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"The Oil Industry’s Downstream Nightmare Is Here To Stay" by Irina Slav at OILPRICE.COM

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The Oil Industry’s Downstream Nightmare Is Here To Stay

By Irina Slav - Jun 01, 2022, 6:00 PM CDT

  • There appears to be no end in sight for the current fuel supply crisis, with summer demand set to spike while refineries run at an unsustainable rate.
  • While refineries have the ability to bring more capacity online, investors are unwilling to get involved in long-term oil and gas projects.
  • U.S. fuel exports have hit record highs and the banning of Russian oil imports by the European Union will only add to demand.

Last week, Bloomberg reported, citing anonymous sources, that the Biden administration was looking into the possibility of restarting idled refineries in order to boost fuel production and tame prices. Meanwhile, operating refineries are running at utilization rates of over 90 percent, which, according to industry insiders, is an unsustainable rate. And come hurricane season, if there is refinery damage, things could get really ugly with the fuel supply situation. 

Welcome to the downstream nightmare of the energy world.

The United States has lost around 1 million bpd in refining capacity since 2020, according to a Reuters report that also cited one analyst, Paul Sankey, as saying this meant the country is in what is effectively a structural shortage of such capacity. Globally, refining capacity has shrunk by over 2 million bpd since 2020.

According to the International Energy Agency, this is not a problem at all. The IEA estimated that global refining capacity shed 730,000 bpd last year and that, this year, refinery runs would be about 1.3 million bpd lower globally than what they were in 2019. The reason that would be no problem for the IEA is that demand for oil is seen as 1.1 million bpd lower than what it was in 2019.

Not everyone is so calm, however, especially in the United States, where retail fuel prices are breaking records while refiners convert their refineries to biofuels production plants.

"It's hard to see that refinery utilization can increase much," Gary Simmons, chief commercial officer of Valero, told Reuters. "We've been at this 93% utilization; generally, you can't sustain it for long periods of time."

Interestingly enough, despite the imbalance in supply and demand, which has pushed the crack spreads to the highest in years, refiners do not seem to be planning new capacity additions. The reasons: time and investor sentiment.

"Investors do not want to see companies pouring money into organic oil and gas growth," Jason Gabelman, director at Cowen, told Marketplace last month. In addition to this, building a new refinery is a lengthy and expensive endeavor that few refiners appear to believe is justified despite the record crack spreads. Also, investors have become more impatient and don't want to wait for returns from projects such as new refineries.

At the same time, demand for refined products remains strong: U.S. fuel exports are running at record rates, a lot of them going to Europe, which, like the U.S., reduced its refining capacity over the last two years but now needs new sources of oil products after it embarked on an emergency course to cut its dependence on Russian oil and fuels.

Speaking of Russia, sanctions have resulted in a substantial reduction of refining capacity, with Reuters estimating as much as 30 percent idled, with some 1.2 million bpd in capacity likely to remain offline until the end of the year, according to JP Morgan.

Related: Russia Says It Will Find Other Oil Buyers After EU Ban

Meanwhile, in Asia and the Middle East, refining capacity has been on the rise. In Asia, the new additions have topped 1 million bpd, according to a Bloomberg chart, while in the Middle East, new refining capacity since 2019 has reached about half a million barrels daily.

The balance of refining capacity, then, has not just changed but also shifted geographically. The U.S. two weeks ago exported 6 million bpd in refined petroleum products. After the EU approved an embargo on Russian crude and products, albeit "in principle" for now, chances are that demand for imports from the U.S. will rise further, straining U.S. refiners even more. 

Then it will be time for hurricane season, and even if the Gulf Coast gets lucky this year, refinery closures in anticipation of storms making landfall are pretty much guaranteed, based on what we have seen in the past.

This does not bode well for fuel prices, which have become a major issue for governments on both sides of the Atlantic. There is a certain sense of irony in that one, although by no means the only, reason for the capacity imbalance is investors' focus shift from oil and gas to alternative energy sources.

The way things look, refiners could build more refining capacity, but investors are unwilling to participate in the long-term growth of the oil industry, as Marketplace's Andy Uhler put it. What this translates into is higher fuel prices for longer until demand begins to subside, which would probably happen at some higher price level.

In the immediate term, however, with driving season soon to be in full swing, the refining capacity situation will likely make a lot of lives harder. And while gasoline is in the headlines because of the millions of drivers who have to pay a lot more at the pump, the bigger problem remains diesel - the fuel that the freight industry depends on to bring goods from producers to consumers all over the world.

By Irina Slav for

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Irina Slav on energy - SUBSTACK - June 1st, 2022

It's embargo time

The European Union has done it. It has overcome opposition from Central Europe and has managed to remain united in the face of adversity, that is, Russia making money from the export of its fossil fuels.

The President of the European Council, Charles Michel, tweeted proudly that “The sanctions will immediately impact 75% of Russian oil imports. And by the end of the year, 90% of the Russian oil imported in Europe will be banned.” The EU rejoiced. Or did it? (Sorry, I couldn’t help it.)

Where to begin… Let’s begin with the fact that the agreement reached by EU leaders is an agreement in principle. This is suspiciously similar to memoranda of understanding that sound just like hard contracts but are, in fact, nothing of the sort. An agreement in principle is basically an indication that you will do something but the how and the what exactly remain to be determined.

Let’s then continue with Michel’s assertion that “The sanctions will immediately impact 75% of Russian oil imports.” Really? How? The agreement appears to be on a gradual phase-out of imports to last until the end of the year. There is nothing immediate about a gradual phase-out and I apologise I had to put this blatant truism into words.

The 75% of Russian oil imports into the EU, according to Reuters, are the imports that come by tankers. In addition to suspending these imports — in principle and gradually — Germany and Poland intend to stop buying oil coming via the Druzhba pipeline by the end of the year, leaving, theoretically, only the Central European sucklings of the pipeline importing Russian oil come 2023.

All this sounds wonderful. In principle. In reality, things look a bit, shall we say, expensive. As Reuters’ Clyde Russell noted in an immediate column following the news of the embargo agreement, the EU will need to source its oil elsewhere once it stops letting tankers carrying Russian crude offload at EU ports. And they can’t just buy any oil because of the way many European refineries are configured, for oil with the characteristics of Urals.

“Some grades of crude from Angola and Nigeria, as well as some from the Middle East have similar qualities to Urals, which has an API gravity of 30.6 and a sulphur percentage of 1.48, making it a medium sour oil,” Russell wrote. Let’s have a look at prices, shall we?

As of Monday, May 30th, Urals was trading at a $35 discount to Brent crude per barrel. Saudi Arabia’s flagship Arab Light, categorised by S&P Global as medium sour as well, was trading at $116.31 per barrel as of Monday.

The UAE’s Upper Zakum, which has comparable medium sour chracteristics to Urals, was trading at $113.87 per barrel Monday.

Iraq’s Basrah Light is also relatively close to Urals in terms of API gravity and sulfur content to Urals but Iraq has excluded that grade from 2022 allocation options.

To cut a long and tedious story short, the OPEC basket was trading at close to $119 per barrel Monday before the EU embargo agreement was announced. After the announcement, it rose to $120.

I don’t think we need to guess where OPEC oil prices are headed for the rest of the week or the next few months, really. In other words, proud and moral EU will be paying a lot more for the oil that, disgusting as it may be, it still needs.

But it’s not just refinery configurations that will limit the choice of EU buyers in crude grades. Availability will play a significant role as well and availability is, not to put too fine a point on it, quite tight.

In April, OPEC produced a quite impressive 2.7 million bpd of crude less than it was supposed to under its own output recovery quotas. In the current price environment this could, and does, mean two things: first, some members cannot produce more than they are already producing and second, other members have done what they could for oil prices and couldn’t do any more.

What’s left? U.S. oil, of course. The United States exported 4.341 million barrels of crude daily in the week to May 20, the latest week there’s detailed data for. This compared with 3.52 million bpd a week earlier, so there’s a solid increase.

The U.S. exported even more refined products, at 6.235 million bpd during that most recent week with detailed data. A lot of that, though not all, went to Europe. And a lot of it will probably continue to go to Europe. If refiners can cope, that is.

Reuters earlier this week published a report that should cause concern, and a lot of it. The report suggests that global refining capacity is lower than it needs to be in order to satisfy demand for oil products. And the U.S., specifically, has slipped into something fascinatingly called a structural deficit of refining capacity, for the first time in decades. That capacity is down by 1 million bpd since 2019, according to official data cited in the report.

As a result, of course, the operating refineries have had to increase their utilisation rates, especially with exports booming, with rates reaching over 92%. The fun part is that "We've been at this 93% utilization; generally, you can't sustain it for long periods of time," according to Valero Energy’s chief commercial officer Gary Simmons.

Meanwhile, the White House is making inquiries into some of the refinery closures and apparently considering asking oil refiners to reopen some idled capacity. Because, as we can all imagine, it takes a week to restart an idled refinery and all will be well.

On a totally unrelated note, global refining capacity excluding the U.S. has shrunk by over 2 million bpd over the last two years. What a time to impose oil embargoes, right?

Right now, this means that should the EU stick to its in-principle agreement and transform it into a practical agreement, it would not only have a limited pool of crude for its refineries, it will also have a limited pool of ready oil products, neither of which will be more affordable than current oil and product imports are.

Then, of course, there is the question of whether the EU will not actually continue to import Russian crude and products but under a different name. Someone on Twitter joked that “If its 49% Russian, it’s good” and I think this is not too far-fetched.

If oil supply is as tight as the majority of analysts are saying, any oil would be better than no oil and it would be safe to speculate that a lot of blind eyes would be turned on oil blending here and there. After all, we’ve seen it happen with Iranian crude for years now.

So, what awaits us in most of Europe, is higher prices for energy and for everything that uses energy to reach its end consumer. Good times are ahead, especially for renewable energy developers and EV makers, with EC President Von der Leyen accurately, although convolutedly pointing out in that now notorious Brzezinski interview that the war in the Ukraine will push the EU further into the arms of wind and solar.

Meanwhile, down here, we, the poorest of the poor, are getting a temporary exemption from the oil import sanctions until the middle or the end of 2024. The EU, in other words, is confident that it can survive its own sanctions unscathed for another two years, at least. I have to give them top points for confidence.

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The Rush Is On For LNG Tankers

By Irina Slav - Jun 03, 2022, 10:00 AM CDT

  • EU rush to reduce independence on Russian gas is a major boon for LNG tanker markets.
  • Charter rates for LNG carriers have soared to the highest in 10 years.
  • Clarksons Platou Securities data shows that LNG tanker rates are now around $120,000 per day.

Gas traders are scrambling to find enough LNG carriers ahead of the start of the next heating season amid the European Union's own rush to reduce its dependence on Russian energy.

Among those seeking LNG carrier capacity are TotalEnergies, Shell, and China's Unipec, according to a Financial Times report that cited LNG shipowners and brokers.

As a result of the rush, charter rates for LNG carriers have soared to the highest in 10 years, the FT noted in its report, to $120,000 per day, according to data from Clarksons Platou Securities.

Some are buying LNG carriers: Abu Dhabi's Adnoc recently purchased three newbuild LNG carriers in anticipation of greater global LNG exports. The vessels have a capacity of 175,000 cubic meters each. This is significantly higher than the average capacity of the current Adnoc fleet, at 137,000 cubic meters.

Meanwhile, the demand patterns in LNG are becoming problematic because of the European Union's mad dash for alternative gas imports: according to Rystad Energy, if the EU pursues its plans to reduce Russian gas imports by two-thirds by the end of the year, the global supply of liquefied natural gas will fall short of demand by as much as 26 million metric tons.

"By shunning Russian gas, Europe has destabilized the entire global LNG market that began the year with a precarious balance after a tumultuous 2021," Rystad Energy said.

It is also largely because of the EU's supply reorientation that gas buyers are in a rave to secure LNG carriers.

"The market has exploded. It's very hard to find any ships with length [of availability] in the market. It's going through the roof," Oystein Kalleklev, head of Flex LNG and Avance Gas, told the FT.

There seems to be no way that the LNG carrier crunch will let up anytime soon, either. New LNG carriers take years to build, and no one expected Europe to suddenly become the biggest buyer of U.S. liquefied gas in a matter of months.

By Irina Slav for

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The sanction countdown has begun

With the EU approving an almost complete embargo on Russian oil and the U.S. already having banned Russian crude, how long can the collective West endure the consequences?

I realise this question, as I have posed it, may sound biased but it is a fact that fuel prices are rising in Europe and the U.S., not in Russia.

So, how long until the importers fold/change the narrative?

I will generously say November. Your turn.


Irina Slav Substack

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