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Oil Rallies Despite Bearish Demand Forecasts

COVID Market Update

Oil prices perked up this week, buoyed by both OPEC developments and Hurricane Sally. That is despite BP’s pessimistic 2020 edition of its annual outlook that suggests we have already seen peak oil demand. This is startling given BP’s 2019 outlook that suggested oil demand would continue to rise for more than a decade. Undeterred by the news--or perhaps not persuaded by BP’s assessment--oil prices reclaimed lost ground, with WTI topping more than $41 per barrel.

Citigroup’s forecast sees oil prices reaching $60 per barrel by the end of next year, with oil demand not returning to 2019 levels until late 2021. At the same time, oil trader Vitol gave its bullish assessment that global oil stockpiles will continue to decline this year, while rival Trafigura is predicting a return to surplus.

Hurricane Sally took more than 500,000 bpd offline this week, with more than 100 platforms in the GoM evacuating personnel, and the EIA estimated that crude oil inventories decreased by 4.4 million barrels.

Deals, Mergers & Acquisitions

IBM and Red Hat are joining forces with the oil and gas industry, and specifically with Schlumberger, to collaborate on a digital transformation that is a long time in coming. Schlumberger’s E&P cloud-based/cognitive applications will be able to leverage IBM’s hybrid cloud tech, and it will all be built on Red Hat’s OpenShift container platform.

A major merger appears to be underway in the UK, with the country’s two biggest oil and gas producers said to be in talks. Premier Oil is reportedly in talks with its key rival, Chrysaor, on debt restructuring. A month ago, Premier had reached a deal with creditors, so talks with Chrysaor are new and could emerge as a different way out of this debt pile. While there is no explicit talk of a merger, as the media has pointed out, it is unlikely that Chrysaor would be discussing Premier’s debt restructuring without some skin in the game. For anyone unfamiliar, Chrysaor paid $2.7B last year for ConocoPhillips North Sea assets.

Over the next five years, BP is targeting a major sell-off of its oil and gas production assets, eyeing the divesting of 600,000 boe/d. The oil major will drop its upstream production down to around 2 million boe/d by 2025, from 2.6 million boe/d as of last year.

Tanzania and Uganda signed an agreement this week to construct a 900-mile, $3.5 billion pipeline through East Africa to bring landlocked oil out of Uganda. The pipeline is spearheaded by French Total S.A. and is a joint project with CNOOC and Tullow Oil--the latter which is looking to dump its stake. Work is expected to start yet this year.

Abu Dhabi’s SWF disclosed this week that it holds a 5.1% in the United States’ largest LNG exporter, Cheniere Energy. The $615-million stake makes SWF Cheniere’s fourth-largest shareholder, raising questions about the true independence of American energy.

Discovery & Development

Russian Rosneft has launched drilling at its Orenburg region Domanik formation exploration well, where it expects reserves to increase by 70 million tonnes of oil and 23 billion cubic meters of natural gas by the end of exploration in 2021. This is the first well to be drilled in the area, and it has been noted in the past that the oil will be difficult to recover. At the same time, due to sanctions, Rosneft is going this one alone, with no exploration partners after BP dropped out.

China has put its first-ever offshore platform for heavy oil thermal recovery into production. The platform, Lyuda 21-2 in the Bohai Sea, will produce around 400 tons of crude oil per day.

Italian Eni and BP have made a discovery in Abu Madi West Development lease offshore Egypt, just north of the Nooros field. Eni discovered 100 meters of gas-bearing sands at its exploration well, and according to Eni, 4Tcf of gas in place could be in the Greet Nooros area. Eni owns 75% in the project, with BP holding the rest.

Colombia’s state-run oil company, Ecopetrol SA, has plans to drill 100 wells in the Permian Basin by the end of next year with its partner Occidental. The duo has drilled 22 wells in the area since last November, but drilling stalled due to the pandemic. The real question will be whether there is demand for this crude.

Petrobras is resuming oil trade with the world’s top commodity trading houses Vitol, Trafigura, and Glencore, after nearly two years of suspension amid a bribery investigation into the oil trading giants.

Apache and partner Total SA are drilling yet another well offshore Suriname, this time Keskesi East-1 in Block 58. This well is located 9 miles southeast of Sapakara West-1 discovery. The drillship for the project, the Noble Sam Croft, also drilled the Kwaskwasi-1 in Block 58.

Iran has raised oil production from the five oilfields in its southwest it shares with Iraq to 400,000 barrels per day (bpd) from 70,000 bpd in the past seven years. In addition to that, Iran plans to boost production and exports from the West Karoun cluster of oilfields, estimated to contain at least 67 billion barrels of oil in place.

Politics, Geopolitics & Conflict

Turkey is extending its oil and gas drilling operations offshore Cyprus until October 12th, with three additional Turkish vessels joining the Yavuz drillship which is already in place in the area. The more ground Turkey loses in Libya right now, the more aggressively it will target controversial offshore drilling around Cyprus and Greece to maintain the momentum of its power play.

Earlier this week, Bloomberg cited unnamed sources attesting that an oil tanker carrying Iranian condensate to Venezuela had begun offloading after having avoided sanctions by turning off satellite signals. The cargo was allegedly 2 million barrels of Iranian South Pars condensate, unloaded at the Venezuelan port of Jose.

Venezuela is alleging that they have captured a U.S. spy and charged him with terrorism. Venezuela claims that Matthew Heath was planning an attack on its oil industry and electricity system. Venezuela has charged three others--Venezuelan citizens--of taking part in the plot. The United States has not commented on the alleged spy or the alleged plot to disrupt the country’s oil industry, which is but a shell of what it once was. Venezuela’s oil production is now less than 200,000 bpd, and its refineries have been shut to zero or nearly zero, so there is not much left to disrupt.

The European Court of Justice has upheld sanctions adopted by the bloc in 2014 against Russian oil and gas companies in connection with Russian actions in Ukraine. In 2018, the EU court dismissed the claim of Rosneft against the EU Council when the Russian oil company challenged the legality of imposing EU sanctions against it.

Energy, Climate & ESG

Google is claiming that it now has a zero carbon footprint, after compensation for all the carbon it has created. Ever. Google also plans to have all of its data centers use carbon-free energy within a decade. The news follows other similar carbon-free pushes like Microsoft and Apple.

The United States has approved designs for its first scaled-down fission reactor, known as the SMR, developed by NuScale Power. It is a baby step towards broad scale, low-cost, locally produced nuclear energy, but if successful, the plan would see local utility companies apply to build the SMRs, which are just nine-feet in diameter. First reactors are expected by 2027 according to NuScale, with the reactors set to be online by 2029.

In another first, China’s state-run oil giant CNOOC has brought online its first offshore wind power stations, in the Jiangsu province. With 67 turbines, it has a planned capacity of 300 megawatts per year, and cost $770 million. It will produce 860 million kilowatt-hours of electricity each year. It will be brought fully online by the end of this year. CNOOC is just one of China’s oil majors that are dipping their toes into the renewable arena.

Regulations & Legislation

Looking to bring in another $4.5 billion to the budget annually, Russia is planning to rehaul taxes for the mining, tobacco, and oil industries, including a plan to scrap the zero extraction tax specifically for oil of high-viscosity. Under consideration is a tripling of the mineral extraction tax. The new tax proposal has not yet been finalized.


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