A number of developments this week, including Haftar’s actions in Libya, would normally have moved oil markets significantly, but in today’s market, it is only those that are to do with demand that seem to have any influence.
- Travel restrictions and a dangerously spreading virus are dragging oil prices down. Goldman Sachs sees a potential drop in oil demand in China due to the outbreak of the coronavirus, which has now spread across the country, with 830 confirmed cases as of Thursday, and 26 confirmed deaths, along with one confirmed case in the United States and cases reported in Thailand, Japan, Taiwan and South Korea. Goldman predicts this outbreak could slash Chinese demand and shave $3 off a barrel of crude. The math here mirrors what happened in the 2003 SARS outbreak, which leads Goldman to believe that there is the potential for demand to lose 260,000 barrels per day and “shock” global oil demand. Goldman is adding 170,000 bpd loss of jet fuel demand in its calculations. The SARS virus caused a slowdown that was much smaller than what Goldman is projecting. The logic behind the fear that the slowdown could be much worse this time around is that Asian air travel has enjoyed rapid growth since the early 2000s, so the slowdown in air travel and the reduced use of jet fuel could be compounded. In other words, there’s more to slow down this time. At the time of writing, Brent has fallen to $60.88 and WTI to around $55.
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A number of developments this week, including Haftar’s actions in Libya, would normally have moved oil markets significantly, but in today’s market, it is only those that are to do with demand that seem to have any influence.
- Travel restrictions and a dangerously spreading virus are dragging oil prices down. Goldman Sachs sees a potential drop in oil demand in China due to the outbreak of the coronavirus, which has now spread across the country, with 830 confirmed cases as of Thursday, and 26 confirmed deaths, along with one confirmed case in the United States and cases reported in Thailand, Japan, Taiwan and South Korea. Goldman predicts this outbreak could slash Chinese demand and shave $3 off a barrel of crude. The math here mirrors what happened in the 2003 SARS outbreak, which leads Goldman to believe that there is the potential for demand to lose 260,000 barrels per day and “shock” global oil demand. Goldman is adding 170,000 bpd loss of jet fuel demand in its calculations. The SARS virus caused a slowdown that was much smaller than what Goldman is projecting. The logic behind the fear that the slowdown could be much worse this time around is that Asian air travel has enjoyed rapid growth since the early 2000s, so the slowdown in air travel and the reduced use of jet fuel could be compounded. In other words, there’s more to slow down this time. At the time of writing, Brent has fallen to $60.88 and WTI to around $55.
- Hoping to counter this is a projection from Barclays, which expects crude oil demand (China virus aside) to rise by 1.4 million bpd, from 900,000 bpd in 2019. Previously, Barclays had forecast oil demand to be 500,000 bpd less than this. Barclays is banking on India to drive much of this new demand growth, but also believes that the US and China will see an uptick in demand following the Phase 1 trade deal.
- Iraq’s oil expansion plans just got hit with more bad news - beyond the fact that the country is a proxy battlefield between the United States and Iran. In Kirkuk, in northern Iraq, giant BP has pulled out, letting its $100-million exploration contract expire and putting any hope for the expansion of the Kirkuk oilfield on hold. We’ve noted previously that one thing the US-Iran conflict will do for oil prices is at least keep Iraq - one of OPEC’s biggest over-producers - from further expanding its production potential, even if current production isn’t taking a hit.
- Chevron has won another three-month stay of execution in Venezuela, courtesy of the U.S. Treasury Department. This is the third extension Chevron has received to continue operations in Venezuela, as the only remaining major U.S. oil company in the country. Chevron’s ventures with Venezuela's state-run oil monopoly PDVSA produce about 200,000 barrels a day, which represents about 25% of Venezuela’s total production.
- Houston-based oilfield services giant Halliburton is taking a $1.1 billion loss for 2019 due to a shale slowdown that has hurt demand for fracking and other oilfield services. Revenue for 2019 was $22.4 billion, down 7% from $24 billion for 2018. HAL disclosed a $2.2-billion charge to earnings for asset impairments on fracking and other drilling equipment and workforce reductions. However, this was in part offset by higher drilling activity in international markets.
Deals, M&A, Offerings
- Somalia has invited Turkey to explore for oil in its waters, and Erdogan is planning on taking Somalia up on its offer. Somalia’s waters do have a significant potential for oil, according to seismic surveys, but Somalia is not yet an oil producer. Earlier this month, Somalia passed new petroleum laws to entice foreign oil companies to invest in its energy sector. The new law also defined revenue sharing between the central government and its states.
- Uganda, too, is trying to get into the oil game, and has plans to spend $5 billion to develop the Kingfisher and Tilega oilfields. But controversy abounds, and the two fields are currently the subject of tax disputes between the government and Total, CNOOC, and Tullow, who jointly own the fields. Tullow, however, wishes to reduce its stake in the joint project. Uganda expects first oil from the two fields in 2022. The $5 billion is just part of Uganda’s planned spend of $15 billion to $20 billion on its oil industry within the next three to five years. The money will be spent not only on drilling more than 500 wells, but also an oil refinery, an oil pipeline, two central processing facilities, and a water plant - without which the two fields cannot go into production. Uganda is also looking to award five blocks by the end of 2020 to oil companies interested in exploring there. Uganda has some challenges here as the oil is heavy, and transporting the oil through the planned pipeline through Tanzania will require heaters to keep the oil flowing.
- Egypt has signed deals with four companies - Apache, BP, Shell, and Petronas - to develop nine blocks for a collective investment of $452 million. The four will drill 38 wells.
- BP signed an agreement with Angola's government aimed at acquiring further offshore exploration rights for two oil blocks. The company is already a partner in ongoing production in Block 18, called the Greater Plutonio development. Last week, BP, Eni, Total and Equinor won rights to develop several offshore Angola blocks.
- Total and Japan-based Marubeni have plans to build an 800MW solar plant in gas-rich Qatar--the first utility-scale solar project in the country. The cost for the project is the lowest ever for a solar PPA. The plant will be operational by the time Qatar hosts the 2022 World Cup, but the first 350MW will be operational next year. When complete, it will be one of the largest bifacial projects in the world.
Legislation & Regulations
- Kazakhstan has suspended oil exports to China after a high volume of organic chloride was found in the oil. It is unknown just how much oil is affected. Shipments of oil will resume after the contamination issue has been resolved. The issue of contaminated oil is reminiscent of Russia’s contamination problem from last April, when millions of tonnes of oil were contaminated.
- Brazil is contemplating joining OPEC, at a time when OPEC members are cutting oil production in an effort to rebalance what it considers to be an oversupplied market. Brazil, which is expected to hold talks with OPEC in July, is not planning on joining OPEC this year, rather at a later date if at all. If Brazil - the world’s second-largest non-OPEC oil producer - does in fact decide to join OPEC, it will restore in part some lost clout that OPEC once had. For Brazil, though, this may run counter to its plans, which include doubling its oil output. And that is not just pie in the sky - Brazil’s production in 2019 was the highest annual output growth in years, and prospects for further increases look bright. Brazil is surely a headache for OPEC, which is countering increased production from non-OPEC producers like the United States and Brazil. If it did join, Brazil would be OPEC’s third-largest producer after Saudi Arabia and Iraq.
- The Trump administration has rubber-stamped a permit to build the controversial Keystone XL pipeline. The permit will allow the pipeline to be built on US land in Montana, allowing construction crews on federal lands. The approval is a big win for the troubled pipeline, which overall will span 1200 miles and carry 830,000 bpd of oil from Canada to the Gulf of Mexico. While this approval means the pipeline has clearance to make it through the Montana portion of the line, it will be anything but smooth sailing, and will likely face continued opposition until it is complete.
Politics, Geopolitics & Conflict
- Moqtada al-Sadr’s calls for a “million-man” protest in Baghdad succeeded in bringing hundreds of thousands of demonstrators to the streets of the capital on Friday in a power play by the “nationalist” Shia cleric whose latest gimmick is Iraqi sovereignty (from both Iran and the U.S.). Protesters are trying to increase the pressure on the Iraqi PM to ensure that U.S. forces are kicked out of the country.
- Russia is attempting to re-establish Assad’s control of northeastern Syria (Syria’s Kurdish region), but are being thwarted by the continued US military presence around the area’s oil venues. Earlier this week, US troops blocked the passage of Russian forces. The Assad regime has regained control of most areas previously held by Syrian rebels but remains unable to fully retake Idlib (where Syrian rebels are still holding strong) or to control the northeast without coming into direct conflict with US troops, via Russian allies.
- Cyprus accused Turkey of being a “pirate state” following the Turkish President’s Recep Tayyip Erdogan renewed vow to start drilling for natural gas off the coast of the disputed island. Cypriot leaders have also suggested that Turkey may have stolen technical data for Block 8 in Cyprus EEZ, which was recently licensed to Italian Eni and French Total SA.
- Amid an ongoing dispute with Russia over crude oil supply and tariffs for transporting Russian gas through Belarus, Belarus’ BNK oil company has announced it will import crude from Norway’s Johan Sverdrup field via a Lithiuanian port. This is not a long-term move and is a temporary resolution for the current month. On January 1st, Russia suspended oil supplies to refineries in Belarus and then returned partial supply three days later, though supply terms for the year have not been agreed upon yet.
- The U.S. Treasury Department blacklisted four foreign companies for allegedly purchasing Iranian oil and petrochemical products in violation of U.S. sanctions. The Treasury alleged that the four companies, two based in Hong Kong, one company based in Shanghai and another company based in Dubai collectively ordered the transfer of the equivalent of hundreds of millions of dollars to the state-owned National Iranian Oil Co. as payment for Iranian exports.
