fiasco at Russia’s Druzhba pipeline winds down – with Total joining the chorus of clients demanding compensation – deals have been struck with refineries including Germany’s Leuna, as well as Poland’s Plock, Gdansk and PCK, to process the contaminated crude after blending with clean oil
  • Russia is also looking to ship the contaminated crude from the Belarus portion of the Druzhba pipeline to be processed by Russian refineries after dilution with clean oil to reduce the organic chloride down from unusable 300ppm levels
  • Following the start-up of its 400,000 b/d refinery in Dalian, Hengli Petrochemical is aiming to become China’s first private exporter of jet fuel, a move that will require a litany of red-tape bureaucracy, licensing and approvals
  • State oil firm Petroperu is looking at selling off units in its 95,000 b/d Talara refinery to raise up to US$1 billion to finance a massive planned expansion
  • Despite protests from farmers, Total’s 500,000 tpa palm oil-based biodiesel refinery will be starting up in early June, completing the turnaround for the La Mede site from loss-making oil refinery to a competitive biodiesel plant
  • Azerbaijan’s SOCAR is looking to list its Turkish subsidiary and the 215 kb/d STAR refinery in the London, Hong Kong and Istanbul stock exchanges in 2021

Natural Gas/LNG

  • Venture Global LNG’s Calcasieu Pass export project in Louisiana’s 10 mtpa Cameron Parish has received a US$1.3 billion equity injection from Stonepeak Infrastructure Partners
  • Argentina’s first LNG shipment is reading for loading, with state oil firm YPG preparing the first 30,000 cbm shipment from the Vaca Muerta shale play
  • American LNG is going places, with Bulgaria agreeing to take two US LNG cargoes this year – one from Cheniere and one from BP’s US trading unit
JOB ALERT
EFG seeks to appoint a new Executive Director

 

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.

About EFG:

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.

Minimum requirements:

  1. BSc Management, Engineering or Geosciences or equivalent (or higher);
  2. Proven affinity with geology/earth sciences;
  3. Minimum working experience of 5 years in international organisations preferably linked to European affairs, geoscience professional activities or consultancy; (additional work experience in leadership positions is an advantage); 
  4. Leadership and self-leadership (self-starter and self-motivating) capable of managing of its own work;
  5. Ability to communicate (verbal and written) clearly in English (level B2 or higher) and good presentation skills;
  6. Ability to adjust to changing situations, while maintain the existing structures;
  7. Stationed in or near Brussels and willingness to travel regularly, mainly in Europe;
  8. Basic knowledge of French and/or Dutch will be considered as an added value.

Summary of tasks (objectives and scope):

  1. Complies with the defined EFG strategies to achieve the objectives, and defines the strategy to achieve these objectives in the short and medium term, including setting targets and reports this to the EFG board;
  2. Establishes financial requirements, jointly with the acting responsible board member(s);
  3. Supervises EFG office staff, Projects Managers, Project Controller and In-House Consultants, ensuring that the work programmed and executed corresponds effectively to what was agreed with European Commission, partners and other stakeholders;
  4. Is committed to the prompt reporting (i.e. annual, periodical etc. reports) for the European Committee and the preparation of other operational documents (i.e. Bylaws, contracts) of the EFG;
  5. Is committed to a constant and active communication between EFG and policy-makers, decision-makers and various stakeholders, including the EFG members;
  6. Represents the EFG in public.

Timeframe: 

  • Deadline for applications: 21 June 2019
  • Tentative dates for interviews: 11 or 12 July 2019
  • Contract start: 2 September 2019

 

You may find the full job vacancy here.

Please send your application to: [email protected]

Escalating Trade Wars and Oil Markets

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:

  • China: tariffs on up to US$540 billion worth of imports
  • Mexico: tariffs on up to US$352 billion worth of imports
  • India: tariffs on 2,000 currently duty-free products worth some US$5.7 billion