More Volatility Than Oil Can Handle

Politics, Geopolitics & Conflict

- Russian troops continue to withdraw from northern Ukraine, having left the Kyiv region to refocus on the east primarily and parts of the south. This maneuver is being interpreted in various ways. One interpretation is that the Russians have suffered too many losses and lack reinforcements to effectively capture the north and are instead focusing on expanding their hold in the Donbas region, which is what we initially expected them to do when the threat loomed in February. An alternative interpretation is that the Russians are simply regrouping and resupplying for another assault on the north. The destruction in the east is devastating, and as evidence of atrocities against Ukrainian civilians piles up, there are indications that the European Union could reconsider a ban on Russian oil. These atrocities and mounting cries of "war crimes" could push it over the edge, creating far more volatility for oil prices in the interim. Some analysts have even suggested $150 oil as a result of what this would mean for Russian output. Combine this with the looming threat from the Iranian-back Houthis on both Saudi and UAE targets and we have more volatility than oil can handle.

- While all is quiet in Libya as the next storm involving another parallel government setup collects momentum, what we expect to see is a notable shift in external strategy and external alliances with Libyan factions as a direct result of Russia's war on Ukraine. There is a high chance of violent clashes between the incumbent government and a newly sworn-in prime minister from the east, but things will likely be different this time in terms of external power plays. More than ever, the strategic goals are energy security. In one way or another, some major powers (the UAE, Egypt, France and to a lesser extent, the US) threw in with Russia in Libya during the most recent civil war, backing Haftar. Now, a US trial against Haftar for human rights abuses is back on after conveniently being suspended to allow him to run in December elections that never took place. Instead, Washington and Brussels are trying to keep Libya's oil pumping without supporting Haftar and by attempting to broker a deal between the two rival prime ministers. Turning their backs on Haftar, who has increasingly become a Russian pawn, has now become more urgent given unconfirmed Ukrainian intelligence that Haftar may help Russian with new Libyan recruits in Ukraine.

- All OPEC members either abstained from or voted against the resolution that voted to remove Russia from the UN's Human Rights Council-everyone except for Libya. The OPEC members are allies with Russia with regards to oil production quotas, and this vote is one more tie that holds the fragile and hard-fought alliance together.

- The U.S. Senate passed by a 100-0 vote to ban imports of Russian crude oil. While President Biden had issued an executive order in earlier March banning imports of Russian crude, gas, coal, and all energy products, it has now been codified into law and would be more difficult to change. The measure will now go to President Biden's desk for signing. The House passed the bill weeks ago.

Markets

- There is renewed talk of the possibility of Europe banning Russian oil. So far, that has not materialized; however, the EU has agreed to ban Russian coal, which will cost Russia an estimated $4.4 billion a year, while Europe will need only several months to replace Russian coal supplies. While this idea gained traction early in the week, by Thursday, oil settled lower, partly due to growing sentiment that Europe will not in fact be able to fully ban Russian energy imports. Also contributing to the lower settlement: Member countries (31 in total) of the International Energy Agency will release 60 million barrels of oil from their emergency reserves in an attempt to help bring down soaring oil prices, which are set to remain volatile. This release is in addition to the 62.7 million barrels IEA members had pledged to release in March.

- We could see Asia start to take less oil from Saudi Arabia and more on the spot market with Saudi's significant price hike. Saudi Arabia's price hike comes just before domestic air conditioning season when they will use more crude at home.

- Russia's war on Ukraine has led to an asset write-off of up to $5 billion for Shell, which pulled out of Russia after Putin's invasion but not before getting some bad publicity for scooping up a nicely discounted cargo of Russian oil. Shell's previous estimate for an asset value write-off was $3.4 billion. Now it is between $4 and $5 billion and the impact of the war becomes clearer for Western oil companies with assets in Russia.

Deals, Mergers & Acquisitions

- A $1-billion IPO is in the plans for Saudi Aramco's Luberef Refinery Unit. The plan, according to anonymous Bloomberg sources, is to sell a 30% stake owned by Jadwa Investment.

- Curacao's RdK is looking to finally select an operator for its refinery and storage terminals after PdVSA's lease expired in 2019. Proposals from three undisclosed parties have so far been submitted. Some suggest that PdVSA is among the bidders.

- Dangote's $19B, 650,000 bpd refinery in Nigeria is set to begin production in the fourth quarter after suffering years of delays and billions in cost overruns. The refinery could help Nigeria escape the high cost of substantial refined products imports due to the state of disrepair of Nigeria's existing refineries. Dangote's refinery was announced in 2013 with completion originally set for some time in 2016.

- Exxon has reached FID after receiving governmental approval for a $10 billion oil project-its fourth one-offshore Guyana. The Yellowtail project is expected to produce 250,000 bpd beginning in 2025. Between Exxon and its partner Hess, the duo has found about 10 billion barrels of recoverable oil in Guyana.

- Belgium's Euronav and Norway's Frontline are mulling a merger that would create the world's largest oil tanker fleet with over 140 vessels with a $4.2 billion market cap. Shipping magnate John Fredriksen owns stakes in both Euronav (10% through his Hemen Holding) and Frontline (40%). Both companies reported losses last year.

- Senior U.S. Under Secretary of State Victoria Nuland poured cold water on the EastMed pipeline, saying it was not economically viable and would take so long to complete that it wouldn't do anyone any good. The project was supposed to be complete in 2025 but has yet to secure financing. The pipeline had the previous U.S. administration's support.

- Italy has cut a deal to buy more gas from Libya to replace Russian gas, which accounts for some 40% of the gas piped into Italy. The first deals should be finalized within a matter of weeks. While it is not yet clear exactly how much more gas Italy will take from Libya, it currently only accounts for about 2.5% of Italy's daily demand.