China is now holding most of the cards in the oil price game as far as Riyadh and Moscow are concerned--and Beijing is right where it wants to be. The other two have overplayed their hands. And the U.S. has--once again--been caught napping. There’s a ton of geopolitical leverage to be had for China. The king of ‘soft power’, can simply turn the import taps off to make things extremely uncomfortable for Saudi Arabia and Russia, both vying for China oil sales and both with budgets that depend upon this far too heavily.
This is the bigger game that is unfolding at a time when most are worried about whether U.S. shale will be able to find its new normal. For the U.S., shale isn’t the gravest concern--it’s the loss of geopolitical leverage, and it has nothing to do with OPEC.
Another perceived looming threat to oil prices is the prospect of an end to the Libyan conflict that would see the country return to a minimum of ~1.2 million bpd (pre-conflict levels). With demand predicted by some to never again reach its peak 2019 levels, bringing all this Libyan supply back online would not be helpful. But those external powers (UAE, Saudi Arabia, Russia, Egypt) supporting General Haftar’s bid to control Libya and its oil have now been backed into a corner. They have to act on his behalf, or he will lose Libyan oil to the GNA, Turkey and Qatar. As we noted last week, the Turks may be spinning recent developments as a victory over Haftar,…
China is now holding most of the cards in the oil price game as far as Riyadh and Moscow are concerned--and Beijing is right where it wants to be. The other two have overplayed their hands. And the U.S. has--once again--been caught napping. There’s a ton of geopolitical leverage to be had for China. The king of ‘soft power’, can simply turn the import taps off to make things extremely uncomfortable for Saudi Arabia and Russia, both vying for China oil sales and both with budgets that depend upon this far too heavily.
This is the bigger game that is unfolding at a time when most are worried about whether U.S. shale will be able to find its new normal. For the U.S., shale isn’t the gravest concern--it’s the loss of geopolitical leverage, and it has nothing to do with OPEC.
Another perceived looming threat to oil prices is the prospect of an end to the Libyan conflict that would see the country return to a minimum of ~1.2 million bpd (pre-conflict levels). With demand predicted by some to never again reach its peak 2019 levels, bringing all this Libyan supply back online would not be helpful. But those external powers (UAE, Saudi Arabia, Russia, Egypt) supporting General Haftar’s bid to control Libya and its oil have now been backed into a corner. They have to act on his behalf, or he will lose Libyan oil to the GNA, Turkey and Qatar. As we noted last week, the Turks may be spinning recent developments as a victory over Haftar, but look no further than the fact that oil is not pumping, and both Egypt and Russia have drawn ‘red lines’ in Sirte and al-Jufra districts--both gateways to Libya’s oil facilities.
We also note this week that while Turkey was trying to replace Hafter with another potential powerbroker in the country’s east--eastern parliamentary speaker Aguila Saleh--things are not panning out in Ankara’s favor. Saleh showed his hand this week when he urged Egypt to intervene militarily if the GNA/Turkey made a move on strategic Sirte, where Egypt has already drawn the ‘red line’.
Market Movers
India’s oil refining rates increased in May after falling to near 30% in April after the lockdowns sapped fuel demand. India’s refining rates increased to 77% in May, processing 16.34 million tonnes of crude. That’s 11% more than in April, but almost a quarter less than May 2019.
When it comes to active rigs and wells in the United States, less is more, according to the EIA. While 2019 saw near 45-year lows for the number of active oil and gas rigs in play, it also saw record production thanks to tight oil--specifically horizontal drilling. While 2019 saw steady declines in the United States to the number of active rigs and the number of new wells drilled monthly, the United States gradually increased production. The efficiency gains in oil and gas drilling and production are precisely what allowed the United States to increase production while OPEC was cutting it. In effect, this opened the door for the US to snag market share from OPEC and OPEC+. This reality is what is causing Russia consternation as it balked at the idea of increased production quotas in March, arguing that any production cut that the cartel could pull off would simply hand the corresponding market share to U.S. shale. This would have been true, had it not been for the pandemic, which sunk prices even lower than Russia and Saudi Arabia had planned.
Developments in crude benchmarks this week may shift the balance of power of some of the world’s most prominent grades of oil. The Russian Urals crude grade is now trading at a premium to dated Brent after Russia cut its exports, causing European refiners to hunt for a bargain elsewhere--most notably in WTI, Johan Sverdrup, or West African light oil. This comes as S&P Global and Argus are adding another crude grade into the mix for oil exported from the US Gulf Coast to replace WTI.
Argentina’s YPF SA has issued a force majeure notice to Belgian shipping company Exmar for its Tango floating export project due to the coronavirus. Part of the force majeure claims that YPF cannot pay its outstanding invoices for services rendered in March.
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