Tuesday, December 1, 2020

Oil Trades at Highest Level Since March on Wider Market Confidence

President Trump stands, smiling, with Mount Rushmore behind him.

US President Donald Trump arrives for the Independence Day events at Mount Rushmore in South Dakota, July 3.
Saul Loeb/AFP/Getty Images

Oil is trading at its highest level since March as the commodity is swept up in wider market enthusiasm about the US presidential transition process getting underway and positive progress on the vaccine front.

Brent (BZ=F) was up as much as 1% on Tuesday, sitting at $46.47 (£34.26) a barrel at around 10:40am in London.

European markets rallied on Tuesday in the wake of US General Services Administration chief Emily Murphy writing a letter on Monday that confirmed President-elect Joe Biden could formally begin the hand-over process.

Market enthusiasm was also buoyed by the latest news on the vaccine front. AstraZeneca (AZN) said on Monday that its COVID-19 vaccine could be as much as 90% effective, be cheaper to make, easier to distribute and faster to scale-up than its rivals.

“The oil market has for a long time been shrouded with fog, with predictability extremely difficult with respect to both the timing and magnitude of an oil demand rebound,” said Bjarne Schieldrop, chief commodities analyst at SEB.

“This fog has now been lifted and blown away.”

Still, Schieldrop contends that a “Biden administration is bad news for oil” as he is expected to accelerate the green energy transition as well as the electrification of transportation, which will lower oil demand over the long-term.

While the Organization of the Petroleum Exporting Countries and its allies (OPEC+) are expected to extend current output cuts into next year, some members of the group are facing major obstacles. For instance, Iraq is seeking upfront payments of about $2bn for a long-term crude-supply contract, as the country continues to suffer an economic crisis due to low oil prices and wider OPEC+ cuts.

“Once financial markets know the oil market will tighten up, that inventories will decline and the oil market will move from a surplus situation to a tightening situation, then the forward crude oil price curve flattens almost overnight, well before the physical tightening actually begins,” said Schieldrop.


Monday, November 30, 2020

President Buhari Commissions Waltersmith Modular Refinery

President Muhammadu Buhari of Nigeria


President Muhammadu Buhari of Nigeria virtually commissioned the 5,000 barrel per day Waltersmith Modular Refinery in Ibigwe, Imo State, on November 24. The president stated the project was “in fulfillment of our Refinery Roadmap.” Work has now commenced to expand the capacity of the refinery to 50,000 barrels per day.

“We rolled out our administration’s Refinery Roadmap in 2018, with the ultimate goal of making Nigeria a net exporter of petroleum products. The Roadmap has four key elements, namely, Rehabilitation of existing refineries, Greenfield Refineries, Co-location & Modular Refining, Buhari stated on his Twitter feed.

“I am delighted that the Waltersmith Refinery is coming on-stream within two years of the commencement of the Roadmap, and after many years of granting licenses for the establishment of modular refineries with nothing to show for it,” he added.

Friday, November 27, 2020

Poten Tanker Opinion: Refining in the doldrums

 Oil and gas worker with PPE | Photo Credit: Courtesy of Helmerich & Payne, IDC

Photo Credit: Courtesy of Helmerich & Payne, IDC


Covid-19 accelerates changes in global refining landscape.

At the start of 2020, the focus of the global shipping and refining industry was on the implementation of IMO 2020. What would be the winning fuel and which refiners were best positioned to make it? Now, as we are approaching 2021, the conversation has changed dramatically, and so has the refining landscape.

The demand shock caused by Covid-19 has hit the industry hard and it has accelerated the rationalization of the global refining business. Overall, global capacity is still growing, albeit at a slower pace than was planned pre-pandemic. In some regions of the world (mainly in the developed countries) refinery capacity is being closed, but expansions are still being planned in developing countries in Asia and the Middle East.

The implications for the product tankers industry can be significant, depending on overall demand growth and regional product balances and refining economics.

Wednesday, November 25, 2020

Could OPEC's House of Cards Collapse?

Can he keep the OPEC+ accord together?

 Photographer: Karim Sahib/AFP via Getty Images


The UAE may not be serious about quitting the oil cartel, but its tantrum is a timely reminder of the group's deep fractures.

All is not well in the house of OPEC.

As the cartel’s oil ministers prepare to meet in just over a week to decide on the next step in their record-breaking output deal, officials in the United Arab Emirates, normally a loyal Saudi ally, are privately questioning the benefits of participating, and may even be considering whether to leave the Organization of Petroleum Exporting Counties.

The deliberations, leaked to the press on Wednesday, may be nothing more than an attempt to get the producer group to review the Persian Gulf country’s quota. If so, it seems unlikely to succeed. Worse, it risks throwing a wrench into the discussions over how producers should respond to the conflicting pressures from positive vaccine news and the negative impact of renewed coronavirus lockdown restrictions on travel and economic activity.

Questions about the UAE’s future in OPEC, even if they are only preliminary internal deliberations, come at an awkward time for the group and its OPEC+ allies. Tensions are emerging over what to do about output targets, which are set to be eased from the beginning of next year.

The answer seems obvious. Covid-19 vaccines are unlikely to affect oil demand any time soon and stockpiles remain high. Meanwhile, Libya, an OPEC member emerging from civil war, has added about 1 million barrels a day to supply in a matter of weeks. As a result, the OPEC+ alliance is expected to extend the current output cuts for another three to six months.

But there’s a spanner in the works: Not everyone is respecting their commitments. So the UAE, already chafing at the restrictions, says there shouldn’t be any decision until all members have fully implemented their agreed cuts.

OPEC+ Compliance

Russia has avoided criticism despite being the group's second biggest over-producer

Figures presented at last week’s meeting of the Joint Ministerial Monitoring Committee, which oversees the OPEC+ output deal, show that fewer than half of its signatories have done so.

While over-producers like Iraq, Nigeria and the UAE itself have come under intense pressure from OPEC’s de facto leader Saudi Arabia to compensate for past failings with deeper “compensation cuts,” one country has remained conspicuously absent from the roster of cheats: Russia. Despite being the OPEC+ group’s second-largest over-producer, the country has faced no public criticism whatsoever.

Long seen as the Saudis’ most reliable ally in OPEC, it’s easy to understand why the UAE chafes at this apparent favoritism towards Russia — regarded for decades as a competitor. Especially considering the very public humiliation inflicted in September on UAE Energy Minister Suhail Al-Mazrouei by his Saudi counterpart.

The UAE seems to feel aggrieved that it’s making deeper cuts than everyone else. Officials support that complaint by comparing the country’s output target with its production in April, the month the deal was hammered out.

Deepest Cut

When compared this way, the UAE has to make deeper cuts than anyone else

But that’s a cheap shot. April was when everybody opened the taps in a damaging free-for-all. None of the output targets was based on those levels. Plus, the UAE agreed to its baseline when it signed up to the deal, so it’s a bit rich to start quibbling about it seven months later.

Revisiting the UAE’s target would open up a can of worms. Iraq wants special treatment too, because of its costly fight against the so-called Islamic State. Nigeria wants some crude reclassified to remove it from its quota. Considering everyone’s grievances would set in motion a rapid unravelling of the entire OPEC+ deal.

It’s unlikely, but not impossible, that the UAE would decide to quit OPEC. Others have done so — some repeatedly — and the country doesn’t have the moral handcuff of being a founding member of the group. The political and economic stakes would be high though. In one stroke such a move would destroy the goodwill between the UAE and Saudi Arabia, which could prove costly.

After a day of public silence following the press reports, Mazrouei on Thursday said the UAE “has always been a committed member” of OPEC. The statement sounded very backward-looking and avoided any denial that it was reconsidering its membership.

Even if the issue blows over, it serves as a reminder of the fractures within the producer group ahead of a decision that will determine the course of oil prices in the coming months.

But if it doesn’t, other countries would certainly follow in ending production restraint. The impact of an extra 1.6 million barrels a day of UAE crude might not be catastrophic for oil prices, but add another 7 million barrels from the rest of the group and March’s price collapse to just below $20 a barrel would look positively benign.

Tuesday, November 24, 2020

America's Biggest Oil Storage Hub Is Filling to the Brim Again

 All eyes on Cushing, Oklahoma as oil prices skid on fears that storage will soon reach full capacity


Oil tanks in America’s most important crude storage hub are filling to the brim once again, quickly approaching the critical levels reached in May after prices crashed. Stockpiles at Cushing, Oklahoma, the delivery point for West Texas Intermediate futures, stood at 61.6 million barrels as of Nov. 13, or about 81% of capacity, according to the most recent U.S. government data. That’s 3.83 million barrels shy of the levels seen in May.

Though a repeat of the negative oil prices seen in April is unlikely, the mounting supply glut brings home how lockdown measures to contain the Covid-19 pandemic may soon force traders to store oil in every nook and cranny available, including ships and pipelines. Some are already doing that.

The reasons behind the buildup are similar to what happened before: Refineries are still coping with lackluster demand as coronavirus cases surge anew. On top of that, some of them have also been undergoing seasonal maintenance.

“Even as those facilities come back online, we are seeing excess inflows into Cushing overshadowing increased demand,” said Hillary Stevenson, a research director at Wood Mackenzie Ltd.

With states reimposing restrictions, demand for gasoline fell by half a million barrels a day last week, the biggest week-over-week decline since May, data from the Energy Information Administration show.

The structure of oil’s so-called futures curve has also motivated traders to store barrels. WTI has been in contango, when nearer-dated contracts are at a discount to later-dated ones. That means that, if the gap is wide enough, traders can make a profit by storing crude to sell it at a higher price later, when the glut eases.

Bets on an eventual vaccine have provided a buffer, though. And a lot has changed since the historic crash of April 20, when WTI collapsed to settle at minus $37.63 a barrel.

In the months following WTI’s plunge below zero, changes swept through the oil market in the hopes of avoiding a repeat. Many clearinghouses took it upon themselves to limit how much exchange-traded funds and passive oil funds can accumulate in the nearest contract. Models have also been adjusted to account for negative prices that, up until April, were unprecedented.

All the while, the supply and demand dynamics for oil have also improved in the U.S. Domestic oil output has meaningfully declined as the pandemic spurred bankruptcies and other financial hardships in America’s shale industry. On the other side of the equation, while demand remains well off pre-Covid levels, it has gradually improved from the depths of its slump.

Since then, some investors fled volatility. Oil producers from the Permian to the Bakken formations pared down output. Plus, the lockdowns are not as severe as in the immediate weeks following the pandemic outbreak.


China is Set to Eclipse America as World’s Biggest Oil Refiner

 Chinese President Xi Jinping pictured in 2018


Earlier this month, Royal Dutch Shell Plc pulled the plug on its Convent refinery in Louisiana. Unlike many oil refineries shut in recent years, Convent was far from obsolete: it’s fairly big by U.S. standards and sophisticated enough to turn a wide range of crude oils into high-value fuels. Yet Shell, the world’s third-biggest oil major, wanted to radically reduce refining capacity and couldn’t find a buyer.

As Convent’s 700 workers found out they were out of a job, their counterparts on the other side of Pacific were firing up a new unit at Rongsheng Petrochemical’s giant Zhejiang complex in northeast China. It’s just one of at least four projects underway in the country, totaling 1.2 million barrels a day of crude-processing capacity, equivalent to the U.K.’s entire fleet.The Covid crisis has hastened a seismic shift in the global refining industry as demand for plastics and fuels grows in China and the rest of Asia, where economies are quickly rebounding from the pandemic. In contrast, refineries in the U.S and Europe are grappling with a deeper economic crisis while the transition away from fossil fuels dims the long-term outlook for oil demand.

America has been top of the refining pack since the start of the oil age in the mid-nineteenth century, but China will dethrone the U.S. as early as next year, according to the International Energy Agency. In 1967, the year Convent opened, the U.S. had 35 times the refining capacity of China.

The rise of China’s refining industry, combined with several large new plants in India and the Middle East, is reverberating through the global energy system. Oil exporters are selling more crude to Asia and less to long-standing customers in North America and Europe. And as they add capacity, China’s refiners are becoming a growing force in international markets for gasoline, diesel and other fuels. That’s even putting pressure on older plants in other parts of Asia: Shell also announced this month that they will halve capacity at their Singapore refinery.

here are parallels with China’s growing dominance of the global steel industry in the early part of this century, when China built a clutch of massive, modern mills. Designed to meet burgeoning domestic demand, they also made China a force in the export market, squeezing higher-cost producers in Europe, North America and other parts of Asia and forcing the closure of older, inefficient plants.

“China is going to put another million barrels a day or more on the table in the next few years,” Steve Sawyer, director of refining at industry consultant Facts Global Energy, or FGE, said in an interview. “China will overtake the U.S. probably in the next year or two.”

Asia Rising

But while capacity will rise is China, India and the Middle East, oil demand may take years to fully recover from the damage inflicted by the coronavirus. That will push a few million barrels a day more of refining capacity out of business, on top of a record 1.7 million barrels a day of processing capacity already mothballed this year. More than half of these closures have been in the U.S., according to the IEA.

About two thirds of European refiners aren’t making enough money in fuel production to cover their costs, said Hedi Grati, head of Europe-CIS refining research at IHS Markit. Europe still needs to reduce its daily processing capacity by a further 1.7 million barrels in five years.“There is more to come,” Sawyer said, anticipating the closure of another 2 million barrels a day of refining capacity through next year.

Chinese refining capacity has nearly tripled since the turn of the millennium as it tried to keep pace with the rapid growth of diesel and gasoline consumption. The country’s crude processing capacity is expected to climb to 1 billion tons a year, or 20 million barrels per day, by 2025 from 17.5 million barrels at the end of this year, according to China National Petroleum Corp.’s Economics & Technology Research Institute.

India is also boosting its processing capability by more than half to 8 million barrels a day by 2025, including a new 1.2 million barrels per day mega project. Middle Eastern producers are adding to the spree, building new units with at least two projects totaling more than a million barrels a day that are set to start operations next year.

Plastic Driven

One of the key drivers of new projects is growing demand for the petrochemicals used to make plastics. More than half of the refining capacity that comes on stream from 2019 to 2027 will be added in Asia and 70% to 80% of this will be plastics-focused, according to industry consultant Wood Mackenzie.

The popularity of integrated refineries in Asia is being driven by the region’s relatively fast economic growth rates and the fact that it’s still a net importer of feedstocks like naphtha, ethylene and propylene as well as liquefied petroleum gas, used to make various types of plastic. The U.S. is a major supplier of naphtha and LPG to Asia.

These new massive and integrated plants make life tougher for their smaller rivals, who lack their scale, flexibility to switch between fuels and ability to process dirtier, cheaper crudes.

The refineries being closed tend to be relatively small, not very sophisticated and typically built in the 1960s, according to Alan Gelder, vice president of refining and oil markets at Wood Mackenzie. He sees excess capacity of around 3 million barrels a day. “For them to survive, they will need to export more products as their regional demand falls, but unfortunately they’re not very competitive, which means they’re likely to close.”

Demand Trap

Global oil consumption is on track to slump by an unprecedented 8.8 million barrels a day this year, averaging 91.3 million a day, according to the IEA, which expects less than two-thirds of this lost demand to recover next year.

Some refineries were set to shutter even before the pandemic hit, as a global crude distillation capacity of about 102 million barrels a day far outweighed the 84 million barrels of refined products demand in 2019, according to the IEA. The demand destruction due to Covid-19 pushed several refineries over the brink.

“What was expected to be a long, slow adjustment has become an abrupt shock,” said Rob Smith, director at IHS Markit.

Adding to the pain of refiners in the U.S. are regulations pushing for biofuels. That encouraged some refiners to repurpose their plants for producing biofuels.

Even China may be getting ahead of itself. Capacity additions are outpacing its demand growth. An oil products oversupply in the country may reach 1.4 million barrels a day in 2025, according to CNPC. Even as new refineries are built, China’s demand growth may peak by 2025 and then slow as the country begins its long transition toward carbon neutrality.

“In an environment where the world has already got enough refining capacity, if you build more in one part of the world, you need to shut something down in another part of the world to maintain the balance,” FGE’s Sawyer said. “That’s the sort of environment that we are currently in and are likely to be in for the next 4-5 years at least.”