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The Oil Market Is Struggling To Interpret Mixed Signals

  • Global oil inventories are at multi-year lows, with unprecedented stock draw across the Americas and Asia
  • At the same time, a new wave of covid has increased fears of another round of lockdowns and more demand destruction
  • The market is likely waiting on news from either the U.S. or OPEC+ to give oil prices are firm direction

Oil prices

Rig count

Rig count

Chart of the Week

Energy Mix

- Despite COP26 ending with no powerful mandate and a watered-down version of climate commitments, the UN summit put developing economies and OECD countries on a collision course.  

- According to IEA estimates, fossil fuel subsidies that the initial COP26 draft wanted to scrap, still amount to some 180 billion globally and remain likely to be a key target for upcoming climate summits.  

- Global oil demand alone would need to collapse by 75% over the next 30 years from today’s levels to put the world on a pathway to net-zero emissions by 2050, Platts reports.

- The Beyond Oil and Gas Alliance, which seeks to phase out oil and gas altogether, failed spectacularly as even the conference host declined to sign up, making Denmark the only country participating with any sizeable production as of now. 

Market Movers

- Royal Dutch Shell (NYSE:RDS.A) announced it would scrap its dual share structure and move its HQ to Britain from the Netherlands, on the back of Dutch court pressure and higher taxation, simultaneously changing its name for the first time since 1907 to “Shell”. 

- UAE state oil company ADNOC outlined its $6 billion drilling investments that would bring it closer to having a 5 million b/d production capacity, with Baker Hughes and Technip landing the sweetest bit, a $3.3 billion 10-year wellheads deal.

- US oil major ExxonMobil (NYSE:XOM) launched the sale of its Barnett Shale holdings that include 2,700 wells across some 182,000 acres in North Texas, seeking to garner up to $500 million from the transaction that comes as part of its $15 billion asset sale program. 

Tuesday, November 16, 2021

Crude prices have stagnated this week amid diverging market signals. On the one hand, inventories have dropped to multi-year lows, losing some 300 million barrels from their summer peak. In this, both the Americas and Asia have witnessed unprecedented stock draws that fortify the sentiment of market tightness. On the other hand, resurgent COVID across the Atlantic Basin added to demand worries as nations started to consider potential lockdown measures. To top it off, the public rift between OPEC+ and the United States saw no development this week, meaning the market will need to wait for further signals before a clear direction is established. 

IEA Hikes 2022 Crude Price Forecast. The International Energy agency upped its average 2022 Brent price forecast to 79.40 per barrel, despite keeping incremental crude demand at 3.4 million b/d, indicating that it expects the market tightness to resonate longer in the markets. 

Germany Suspends Nord Stream 2 Approval. BNetzA, Germany’s energy regulator, temporarily suspended the approval process of the Nord Stream 2 gas pipeline, saying the Gazprom-controlled operating company should form a German subsidiary under German law to get the license. 

Xi-Biden Talks Ease Pressure on Metals. Metals prices, especially that of copper, rose today following positive geopolitical developments at the virtual Xi-Biden summit where both leaders called for increased communication between China and the United States. 

United OPEC+ Defies US Calls for Action. Arguing that markets would inevitably switch from a supply deficit this year to a surplus in 2022, leading OPEC+ producers such as Saudi Arabia, the UAE and Russia reiterated they would not change course and that the overall market volatility was coming from other sectors, not oil. 

Pressure Mounts on Biden Administration to Release SPRs. Amidst OPEC+ resisting calls to hike production, several top US officials have indicated the government should release barrels from the US Strategic Petroleum Reserve in a bid to lower fuel prices as Americans head into the holiday season.  

Coal Shares Plunge in COP26 Aftereffect. Despite the softening of the final COP26 communique, the targeting of coal triggered an across-the-board weakening of coal stocks, with Chinese, Australian, Indonesian, and other companies all-seeing 2-7% declines this week. 

Nickel, Zinc Added to US Critical Minerals List. The US Geological Survey suggested that nickel and zinc be added to the list of critical minerals, as both metals are primarily import-dependent and potential supply disruptions could undercut American supply chains. 

Increased Russian Gas Flows to Germany Shake Off Belarus Threat. Russia’s Gazprom (MCX:GAZP) has started to fill its European inventories amid increased flows via Belarus and Ukraine, however, shied away from booking monthly capacities and opting instead for daily transit bookings. 

US DUC Well Count Declines in All Shale Basins. The number of drilled but uncompleted wells (DUC) declined by 222 over the last month to a total of 5,104 wells – whilst all basins saw month-on-month drops, the Permian led the trend, accounting for half of the October backlog clearing.

Italy’s Eni Inadvertently Buys Iranian Cargo. A recent London court hearing shed light on a 2019 transaction that saw the Italian major ENI (NYSE:E) admit that it inadvertently purchased a cargo of Iranian crude disguised as Basrah Light, leading to the dismissal of the crude trading unit’s boss. 

European Carbon Price Reaches Record High. The first day after the UN COP26 climate summit the price of EU carbon dioxide allowances rose by 4% to an all-time high of 66 EUR per metric ton ($75/mt), driven by the overall pressure on Europe’s grid and cold weather forecast for end-November. 

Rosneft Makes Giant Gas Discovery. Russia’s main state oil company Rosneft (MCX:ROSN), partnering with Britain’s BP (NYSE:BP), discovered a 384 bcm (13.5 tcf) giant gas field in the north of the Taimyr peninsula, naming it after the late emergency situations minister Evgeny Zinichev. 

Chinese Coal Production Surges After Government Free-for-All. China’s October coal output rose to a 6-year monthly high of 357.09 million tons as the government hastily approved coal extensions and expedited mining wherever it could, also forbidding local authorities to shut mines without authorization.

By Tom Kool for Oilprice.com

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  • Mamdouh Salameh on November 16 2021 said:
    The global oil market is indeed trying to decipher the mixed signals it is receiving from OPEC+ and the International Energy Agency (IEA). The oil ministers of OPEC+ are competing with each other in interpreting OPEC+ policies thus confusing the market.

    On the other hand, the IEA looks for any adverse news to depress crude oil prices and tries its best to downplay the robustness of the global oil demand.

    Yet, the market always sifts through these signals and reaches the right conclusions. And the right conclusions, in my opinion, are that global oil demand is very robust and is underpinned by a global economy growing this year at 6.3% or more than double the growth rate in 2019 and by the continued decline in international oil inventories.

    That is why I expect Brent crude price to reach $85-$90 a barrel before the end of the year and to average $72-$73 in 2021.

    And with an expected supply deficit in 2022 estimated at 5 million barrels a day (mbd), Brent crude could hit $90-$100 a barrel and average $81-$82 in 2022.

    OPEC+ has signalled loud and clear that it has no plans to increase its production beyond the monthly 400,000 barrels a day (b/d) until the end of next year despite calls by the Biden administration for the organization to increase production beyond its plans.

    A rise in US shale oil production of some 200,000-300,000 b/d in 2022 will hardly impact global oil production and prices.

    Global oil demand could only decline if there is a return to lockdown in the world’s largest economies. However, this is unthinkable with the availability of billions of vaccines around the world.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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