Market Movers
- The predominant theme in the oil markets is still the coronavirus and its effects on oil demand. This week, traders were waiting to hear whether Russia would be on board with deeper production cuts, but hopes were dashed on Thursday as OPEC and Russia announced that it would not move up its March 5-6 meeting to discuss the options earlier than planned, implying that Russia was probably not on board, as suspected. The decision to not move the meeting up highlights the lack of urgency among the cartel and its friends now that oil prices have rebounded somewhat this week. The cartel is clearly hopeful that waiting another two weeks will give them a better idea of how long the coronavirus outbreak will last and how the demand picture will shake out, likely weighing disturbing economic data from China such as coal usage, traffic patterns, and property sales that show a still-paralyzed economy, versus China’s insistence that activity is already returning to normal. In addition to the cartel’s preference for waiting for another couple of weeks to assess the necessity of extended or deeper cuts, whatever is decided will take a bit of time to implement, meaning that production and inventory relief is not just around the corner either way.
- As the coronavirus continues to undermine the LNG market, cancellations of cargoes are being closely watched. This week, Naturgy Energy Group SA (a giant Spanish utility owner) canceled two cargoes from US…
Market Movers
- The predominant theme in the oil markets is still the coronavirus and its effects on oil demand. This week, traders were waiting to hear whether Russia would be on board with deeper production cuts, but hopes were dashed on Thursday as OPEC and Russia announced that it would not move up its March 5-6 meeting to discuss the options earlier than planned, implying that Russia was probably not on board, as suspected. The decision to not move the meeting up highlights the lack of urgency among the cartel and its friends now that oil prices have rebounded somewhat this week. The cartel is clearly hopeful that waiting another two weeks will give them a better idea of how long the coronavirus outbreak will last and how the demand picture will shake out, likely weighing disturbing economic data from China such as coal usage, traffic patterns, and property sales that show a still-paralyzed economy, versus China’s insistence that activity is already returning to normal. In addition to the cartel’s preference for waiting for another couple of weeks to assess the necessity of extended or deeper cuts, whatever is decided will take a bit of time to implement, meaning that production and inventory relief is not just around the corner either way.
- As the coronavirus continues to undermine the LNG market, cancellations of cargoes are being closely watched. This week, Naturgy Energy Group SA (a giant Spanish utility owner) canceled two cargoes from US exporter Cheniere Energy, destined for clients Repsol SA and Endesa SA. One of the canceled cargoes was for April delivery.
- China exempted tariffs on a number of goods this week--including on LNG and crude oil--as the Phase 1 trade deal with the US went into effect just days earlier. The tariff exemptions will make it easier for China to meet its ambitious promise to purchase $200 billion in goods and services over the two years, although that plan’s feasibility is questionable. As the coronavirus continues to eat away at China’s oil demand, the likelihood of meeting that target this year is slim.
- Oil traders are taking advantage of the depressed oil demand in China by renting millions of barrels of crude storage in South Korea as inventories pile up. The leases for the storage are short-term leases of between three and six months, allowing them to take advantage of the current contango, and betting--riskily so--on an oil buying spree once the coronavirus is under control and demand for oil rebounds. Traders are also booking short-term floating storage, but analysts are nervous that the inventory increases cannot last indefinitely.
- Analysts are still cutting oil demand forecasts, including the EIA, which this week lowered its oil demand outlook by 378,000 barrels per day. The EIA’s forecast follows OPEC’s Friday forecast that was 230,000 bpd lower. Standard Chartered this week estimated a lower demand growth outlook for 2020 as well, by 793,000 bpd compared to its estimate before the coronavirus outbreak.
- Tesla has been ordered by a German court to stop clearcutting trees for its gigafactory there in what some are hailing as a victory for environmental activists. It’s not often that Tesla--the poster child for weaning the world off fossil fuels--faces environmental backlash. The court, however, noted that the temporary order to halt the cutting was a temporary measure, and not an indication that the court case brought by a green activist group had any chance of succeeding--the order is merely a temporary measure to give the court a chance to make a final ruling.
- JODI data showed this week that Saudi Arabia’s oil exports fell nearly 11% in 2019. Meanwhile, Chinese customs data shows that Saudi Arabia increased the amount of oil it exported to China in 2019 - by 47%. This places Saudi Arabia as China’s largest supplier of crude oil, stealing that title away from Russia. The interesting shift of lower overall exports while upping exports to one market--China--highlights the critical nature of the Chinese market. Saudi Arabia also recently struck deals with two independent refiners in China--where it has previously only sold to state-run refiners there. Overall in 2019, Saudi Arabia supplied an average of 1.67 million bpd to China.
- Rosneft is joining the ranks of other big oil companies in jumping on the green bandwagon, pledging $5 billion in investments over the next five years to environmentally friendly projects including projects to restrict CO2 emissions and projects that will use associated petroleum gas. For comparison, Rosneft’s green investments over the past five years totaled just under $4 billion.
Discovery & Development
- Trial production has finally begun at the Saudi Arabia and Kuwait shared oilfields, Khafji and Wafra. Kuwait’s oil minister has promised 550,000 bpd of production by the end of this year, after a long five-year wait as the two countries couldn’t agree on terms. Kuwait said at the beginning of the year that its share of the production would be 250,000 bpd by the end of the year. Without accounting for any production declines, we’re not sure where this fits in with OPEC’s proposed plans to cut deeper through the end of Q2, or even to keep its current production quota intact through the end of the year. Kuwait is supposed to be pumping no more than 2.72 million bpd, and its February production is 2.67 million bpd--there isn’t 250,000 bpd of room left to produce without going over. Saudi Arabia is supposed to be producing 10.31 million bpd, but it produced under as well, at 9.73 million bpd. While Saudi Arabia has the room to add production and still stay under its target, its understood leadership role would make this difficult. This does not account for any natural declines in production from the two producers.
- After its first well offshore Mexico turned up dry in October, Cairn energy, with partner Eni, stands somewhat redeemed after a new well, Saasken-1 well, operated by Eni, could contain up to 300 million barrels of oil, for a production level of 10,000 bpd. Cairn secured its first Mexico acreage in 2017, holding four licenses offshore.
- Shell and Total are in a race to get oil out of its winning bids from last year’s licensing round in Brazil, with both firms requesting environmental permits to move forward. Shell is looking to tap nine wells over two blocks, with a start date of sometime between 2022 and 2024. Total applied for permits to drill up to five wells. Both companies signed concession contracts last Friday, and already seeking environmental permits--showing a rather aggressive push into an area that could potentially reap as much as 50,000 barrels of oil equivalent per well per day.
- VAALCO Energy announced that it had successfully encountered oilsands in the Gamba formation offshore Gabon from its South East Etame 4P appraisal wellbore, estimated the gross prospective resources to be between 1 million and 2 million barrels of oil. Next up will be the South East Etame 4H, after which, the prospective resources of the two will be converted to 2P reserves by the end of the year.
Deals, Mergers & Acquisitions
- All is quiet on the M&A front for the oil industry amid oil price volatility and fears spreading over the coronavirus. In that same vein, we’ll have to wait several more months to learn Qatar’s choice of Western partners for the world’s largest LNG on the books. The delay is being chalked up to a supply glut driven by increasing US production and slowing Chinese demand. The North Field LNG project was slated to have foreign partners revealed in Q1 this year.
- The UAE’s DP World--one of the largest port operators in the world-- is delisting from the Nasdaq Dubai and returning to state ownership at a time when the Gulf’s oil-rich kingdoms are struggling financially. DP World’s stock price has shed 50% over the past two years.
Legislation & Regulation
- Kuwait is looking to nationalize by next year all of its senior oil jobs that are held by nationals, in an attempt to keep the jobs from going to expatriates. Kuwait will also seek to increase to 80% the number of domestic companies doing business with its state-run oil company. The workforce will start to be nationalized in the second half of 2020.
- Petrobras has found itself embroiled in a weeks-long strike as its oil workers continue to rail against the oil giant’s privatization plans that would see the company sell 8 refineries and Petrobras’ recent round of layoffs. Petrobras insists it is operating as usual with temporary labor. Despite a court ruling that the striking action was illegal, fining the union $115,000 per day for every day it continues, the striking workers--accounting for 60% of Petrobras’ workforce--vowed to strike indefinitely, but on Thursday, the union suspended the strike after a court ruled that Petrobras could not move forward with its layoff plans yet, pending a final ruling on March 6.
Politics, Geopolitics & Conflict
- Not only has Turkey remarkably overstepped in Libya and Syria, but now it is seeking Patriot Missile assistance from the United States on Turkey’s southern border with Syria. The Turks invaded northern Syria against the wishes of the United States, and then, as we suggested would happen months ago, the Turks bit off more than they could chew, and now are asking for American help. This is a quagmire of frenemy alliances, most notably between Turkey and Russia. The Americans have taken issue with the Turks’ purchase of Russian weapons. Now, the Turks are hoping the Americans will come to their aid to protect them against the Russians.
- Washington is slapping sanctions on Switzerland-based Rosneft Trading SA, the trading arm of Russian Rosneft. The move is expected to have a fairly significant impact on the flow of Venezuelan crude to China and India because while it does nothing specifically to stop Rosneft from running Maduro’s crude, it does penalize anyone doing business with Rosneft’s trading arm, regardless of whether any deal has anything to do with Venezuela.
- During his visit to Angola, US Secretary of State Mike Pompeo announced that several American firms would invest more than $2 billion in Angolan oil and natural gas projects, presumably giving the country’s new regime a clean bill of health following decades of massive corruption that handicapped the oil industry. Pompeo is trying to promote U.S. investment here as an alternative to Chinese investment at a time when China holds the bulk of Angola’s foreign debt. It’s a tough sell, though, when the Chinese offer better deals under state sponsorship than independent American companies can. Foothold wins out over profit here.
