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OPEC says trade disputes, geopolitics, rising non-OPEC supply make for challenging 2H19

 

OPEC on Thursday said it faces a challenging second half of 2019, with demand-dampening trade disputes combining with expected robust non-OPEC supply growth to complicate the producer bloc's oil market rebalancing efforts.

ts 1.2 million b/d supply cut agreement with Russia and nine other non-OPEC allies expires at the end of the month, and in its closely watched monthly market analysis, OPEC said it must weigh a potential slowdown in global economic activity against geopolitical supply risks.

"The upcoming OPEC and non-OPEC ministerial meetings will carefully consider these developments, in order to ensure continued market stability," OPEC said in the report.

Saudi Arabia, OPEC's largest member, has advocated for a rollover of the cut agreement, saying oil inventories are still bloated, while Russia has said the coalition should consider more flexible quotas, given the expected impact of US sanctions on Iranian and Venezuelan crude supplies.

A proposal for a deeper cut has been floated, as well, with oil prices having slumped almost 20% in the last eight weeks.

The OPEC/non-OPEC coalition has yet to even agree on a date for its meeting to decide on the deal's future, with some countries favoring June 25-26 and others July 3-4.

In its report, OPEC's analysts suggested that the organization's 14 members could raise their production modestly and still keep the market in balance.

Though it revised downward its forecast of 2019 demand growth, OPEC's "record-high conformity levels" with its quotas have pushed the bloc's production below the expected level of demand for its crude, the report showed.

OPEC pumped 29.88 million b/d in April, according to an average of the secondary sources used to monitor output.

But the call on OPEC crude will average 30.52 million b/d for the year, including a robust 31.21 million b/d in the third quarter, the report said.

Even so, OPEC said it would tread cautiously. The organization forecast that 2019 oil consumption will rise 1.14 million b/d year-on-year, a downward revision of 70,000 b/d from last month's report, as "significant downside risks from escalating trade disputes spilling over to global demand growth remain."

Non-OPEC supply, meanwhile, will grow at almost double that pace, at 2.14 million b/d, unchanged from the previous forecast, led by US shale, as well as production ramp-ups in Brazil and the potential start-up of Norway's Johan Sverdrup field.

OECD oil inventories rose 25 million barrels in April, according to the report, and are 7.6 million barrels above the five-year average that OPEC has said it is targeting with its production cuts. Crude stocks, however, are 200,000 barrels below the five-year average, while product stocks are 7.9 million barrels above.

FALLING OUTPUT

Saudi Arabia continued to maintain strong production discipline, pumping 9.69 million b/d in May, according to secondary sources. That is 620,000 b/d below its quota of 10.31 million b/d under the deal.

Saudi energy minister Khalid al-Falih has repeatedly pledged to "do what is needed" to maintain oil market stability, including cutting further.

Sanctions-hit Iran produced 2.37 million b/d in May, a 227,000 b/d plunge from April. Sanctions waivers the US granted to eight countries allowing limited purchases of Iranian crude expired in early May and were not renewed.

Venezuela, also impacted by US sanctions, saw its production fall to 741,000 b/d, a 35,000 b/d drop from April and the lowest since a strike in late 2002 and early 2003 brought its oil industry to a near standstill.

Iraq, OPEC's second-largest producer, raised output by 94,000 b/d to 4.72 million b/d in May, the report showed. That far exceeds its quota of 4.51 million b/d under the OPEC/non-OPEC agreement.

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US oil supply keeping lid on prices despite global risks: IEA chief

Growth in US oil production has kept prices at "reasonable levels" despite the recent oil tanker attacks near the Strait of Hormuz and other supply risks around the world, International Energy Agency chief Fatih Birol said.

"There is substantial amount of oil coming from the United States, which puts a strong ceiling on oil prices," Birol said in an interview Friday on the sidelines of the G20 energy ministerial meetings in Karuizawa, Japan.

"Growth from the United States is a welcome addition to oil markets, especially looking at from an oil security point of view and looking at affordability for oil importers, including Japan, Korea and other Asian importers."

The IEA's June Oil Market Report forecast non-OPEC supply growth will rise to 2.3 million b/d in 2020, from 1.9 million b/d this year amid a surge in US shale and strong output from Brazil and Norway as new fields start up.

"According to our numbers, in five years' time, the United States will be the largest exporter in the world," Birol said.

"This is great news for consumers. Think about the fact we are seeing so many developments in the world: Venezuela, Iran, Libya, Nigeria and many [others]. Still, oil prices are staying at reasonable levels."

TANKER ATTACKS A WAKE-UP CALL

The alleged attack on two oil tankers near the Strait of Hormuz Thursday was a wake-up call to stakeholders in oil markets, Birol said.

"We are seriously concerned about the recent attacks, and we are monitoring the situation very closely in consultation with our member governments. We are ready to act if and when it is necessary."

The Front Altair and the Kokuka Courageous were carrying cargoes including naphtha. The incidents followed attacks on May 12 on four tankers near the bunkering port of Fujairah.

"Having lots of supply does not mean that oil security is not important, and this very important incident reminds all of us, all actors in the markets once again, how important an issue oil security is," Birol said.

The Strait of Hormuz was the most important oil choke point, especially for Asian energy importers, he said.

"Today about 18 million barrels of oil on a daily basis flows through this choke point coming from Saudi Arabia, emirates and other countries to China, Japan, India and other Asian customers."

"But at the same time it is a major route for LNG, liquefied natural gas. About 30% of LNG goes through this strait, coming again to Japan, South Korea, and other Asian countries."

Asked whether oil importers will need to seek alternative supplies away from regions so as not to have to transit the Strait of Hormuz, Birol said: "I think this will be a situation observed by oil importers, especially in this part of the world."

Birol said he did not expect a major shift in oil flows any time soon.

The tanker attacks and heightened supply risks came at a time of concerns about lower global oil demand growth.

Asked which was the biggest risk to the oil market, Birol said the IEA cut its oil demand growth forecast in its June report mainly because of a slowing in the global economy -- "not only the advanced economy, but [also] the emerging countries. Chinese economic growth prospects are much lower than previously thought".

The IEA cut its 2019 oil growth again to 1.2 million b/d, but it sees 2020 growth of 1.4 million b/d on petrochemical demand.

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Why do we constantly get bombarded by 'experts' predicting what OPEC, Russia or any other producer is going to do each and every week?

As I have said before, I am not a financial analyst or a trader, but I fail to see how the 'oil economics' can be so convoluted. 

Given that nobody seems to have an accurate number for ANY countries actual present production, each country will now their actual production, the minimum price which they can accept for their oil and the true spare capacity they have available.

At this point it is remarkably similar to playing poker. Each player knows what hand he has been dealt and knows exactly how much he can bet to stay in the game. Their 'poker face', willingness to bluff and the strength of their respective hands are now the controlling factors.

Each player will be aware of the global geopolitical climate and demand forecast.

If Russia feels that $40 per barrel oil is fine with them, they will play to increase production. If Saudi Arabia feels that $40 per barrel would crater their economy, they will resist a production increase.

If OPEC+ decide they have had enough of the US shale game disrupting the game then they may decide to increase production to the point that the US shale players can not afford the game (assuming that US LTO is more expensive to produce than Russian or Saudi oil.

I suppose my point is that people not actually in the game, dealing with inaccurate secondary or tertiary production or spare capacity numbers are essentially talking heads whistling in the wind.

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5 hours ago, Douglas Buckland said:

Why do we constantly get bombarded by 'experts' predicting what OPEC, Russia or any other producer is going to do each and every week?

As I have said before, I am not a financial analyst or a trader, but I fail to see how the 'oil economics' can be so convoluted. 

Given that nobody seems to have an accurate number for ANY countries actual present production, each country will now their actual production, the minimum price which they can accept for their oil and the true spare capacity they have available.

At this point it is remarkably similar to playing poker. Each player knows what hand he has been dealt and knows exactly how much he can bet to stay in the game. Their 'poker face', willingness to bluff and the strength of their respective hands are now the controlling factors.

Each player will be aware of the global geopolitical climate and demand forecast.

If Russia feels that $40 per barrel oil is fine with them, they will play to increase production. If Saudi Arabia feels that $40 per barrel would crater their economy, they will resist a production increase.

If OPEC+ decide they have had enough of the US shale game disrupting the game then they may decide to increase production to the point that the US shale players can not afford the game (assuming that US LTO is more expensive to produce than Russian or Saudi oil.

I suppose my point is that people not actually in the game, dealing with inaccurate secondary or tertiary production or spare capacity numbers are essentially talking heads whistling in the wind.

In the age of digitisation, instant messaging and literally time is money, any info regarding a commodity that is one of the most traded, most used and most strategic is critical for many companies in the financial world and otherwise to make decisions based on what "people in certain positions" are thinking, that their views are, and because of those what may happen the next day or following week and so on.

Lot of various kinds of contracts from upstream, midstream , downstream, shipping and logistics are always under consideration by companies globally, so all this adds to the fury, confusion and decisions being made. And it is very critical in terms of investments and geopolitics for companies to have an idea of which direction to go towards when they are making short term and long term decisions.

Information and knowledge is power and speculation has become a major market force or rather is a major market force without which nothing happens. All these bits and pieces of information add fuel to the world's commodity exchanges.

A global poker game every day!

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They like to speak from both sides of their cheek.

 

______

Iran will maintain Strait of Hormuz security if its oil exports not impacted: top military official

Iran's top military official on Monday said the Strait of Hormuz would remain open to traffic as long as the country, which is struggling under US sanctions, is allowed to export its oil

But he warned that Iran maintains the ability to shut down the strait completely, and if it did so, it would not shy away from announcing it publicly.

"The Islamic Republic has announced that as long as someone has not caused any problem for the Strait of Hormuz security, we will keep it safe," said Major General Mohammed Hossein Bagheri, who serves as chief of staff for Iran's armed forces.

"And as long as the Islamic Republic's oil is exported, the others' oil will be exported securely. If the Islamic Republic has the intention or determination to block the strait, it will announce it and it will do it with full strength and completely."

The UK is sending 100 marines to the Persian Gulf, according to a report in The Sunday Times, to police the Strait of Hormuz, a key oil and gas shipping chokepoint which has become a flashpoint in the last few weeks.

Two oil tankers were attacked last Thursday in the Gulf of Oman just outside the strait, with the US, UK and Saudi Arabia blaming Iran, just one month after a similar incident in nearby waters off the eastern UAE port of Fujairah. Iran, which previously threatened to shut down traffic through the strait if its oil exports were blocked by US sanctions, has denied responsibility.

Saudi energy minister Khalid al-Falih on Monday said in Tokyo that Saudi Arabia would "do all that is necessary to ensure safe passage" of oil shipments.

Saudi Arabia has also accused Iranian-backed Houthi rebels of being behind a drone attack on a key Saudi Aramco pipeline carrying crude to the Red Sea port of Yanbu last month.

Iran has criticized its longtime geopolitical rival Saudi Arabia coordinating with the US on sanctions targeting Tehran. The US withdrew in November from the nuclear deal with Iran and reimposed sanctions aimed at bringing Iranian oil exports to zero, allowing waivers granted to some key buyers of Iranian crude to expire last month.

The White House has trumpeted reassurances it has received from Saudi Arabia and close ally the UAE to prevent any oil supply squeeze.

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Tighter oil market could be 'short-lived' on 2020 non-OPEC supply: IEA

 

IEA cuts 2019 oil demand growth again to 1.2 mil b/d but remains upbeat

IEA sees stronger 2020 oil demand growth of 1.4 mil b/d on petrochemicals

IEA calls on OPEC crude to fall 650,000 b/d in 2020 from May levels

 

OPEC will have an uphill battle if it wants to keep oil markets balanced next year as a potentially tighter oil market in the second half of 2019 starts to wash away on a wave of non-OPEC supply.

 

The International Energy Agency's June Oil Market Report predicts a surge in US shale next year along with strong crude oil contributions from Canada, Brazil and Norway. This translates to non-OPEC supply growth accelerating from 1.9 million b/d this year to 2.3 million b/d in 2020.

"A clear message from our first look at 2020 is that there is plenty of non-OPEC supply growth available to meet any likely level of demand, assuming no major geopolitical shock, and the OPEC countries are sitting on 3.2 million b/d of spare capacity," the IEA said.

Indeed, the IEA has called on OPEC crude to drop to 29.3 million b/d in 2020, 650,000 b/d below the May output level. OPEC's May supply fell to its lowest since 2014 as Iranian supply plunged to 2.4 million b/d due to sanctions -- a number not seen since the late-1980s and on lower Saudi Arabian as well as Nigerian output.

This is despite a stronger oil demand growth outlook of 1.4 million b/d next year, according to the Paris-based agency, supported by solid non-OECD demand and petrochemicals expansion.

There are a number of petrochemical projects due to start up in 2020, including in the US, China, South Korea and Thailand. The IEA highlighted that "if they come on stream as scheduled, LPG and ethane demand could increase by a combined 395,000 b/d and naphtha demand by 110,000 b/d by the end of 2020."

PRESSING QUESTION

However, in the more immediate term, OPEC, Russia and its allies, which still have yet to decide on a date to meet, must decide whether to roll over the 1.2 million b/d in cuts and the IEA report offers mixed clues.

On the one hand oil demand growth for 2019 has been downgraded for the second month in a row and the IEA notes that "world trade growth has fallen back to its slowest pace since the financial crisis ten years ago".

But on the other, it states that "there is optimism that the latter part of this year and next year will see an improved economic picture... assuming that trade disputes are resolved and confidence rebuilds".

The IEA signaled to OPEC oil ministers that OECD oil stocks remain at comfortable levels of around 16 million barrels above the five-year average.

However, the IEA also pointed to the expected pick-up in refining activity later this year, noting "high levels of maintenance in the US and Europe, low runs in Japan and Korea, and fallout from the Druzhba pipeline contamination contributed to weak growth in global refining throughput."

The agency estimates crude runs in August could be about 4 million b/d higher than in May, tightening oil markets soon after the OPEC pact makes its decision on its output agreement. Russia, Saudi Arabia, Venezuela, Iran and Iraq are steeped in sour barrels so extended cuts here would tighten the market further in that regard.

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OPEC dithers on a meeting date, even with a solid consensus to continue oil cuts

Iran proposes new date of July 10-12

Saudi Arabia to keep production steady

Cuts set to expire at end-June

 

 

With less than two weeks before OPEC's production cuts are set to expire, the producer group and its allies appear no closer to choosing when their next meeting will be

 

A rollover of the 1.2 million b/d production cut deal is widely expected -- if OPEC, Russia and nine other partners can agree on a date to decide.

Iran, which had been the lone remaining holdout on moving the meeting from next week, when it was originally scheduled, to July 3-4, surprised many OPEC officials Monday in offering a new proposal: July 10-12.

"I have no problem with July 10-12 if they insist, but I can't do it [from] July 3-7. I have other appointments, plans and obligations," Zanganeh told reporters after talking with Russian energy minister Alexander Novak in Tehran. "I told them I can do later than that, not July 3-4."

 

Any date change for the OPEC meeting would require unanimous approval by its 14 members. Several OPEC delegates said news reports of Zanganeh's suggested date were the first they had heard of the proposal.

Novak, who had lobbied for the July 3-4 date to avoid a conflict with the G20 Summit June 28-29 in Tokyo, did not speak to reporters after leaving Tehran for Isfahan, where he will participate in a Russia-Iran bilateral meeting hosted by Iran's power ministry on Tuesday.

Zanganeh said that unless there is a unanimous agreement, the original OPEC meeting date of June 25-26 should be maintained.

"If they want and insist to change the date, I can in two weeks afterwards," he said.

Earlier Monday, Saudi energy minister Khalid al-Falih said that one country, which he did not name, was holding up the date change to July 3-4.

"We hope that they will come along and we will have a date confirmed in the next couple of days," Falih told reporters after the Saudi-Japan Vision 2030 Business Forum in Tokyo. "But I am personally committed to making sure that we do meet and that we have a consensus, which has already been informally developing."

NO SURPRISES WANTED

OPEC and its 10 non-OPEC allies in December agreed to cut 1.2 million b/d for the first half of 2019 to prop up prices and induce draws of oil from storage.

With prices still slumping, many analysts expect the group to extend the cuts, even with Russia suggesting that some quotas should be eased to account for the expected impact of US sanctions on Iran and Venezuela.

Brent crude futures were trading around $61/b Monday, having recovered from briefly dipping to a four-month low below $60/b last week on concerns over the resilience of the global economy to escalating US trade disputes.

Falih has pushed hard for a cut extension and told reporters in Tokyo that he was "absolutely" confident the coalition would reach an agreement, following "very constructive discussions" with Novak earlier this month.

"Our intent is to make sure that we continue to work together closely, not just bilaterally, but with all other members of the OPEC+ coalition -- and that the good work we have done over the last 2 1/2 years continues to the second half of 2019, maintaining supply constraints to bring balance to the global inventories of oil," Falih said.

Saudi Arabia's June and July crude production will be at similar levels as the past few months, Falih said, "to bring inventories back to where they belong." The kingdom pumped 9.70 million b/d in May, according to the latest S&P Global Platts survey of OPEC production.

"I hope that will continue in [H2 2019] with assurances I have received from all the other OPEC+ countries that they will maintain the agreement going into the second half," Falih said.

Equatorial Guinean oil minister Gabriel Mbaga Obiang Lima told Platts that a failure to extend the cuts would be a "big surprise for everybody."

"What we all want is stability; we do not want volatility," he said, adding that OPEC and its allies would be "comfortable" with oil prices in a range of $60-70/b. "We do all believe that it is important to extend the agreement to the end of the year to be able to monitor [the oil market]."

FEELING PINCHED

Last week, OPEC acknowledged that it faces a challenging second half of 2019, with demand-dampening trade disputes combining with expected robust non-OPEC supply growth to hinder the producer bloc's oil market rebalancing efforts.

The International Energy Agency on Friday cut its oil demand growth forecast for 2019 for the second month in a row as "world trade growth has fallen back to its slowest pace since the financial crisis 10 years ago."

But Falih brushed off the demand concerns, saying that the fall in oil prices in recent weeks was based on sentiment, not fundamentals. Fears of growing trade retaliation between the US and China were driving the market, he said.

"From physical demand on oil, I have to say we are not seeing a slowdown from either China, the US, India or other developed economies," Falih said. "The impact so far has been on the sentiment side and fear rather than actual impact."

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Middle East sour crude prices rebound as buyers emerge for August

Price differentials for Middle East grades seemed to have found the bottom after spot market rates fell sharply earlier this month on lackluster demand and ample supply for the August trading cycle, trading sources said Tuesday.

 

Asian refiners, who have been watching the downward spiral from the sidelines in order to test how low prices will fall, emerged early this week as differentials rebounded.

"Buyers had a bearish view, so [they] waited," said a crude trader in Singapore on Tuesday.

"But the market didn't come off [to the level they would've liked] and today is already the 18th," the trader added, saying that refiners would rather pay a small premium on top of the going market rate than lose a cargo at this point.

Market talk depicted that light sour crude cargoes such as Abu Dhabi's Murban and Das Blend could be trading in small premiums of up to 10 cents/b versus their OSPs, according to some fresh deals heard on Tuesday.

This is in contrast to a cargo of Murban that traded at a discount of 1 cent/b on the Platts crude MOC on Thursday, June 13 -- which could have led some market participants to believe prices would fall into steady discounts for the remainder of the month.

But a cargo of the grade sold at a small premium in the MOC as recently as Monday, with French major Total selling to Petrochina's bid for an August 1-31 loading cargo on B/L pricing terms at OSP plus 5 cents/b.

Buyers will be looking to secure their August requirements before the end of June, and with whatever remains available in the market, said crude traders.

After a quiet first half, several spot market deals were heard concluded early on this week. Additionally, several buyers issued spot tenders this week with their purchasing requirements for the month.

Japan's Fuji Oil, and Taiwan's Formosa are amongst the Asian refiners seeking sour crude cargoes for August loading, with requirements ranging from light to medium sour crude grades.

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US crude oil exports buoyed by widening WTI/Brent spread

 

The US exported more than 3 million b/d of crude for the second week in a row in the week ended June 7, aided by macroeconomic factors that have made US oil prices more attractive.

According to S&P Global Platts Analytics data, more than 3.18 million b/d was exported from the US last week, down slightly from the estimated 3.35 million that was exported during the week ended May 31. The Energy Information Administration reported US crude exports averaging more than 3 million b/d since the week ending May 24.

At least 4 million barrels loaded last week are destined for delivery to India, including one VLCC cargo that was loaded June 4 on to the tanker New Prime at the Louisiana Offshore Oil Port. New Prime was chartered by Shell for the voyage, according to Platts’ fixtures reports.

It was not the only VLCC that loaded at LOOP last week. A second ship, the Captain X Kyriakou, chartered by Mercuria, was loaded and sailed from LOOP on June 2. That cargo of US crude is expected to be delivered to South Korea, according to Platts trade flow software cFlow.

PON_20190611_USCrude.jpg

LOOP has rarely loaded two cargoes in one week since it began exports more than one year ago. The offshore facility typically loads about one cargo a month for export, and has the capacity to load some 900,000 b/d, according to company officials. LOOP declined to comment on the recent loadings.

The two VLCCs that loaded last week join another LOOP loading noticed in recent weeks. Coswisdom Lake sailed from LOOP on May 31 and is destined for Qingdao, China.

The US’ four-week crude oil exports average is 3.221 million b/d. It’s the first time that the four-week average has reached over 3 million b/d since March, according to EIA data. Various factors encourage and limit US crude exports. However, it is expected that more US crude will be exported in coming years as US production increases and infrastructure along the US Gulf Coast is expanded. Currently, the US Gulf Coast has the capacity to handle some 5.92 million b/d of crude.

Macro factors favor exports
US crude for export has benefited over the past four weeks from certain macroeconomic and geopolitical factors that have helped widen the Brent/WTI spread. Over the last four weeks, the Brent/WTI swap spread, an indicator of the competitiveness of WTI-based crudes versus their Brent-based counterparts, has averaged $8.23/b. In the four weeks prior, the swap spread averaged $7.71/b, while the four further weeks prior, the swap spread average $7.15/b.

20190611_WTIBrent.jpg

A widening swap spread is indicative of WTI-based crudes becoming more competitive in comparison to their Brent-based peers.

The factors affecting the Brent/WTI spread can be placed into two categories: demand-side and supply-side. On the demand side, lingering US-China trade tensions have created fear of an overall slowing of the global economy. Any dip in demand growth spurred by a cooling relationship between the world’s two largest economies has potential to disrupt global supply chains and investment.

US-China trade tensions have contributed to an overarching decline in momentum for European and Asian markets. Business confidence has weakened and economic indicators ranging from car production in Germany, investment in Italy, and external demand in emerging Asia have all been lackluster.

US crude oil stocks and OPEC-plus production cuts have driven supply-side concerns in the global oil complex. US crude stocks have trended upwards in 2019, with stocks climbing 6.77 million barrels in the week ending on May 31, and up nearly 40 million barrels since the start of the year, according to data from the EIA. With US crude production at record levels, and production in the Permian Basin forecast to grow 26% year over year in 2019, the global market is a natural outlet for the new barrels.

OPEC and partners, Russia in particular, sought to bring nearly 1.2 million b/d off the global market in the first half of 2019, a goal they accomplished and passed by 300,000 b/d in March. As a continuation of OPEC cuts is expected, and Saudi oil output at a four-and-a-half year low, US crude exporters are well positioned to grow market share.

WTI FOB with a loading window from June 22 to July 22 was assessed by S&P Global Platts on June 7 at a $7.30/b premium to the WTI strip. That represents a 31 cents/b premium to July barrels of WTI at the Magellan East Houston Terminal.

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Why oil vessels are attacked in the Gulf?

 

The attack on two oil tankers in the Gulf of Oman, which connects the Arabian Sea with the Strait of Hormuz, a critical choke-point in one the world’s busiest shipping routes, has raised tensions between the U.S. and Iran. The crisis has also pushed up global oil prices as well as the cost of shipping insurance. Within hours of Thursday’s attack on the vessels, one is Japanese-owned and the other Norwegian, the U.S. has blamed Iran for the incident. The U.S. Central Command, which is based in the Gulf, has also released a video footage that the U.S. claimed showed men on an Iranian boat removing a mine from one of the tankers.

This was the second time in two months oil tankers have come under attack in the region. On May 12, four vessels, owned by Saudi Arabia and Norway, were targeted off the UAE coast, just outside the Strait of Hormuz. The U.S. had blamed Iran for that attack as well. Tehran has denied any role in the incidents. Whoever is responsible for these attacks, they are actually weaponising the Strait of Hormuz and the Gulf of Oman, both vital spots on the Gulf-Arabian Sea trade route.

Why Strait of Hormuz is important?
The Gulf (also known as the Persian Gulf or the Arabian Gulf) lies between Iran and the Arabian Peninsula. Besides Iran and Saudi Arabia, Oman, the UAE, Qatar, Bahrain, Kuwait and Iraq also share the Gulf coastline. As all these countries are energy-rich, the Gulf naturally emerged as a major trade route through which most of the oil exported from these countries flow out. Strait of Hormuz is a choke-point between the Gulf and the open ocean. With Iran on its northern coast and the UAE and an Omanian enclave on the south, the Strait, at its narrowest point, has a width of 34 km. The Strait opens to the Gulf of Oman which is connected to the Arabian Sea. A third of crude oil exports transported via ships pass through the Strait, which makes it the world’s most important oil artery.

According to the U.S. Energy Information Administration, a record 18.5 million barrels a day of oil passed through the Strait in 2016, a 9% jump on flows in the previous year. Besides oil, nearly all the exported liquefied natural gas (LNG) from Qatar, the world’s second largest LNG exporter, pass through the Strait of Hormuz. If the Strait is closed or if the flow of oil and gas is disrupted, it would have serious impact on global energy stability and thereby on world economy. Last time when there was a tanker war in the Gulf, it lasted for years and caused a major rise in prices and drop in commercial shipping.

The last Tanker War
In the 1980s, when Iran and Iraq were locked in a protracted conflict, both sides targeted each other’s energy vessels in the Gulf and on the Strait of Hormuz. Iraq started the Tanker War by targeting ships carrying Iranian fuel in 1981. Three years later, Iran started attacking vessels carrying Iraqi fuel turning the Gulf waters into a war zone. While Iraq largely attacked ships using missile-armed jet aircraft, the Iranians developed multiple ways to target tankers. They used speedboats, sea mines; anti-ship cruise missiles and traditional naval gunfire, among others. According to a report by the U.S. Naval Institute, in total, 340 ships were attacked and more than 30 million tonnes of shipping damaged in the Gulf between 1981 and 1987. It also caused over 400 seaman deaths. The conflict gradually subsided after the U.S. naval intervention in 1987, but only after Iran developed and demonstrated capability to attack any vessel that passes through the Strait of Hormuz. Among the ships severely damaged was the USS Samuel B. Roberts of the U.S. Navy, which was hit by an Iranian mine in 1988.

What’s next?
With ships again coming under attack in the Gulf region, memories of the Tanker War are being revived. If Iran is actually behind the recent attacks, it may be playing a risky game, demonstrating what it can do in the Gulf in the event of a war. If Iran is not behind the attacks, some other powers are using the Gulf trade lanes to stoke further tensions. Either way, the weaponisation of the Strait of Hormuz is a dangerous game. In the 1980s, the tanker war was largely a war of economic attrition. Also, the conflict was between Iran and Iraq, two relatively similar powers. This time, there are other risks. Given the existing tensions, more attacks on shipping vessels could trigger an all-out war, besides the economic costs of such attacks. Second, this time, conflict is between the U.S. and Iran. The scope of a direct war will be much bigger than what it was in the 1980s.
 

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OPEC’s Battle for Control of the Oil Market

 

Oil supply is confounding expectations. At Wood Mackenzie, we have just raised our forecasts for non-OPEC production, the latest in a series of incremental increases.

Cumulatively, we’ve increased volumes for 2025 by an astonishing 9 million barrels per day (b/d) compared with our forecasts in 2016, the oil price nadir. Non-OPEC supply has already bounced from the 2016 low of 54 million b/d and will touch 60 million b/d this year.

Our latest Macro Oils Long Term Outlook expects a peak of 66 million b/d in 2025, 5% above our forecast last year. Oil demand too has grown more quickly than expected, up 6 million b/d on 2016 forecasts.

Production keeps on growing despite structurally lower oil prices and upstream investment still 40% below peak.

Did we, like many others, underestimate the industry’s ability to adapt and innovate in the face of financial adversity – and keep on producing oil? Maybe. But where on earth is it all coming from? Dougie Thyne, Director of Oil Supply Analysis, identifies four main buckets.

U.S. Lower 48: tight oil and natural gas liquids (NGLs) together contribute 4.3 million b/d, half of the increase versus 2016. This primarily reflects the emergence of the Permian basin as the dominant tight oil play.

The delineation of sweet spots, more efficient drilling, and the present shift to industrialized exploitation have led to a significant improvement in Permian well economics.

Innovation has boosted expected recovery from the more mature Bakken, Eagle Ford and Scoop-Stack plays to a lesser extent.

NGLs associated with the gassier parts of the Permian and shale gas plays make up about one-third of the U.S. Lower 48 increase.

Russia: our forecasts for 2025 are 1.4 million b/d higher than three years ago, in spite of sanctions which restrict inward investment and the transfer of the latest technological advances.

The weakness of the ruble has buoyed upstream margins in Russia since the price fell, supporting higher investment, including an intense drilling program in deeper, low-permeability plays in West Siberia.

Sanction of some greenfield projects has been deferred by Russia’s involvement in OPEC+, effectively pushing new volumes out by a few years.

Guyana: only the original Liza discovery was in our 2016 forecasts. We’ve added another 0.5 million b/d by 2025, reflecting multiple subsequent deepwater discoveries. First production is due in 2020, setting Guyana on track to enter the top 12 non-OPEC producers with over 1 million b/d by the end of the decade.

Mature producers: Together, these have added over 2 million b/d compared with our 2016 forecasts. Colombia, UK, Norway, U.S. (Alaska) and Canada are among a plethora of countries which have surprised on the upside.

Cost cutting, efficiencies, reduced maintenance outages, high-grading and streamlining of new projects, new discoveries tied into existing infrastructure and, in some cases, reduced tax rates have combined to slow decline rates and boost production.

There are valid questions whether production from ultra-mature basins is sustainable at these rates, or volumes are merely being accelerated. As a result, some of these producers are slated to see steeper declines.

Non-OPEC supply won’t grow at this rate forever – in fact, it stops after 2025 as tight oil plateaus, with decline setting in by 2030. In the meantime, the OPEC+ strategy to boost revenues by constraining production and buoying up price has helped its competitors boost production and gain market share.

We estimate non-OPEC production will swallow up 4.3 million b/d, or 76%, of contestable demand over the next five years. OPEC’s scope to increase volumes through this period is limited to just 1.3 million b/d.

The mathematics sits at odds with Abu Dhabi, Kuwait and Iraq which are investing heavily in new capacity. Some producers in OPEC do see flat or declining volumes in this period.

Major supply outages are helping OPEC+ to balance the market today. Disruptions are set to leap to a record 5 million b/d later this year, including 2.5 million b/d from Iran (sanctions) and Venezuela (economic meltdown and U.S. sanctions).

It may suit the rest of OPEC, as well as the U.S., if exports from Iran and Venezuela are kept off the market for some years – at least until non-OPEC production growth shows signs of abating.
Source: Wood Mackenzie

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Abundant oil supply prevented spike to $140/b after ship attacks – US DOE deputy

 

A “very well-supplied” oil market prevented prices from spiking to $140/b last week when two oil product tankers were attacked near the Strait of Hormuz, US Deputy Energy Secretary Dan Brouillette said in an interview with S&P Global Platts.

The ship attacks and concerns about oil supply security have dominated talks among delegates at the G20 energy and environment meetings in Japan.

Saudi Arabia’s energy minister Khalid al-Falih said Saturday that the attacks have damaged global confidence in oil security, and he called for a “rapid and decisive response” to the threat to energy supplies.

International Energy Agency chief Fatih Birol said Friday that the group was very concerned about the attacks. He said IEA was ready to respond in the event of a supply disruption with a range of options, from providing members immediate policy advice to coordinating a release of emergency oil stockpiles.

Brouillette’s agency manages the US Strategic Petroleum Reserve, which currently holds 644 million barrels of crude oil. Asked if the Trump administration would tap the SPR in response to a blockage of the Strait of Hormuz, he said: “The SPR is intended for large disruptions in the marketplace.”

“I can’t tell you without knowing the details whether this particular event constitutes an emergency under the federal law,” Brouillette added. “But it’s these types of events we look at with regard to release of the SPR.”

RISING US EXPORTS

Brouillette’s message to G20 delegates focused on rising US oil and LNG exports and US producers’ willingness to meet the energy needs of Asian and other customers.

Some analysts have questioned whether the world can absorb all the light sweet crude the US is projected to export in several years, given complex refiners’ reliance on heavy crudes. US sanctions against Iran and Venezuela have removed mostly heavy crude from the market.

Brouillette dismissed the crude quality concerns. He said Gulf Coast refiners have started adjusting operations to make use of more light crude, while there has been an uptick in alternative heavy crude sources, such as offshore Gulf of Mexico production.

On LNG exports, Brouillette said China’s retaliatory tariffs and trade policy uncertainty have not damaged the prospects for the US LNG industry. He said sales to South Korea, Japan and Mexico make LNG exports to China “almost a rounding error.”

“The trade conversation with China at the moment has very little impact on US LNG production or exports,” he said.

LNG COMPETITION

Brouillette added that the US is not worried about competition from LNG export terminals in British Columbia, Canada, which hold a location advantage to Gulf Coast ports as cargoes can reach Asia quicker.

“We hope they enter the market because it means cheaper gas for everybody,” he said. “It only makes us better competitors and more efficient operations if they enter the market. We face fierce competition from Australia, Qatar and others already.”

On reports that Russia is boosting gas shipments to Europe to test the limits of US LNG exports, Brouillette said Europe’s access to US LNG imports has forced Gazprom to cut its prices.

“That’s good for consumers in Europe,” he said. “More and more countries are starting to realize the argument around diversity of supply and diversity of suppliers in particular.”

US energy secretary Rick Perry met last week with Polish President Andrzej Duda at Cheniere’s Sabine Pass LNG terminal near the Texas-Louisiana border.

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Saudi Arabia Heeds Chinese Request for More Oil

 

The world’s biggest oil exporter seems willing for now to satisfy Chinese requests for extra crude as supplies are squeezed elsewhere.

At least one Chinese customer got additional oil from Saudi Arabian Oil Co. for loading in July on top of its normal contractual volumes, according to people with knowledge of the matter. The extra supply was at the request of the customer, the people said, asking not to be identified because the matter is private. At least five other Chinese buyers got what they requested, though it’s not clear if they asked for extra crude.

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Aramco declined to comment on the matter in an emailed response.

Saudi Arabia is juggling its commitment to restrict oil production as part of the OPEC+ pact to shore up prices with its pledge to make up a shortfall in supply, if requested by its customers, after U.S. sanctions waivers against Iran were discontinued.

The request for additional July supplies signals that China may be starting to feel the pinch from the lost Iranian barrels as well as curtailments from other producers including Venezuela. China, the world’s biggest oil importer, is also buying less oil from the U.S. because of the worsening trade war between Washington and Beijing.

In Europe, five refineries representing a significant proportion of the continent’s buying are getting their full Saudi Arabian allocations for July as normal, according to traders familiar with the matter. One of them asked for more but the request was declined.

Global benchmark Brent crude has fallen around 19% from a high in late April in spite of the supply losses, as the trade dispute erodes confidence in the global economy. That will ratchet up pressure on the Organization for Petroleum Exporting Countries and its allies to at the very least extend their output curbs at their upcoming meeting in Vienna.

Saudi Aramco fulfilled the contractual volumes nominated by three customers in other North Asian countries, while reducing supplies of lighter varieties to one other buyer in the region, according to people with knowledge of the matter.
Source: Bloomberg

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(Bloomberg) -- Venezuela’s state-owned oil company is taking an unusual step to try and increase production: shut fields.

Starting in July, Petroleos de Venezuela SA will prioritize 13 fields in the Faja, a 55,000 square-kilometer (21,235 square-mile) strip north of the Orinoco River containing heavy crude oil that former president Hugo Chavez turned into the nation’s oil flagship project, according to a document seen by Bloomberg. The other 20 fields -- many producing less than 500 barrels a day -- will be considered inactive, the document showed.

PDVSA is struggling to turn around a slide in Venezuela’s oil production that has only steepened after the U.S. imposed sanctions on sales of naphtha, a compound needed to help tar-like crude from the Orinoco Belt move through pipelines. The restructuring follows PDVSA’s decision to turn oil upgraders into blending facilities in May. Output has fallen to 741,000 barrels a day, after bring further hobbled in March by a series of blackouts.

“This is an emergency plan as a result of the lack of naphtha and light crude,” said Antero Alvarado, managing partner of consultant Gas Energy Latin America. “This will affect total production output, as some fields will be shut temporarily.”

PDVSA declined to comment.

PDVSA plans to recycle naphtha to get the most use of supplies on hand, as it has struggled to buy more of the product on international markets since the sanctions were imposed. The company will concentrate efforts on the 13 most productive fields at the Orinoco Belt, among them those operated with Russia, China and U.S. partners.

According to the plan, four fields -- three of them operated jointly with international companies -- will start producing Diluted Crude Oil, which is a blend of heavy crude and naphtha. Nine others will focus on Merey 16, the country’s top exported grade.

The goal is to increase production from the region to 800,000 barrels a day, including 247,000 barrels of DCO and 552,000 barrels of Merey 16.

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‘Don’t get used to it’: OPEC’s free pass for US shale will be short-lived, JP Morgan says

A gradual fall in oil prices over the coming years could prompt Saudi Arabia and OPEC to reclaim some of its market share from the U.S., according to the head of EMEA oil and gas research at J.P. Morgan.

Saudi Arabia and OPEC are “there to support oil while they are effectively pregnant with all this economic growth and capital they have got to deliver. But, having said that, what we are saying to the bulls is: Don’t get used to it,” J.P. Morgan’s Christyan Malek told CNBC’s “Squawk Box Europe” on Thursday.

Earlier this week, OPEC and 10 other allied producing partners agreed to keep 1.2 million barrels a day off the market for another nine months.

The energy alliance, sometimes referred to as OPEC+, has been reducing output since 2017 as part of a sustained bid to prop up crude prices.

The Middle East-dominated group has succeeded in keeping crude futures near $60 a barrel, albeit five years after oil prices last traded above $100. But, a protracted period of production cuts has seen its share of the global oil market sink to the lowest level in almost three decades.

Meanwhile, the U.S. shale industry has expanded at such a rapid rate that it threatens to overwhelm OPEC-led efforts to mitigate demand concerns, swamping the global oil market with supply.

When asked whether he believed OPEC kingpin Saudi Arabia could change this dynamic and eventually outlast the U.S. shale industry, Malek replied: “I think, at the moment, with OPEC and Saudi focusing on fiscal (and) economic policy, they are absolutely two feet in the value camp.”

“This value proposition, the fact they are giving shale a free pass so to speak is short-lived… I mean three of four years ago, who would have thought that they would be happy with $60 to $70?”

“The bar keeps falling, it is just very gradual. In a few years’ time I expect $50 to be an okay oil price, at which point that could see Saudi and OPEC reclaim that market share and then it becomes more competitive,” Malek said.

‘Peak, plateau and then decline’
International benchmark Brent crude traded at around $63.80 Thursday morning, little changed from the previous session, while U.S. West Texas Intermediate (WTI) stood at $57.13, down almost 0.4%.

Speaking to reporters in Vienna, Austria earlier this week, Saudi Energy Minister Khalid al Falih said shale would eventually go the same way as every other basin in history.

It will “peak, plateau and then decline,” Al Falih said, before adding: “Until it does I think it is prudent … to keep adjusting to it.”
Source: CNBC

 

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Morgan Stanley lowered its long-term Brent price forecast and said the oil market is broadly balanced in 2019 after OPEC and its allies including Russia agreed to extend their production cuts by even longer than expected.

The bank lowered its long-term Brent price forecast to $60 per barrel from $65 per barrel, while it expects prices for the global benchmark to fluctuate around $65 per barrel, from $67.5 per barrel previously, in the next three quarters.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group knows as OPEC+, agreed on Tuesday to extend oil supply cuts until March 2020 as members overcame differences to try to prop up prices.

“OPEC cuts can be very effective when they smooth over relatively temporary imbalances in supply and demand. However, when they become multi-year transfers of market share, history shows that they are usually associated with oil price weakness rather than oil price strength,” the investment bank said.

The production cuts, which started as a temporary rebalancing of the oil market, has become a permanent effort of market management highlighting the weakness in the underlying supply/demand fundamentals, the bank said in a note.

Morgan Stanley now expects the de facto leader of OPEC, Saudi Arabia, to continue to produce about 10 million barrels per day or slightly less throughout 2020, overcomplying with its 10.3 million barrels per day quota and said the oil market will be oversupplied by 0.3 million barrels per day in 2020, down from the estimate of 0.7 million barrels per day before.

“Still, in the short term, there are some offsetting factors. Seasonal demand strength will likely result in inventory draws in the U.S. over the next 2-3 months, which creates upside risk,” the bank said adding, the International Maritime Organization (IMO) 2020 regulation should boost refinery crude runs in fourth-quarter this year and first-quarter of 2020, again supporting prices.

IMO is introducing the rules on marine fuels would limit the sulfur content to 0.5 percent, down substantially from the current 3.5 percent, to curb shipping pollution.

The bank also said softer U.S. currency and stimulus measures by global central bank on the back drop of economic weakness could drive prices higher.

Oil prices fell more than 4% on Tuesday with Brent crude LCOc1 futures at $62.40 a barrel, down 4.1% than the previous session. U.S. West Texas Intermediate (WTI) crude CLc1 futures fell 4.8%, to settle at $56.25 a barrel, after touching their highest in more than five weeks on Monday. [O/R] Source: Reuters

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