Friday, January 17, 2020

China's U.S. crude buying binge to set off global sweet oil shake-up

File photo of a worker walking past a pump jack on an oil field owned by Bashneft, Bashkortostan

By Shu Zhang and Florence Tan

SINGAPORE (Reuters) - Sharply higher Chinese purchases of U.S. energy products as part of the China-U.S. trade deal will shake up global crude oil trade flows if American supplies squeeze rival crudes out of the top oil import market, trade sources said.

China's pledge to buy at least $52.4 billion worth of U.S. energy products over the next two years can only be met through substantial increases in crude imports from the United States, the top global oil producer, according to traders and analysts.

But to make way for any surge in American shipments Chinese importers are expected to dial back orders of similar or pricier grades from places such as Brazil, Norway and West Africa - potentially triggering a shake-up of the light sweet crude oil market that could span the globe.

"U.S. crude is always a good choice to diversify supplies and press down West African crude prices," said a source with a Chinese state-owned oil company, while adding that freight rates were now very high.

Traders said some African crude grades had characteristics similar to U.S. oil that made them replaceable in refiner mixes.

Most African grades also trade mainly on the spot market, making it easier for importers to switch them out than supplies tied to long-term contracts.

U.S. crude has not been offered to Chinese independent refiners yet, but the value of West Texas Intermediate (WTI) Midland delivered to China was estimated to be 50 cents to $1 a barrel cheaper than Brazil's Lula crude and some West African crudes, making it attractive, several trade sources told Reuters.

China's return as a major U.S. oil buyer could help soak up excess supplies as production in the United States is expected to hit records in the next two years, although a recent surge in freight rates for U.S. oil shipments to Asia has slowed exports.

Big Chinese orders of U.S. oil could put some pressure on other Asian buyers, such as India, South Korea and Taiwan, which all boosted U.S. oil imports in 2019 while China was sidelined, the sources said.

"If China has to fulfill buying huge volumes of U.S. crude, the arbitrage can be closed for most other people because freight could be really high," said a Singapore-based oil trader.

Goldman Sachs analysts estimated in a Jan. 10 report that China may increase its crude imports to 500,000 barrels per day in 2020 and 800,000 bpd in 2021.

China's U.S. crude imports dropped 43% to 138,790 barrels per day (bpd) in the first 11 months of 2019 from a peak of 245,600 bpd in 2018 after Beijing imposed a 5% import tariff on U.S. oil amid as trade tension rose between the world's biggest economies.

"The energy part of the deal is likely to be an easy win," said Lachlan Shaw, head of commodity research at the National Australia Bank, adding that China's crude demand will increase as new refining capacities are added in the next two years.

(Reporting by Florence Tan and Zhang Shu in Singapore; Additional reporting by Xu Muyu in Beijing; Editing by Clarence Fernandez)

Thursday, January 16, 2020

Gibson tanker report "talk about closing Strait of Hormuz"

Strait of Hormuz

One of the most talked about scenarios remains the possibility that the Strait of Hormuz could be closed, says broker Gibsons in its weekly tanker market report

"Any closure no matter how temporary would impact approximately 17.2million b/d of crude oil and 2.4million b/d of refined product flows," Gibsons says.

"If this was to materialise, the impact on the oil price would be extreme, with major economic ramifications. 

Gibsons weekly tanker Report

Wednesday, January 15, 2020

U.S. Gas Giant Downgraded To Junk Status

Operational Footprint Section Photo
EQT Operational Footprint

The largest natural gas driller in the United States just announced a massive write-down for its assets, offering more evidence that the shale sector faces fundamental problems with profitability. 

In a regulatory filing on Monday, Pittsburgh-based EQT took a $1.8 billion impairment for the fourth quarter, as the natural gas market continues to sour. EQT said that the write down comes as a result of the “changes to our development strategy and renewed focus on a refined core operating footprint,” which is a jargon-y way of saying that some of its assets are now worth much less.
EQT also slashed spending for 2020 to between $1.25 and $1.35 billion, down by another $50 million compared to the guidance the company provided in the third quarter of last year.
Although not a household name, EQT is the largest gas producer in the country, and is a giant in the Marcellus shale. EQT purchased Rice Energy in 2017, growing into a huge gas producer and pipeline company, but it has posted disappointing results in the last few years. The poor performance led to an internal battle for control of the company. Toby Rice, who co-founded Rice Energy and maintained small ownership stakes in EQT after the tie up, wrestled control from management, convincing the company’s board that he could right the ship. He became CEO last year.

So far, the company’s problems continue. Natural gas prices slid sharply in 2019, and are at rock-bottom levels, particularly for the time of year. According to the FT, while Henry Hub natural gas prices for February delivery trade at $2.24/MMBtu, they are only trading at around $1.83/MMBtu at the Dominion South hub in Pennsylvania. Related: Canada Faces A New Oil Price ‘’Blowout’’

EQT itself admits that it can’t succeed in this environment. “Gas prices are down. It has a big impact, the difference between $2.75 gas and $2.50 gas,” Toby Rice said in December “A lot of this development doesn’t work as well at $2.50 gas.”

EQT hopes to cut $1.5 billion in debt by selling assets and boosting cash flow. However, the cash flow part will be hard to pull off with prices stuck in the doldrums.

Moody’s cut EQT’s credit rating on Monday to Ba1 with a negative outlook, moving it into junk territory after the gas giant said it would issue new bonds to refinance debt. “EQT's significantly weakening cash flow metrics in light of the persistent weak natural gas price environment and the company's intent to refinance its 2020 maturities in lieu of debt reduction through repayment drives the ratings downgrade,” Moody’s senior analyst Sreedhar Kona said.

The agency also noted the “volatility associated with the cash flow of pure-play natural gas producers necessitate a higher retained cash flow to debt ratio threshold than EQT can deliver over the medium term even with significant debt reduction.”

“Additionally, EQT's cash flow metrics compare poorly to other Baa3 rated oil producing companies, despite EQT's size and scale,” Moody’s concluded. Related: This Was The Most Successful Energy Niche Last Year

EQT’s share price is down by more than half since last spring, and it is also down by more than 75 percent since 2017.

These problems are obviously much larger than EQT. Range Resources recently slashed its dividend in order to pay off debt, while also taking out another $550 million in new debt in order to pay off maturing debt this year. Meanwhile, Chesapeake Energy, the second largest gas producer, is now trading at pennies on the dollar and faces the prospect of being delisted from the New York Stock Exchange.

EQT’s predicament reflects the broader financial questions that have long plagued the shale industry. Fracking can produce lots of oil and gas, but steep decline rates make profits elusive. If the largest gas producer in the country is struggling, and has a credit rating in junk territory, then something is wrong with the business model.

The problems endemic to the shale gas industry are starting to affect production. The decade-long boom in gas production from Appalachia may have finally come to a halt.

By Nick Cunningham of

Kinder Morgan sells Pembina Pipeline interest for $764 million

Click on Image to See Larger View
Kinder Morgan Asset Map

North American energy infrastructure provider Kinder Morgan has sold all of its approximately 25 million shares in Pembina Pipeline Corporation.

The stock was initially received in connection with Pembina’s acquisition of the outstanding common equity of Kinder Morgan Canada. The sale of the shares is consistent with the company’s intention to convert shares into cash in an ‘opportunistic and non-disruptive manner’.

The shares were sold for after-tax proceeds of $764 million (€687.1 million), consistent with Kinder Morgan’s 2020 budget.

The company previously announced that it intends to use the proceeds to pay down debt, creating balance sheet flexibility in 2020.

Tuesday, January 14, 2020

The World’s Most Precious Metal Leaves Everything Else in the Dust

Periodic table symbol for Rhodium

  • Rhodium extends multiyear surge, jumping 31% so far this month
  • Stricter emissions rules have boosted demand from auto sector
Palladium’s great start to the year pales in comparison to its lesser known, but much more expensive sister metal, rhodium.

Rhodium -- mainly used in autocatalysts and five times more costly than gold -- surged 31% already this month, touching the highest since 2008. Stricter emissions rules have fueled a multiyear rally and there’s speculation that investors are also jumping in, betting that prices will climb toward a record.

Rhodium rallied 12-fold in the past four years, far outperforming all major commodities, on rising demand from the auto sector. Like palladium, the metal is mined as a byproduct of platinum and nickel, but it is a much smaller market and so is liable to big price moves when supply or demand changes.

“Rhodium is subject to crazy volatility,” said Anton Berlin, head of analysis and market development at Russia’s MMC Norilsk Nickel PJSC, which mines about 10% of all rhodium. Supplies are tight and speculators stepped up buying metal after large industrial users secured volumes late last year, he said.

Price Surge

Rhodium was at $7,925 an ounce by Monday, according to Johnson Matthey Plc. This month’s gain also came after investors turned to precious metals, seeking a haven from Middle East tensions and pushing palladium up about 9%.

“The main driver by the beginning of January was physical demand from Asia, which might be also automotive related,” said Andreas Daniel, a trader at refiner Heraeus Holding GmbH. “Buying triggered more buying and in an unregulated market the effect was massive, with a price move which is only seen maybe every 10 years.”

Demand cooled late last week, according to Daniel. Prices hit $8,200 on Wednesday, before retreating a bit in the following days.

Although pullbacks are possible this year, rhodium could top the record $10,100 set in 2008, according to Afshin Nabavi, head of trading at refiner MKS PAMP Group in Switzerland. Still, those lofty prices a decade ago prompted autocatalyst makers to switch to platinum and palladium, which are also used for cleaning emissions.

It’s much harder to invest in rhodium than in other precious metals. It isn’t traded on exchanges, the market for bars or coins is tiny compared with gold or silver and most deals are between suppliers and industrial users. Global production is equal to little more than a 10th of platinum or palladium output.

Higher rhodium prices are good news for South African producers, which account for more than 80% of global output. Gains in platinum-group metals and a weak rand helped a stock index for the nation’s miners to triple in the past year, reaching the highest since 2011.

But South Africa’s dominance also means production risks hang over the market. Power shortages last year temporarily interrupted some mining operations and there have been long mine strikes in previous years by workers wanting higher pay.

(Updates prices in fifth paragraph)

Monday, January 13, 2020

PDVSA's partners act as traders of Venezuelan oil amid sanctions - documents

PDVSA is the single largest source of income for the Venezuelan government, and oil sales accounting for well over 90 percent of the country’s export revenue. (AVN)

CARACAS/PUNTO FIJO, Venezuela (Reuters) - Venezuela, its oil exports decimated by U.S. sanctions, is testing a new method of getting its crude to market: allocating cargoes to joint-venture partners including Chevron Corp (CVX.N), which in turn market the oil to customers in Asia and Africa.

This would not violate sanctions as long as sale proceeds are used for paying off a venture’s debts, according to three sources from joint ventures. They said this approach could help Venezuela overcome obstacles to producing and exporting oil. 

Venezuela’s oil exports fell 32% last year as the U.S. government blocked imports by American companies and transactions made in U.S. dollars. PDVSA was forced to use intermediaries for crude sales as Washington pressured Venezuela’s Indian and Chinese customers to halt direct purchases. 

The sanctions were designed to oust Venezuelan President Nicolas Maduro after most Western nations branded his 2018 re-election a sham. 

By acting as an intermediary for PDVSA’s oil sales, Russia’s Rosneft (ROSN.MM) in 2019 became the largest receiver of Venezuelan crude, using the sales to amortize billions of dollars in loans granted to Venezuela in the last decade. 

Washington has mostly allowed mechanisms to pay off debt with oil or to swap Venezuelan crude for imported fuel, but Venezuela’s opposition is lobbying the U.S. administration to punish intermediaries. 

PDVSA, the U.S. Treasury Department and the State Department did not answer Reuters’ requests for comment. 

The latest tests of the policy come this month. A 1 million-barrel cargo of Venezuelan upgraded crude consigned to Chevron is scheduled to load at PDVSA’s Jose port, according to internal documents from the state-run firm seen by Reuters. 

Chevron has a stake in the Petropiar joint venture with PDVSA to upgrade oil in the OPEC nation’s Orinoco belt, one of the world’s largest oil reserves. Chevron’s license to operate in Venezuela despite sanctions expires on Jan. 22 unless the U.S. Treasury renews it. 

“Proceeds from these marketing activities are paid to our joint venture accounts to cover the cost of maintenance operations, in full compliance with all applicable laws and regulations,” said Chevron spokesperson Ray Fohr. 

In the past, Chevron itself used to refine Venezuelan crude at its U.S facilities, often bought from PDVSA’s joint ventures. 

Another cargo of 670,000 barrels of Tia Juana and Boscan crudes, chartered by Venezuelan oil firm Suelopetrol, set sail at the beginning of January, the documents showed. 

Suelopetrol, a minority stakeholder in joint ventures with PDVSA, said it was recently allocated a Venezuelan crude cargo under contracts signed prior to U.S. sanctions with PDVSA and joint venture Petrocabimas to support investment and development of oilfields. 

“Those contracts include the designation of Suelopetrol as offtaker of crude produced for compensating accounts receivable, due since 2015, for capital contributions, technical assistance, provision of services and accumulated dividends,” it said in response to questions from Reuters. 

By Venezuelan law, state-run PDVSA is required to market all Venezuela’s crude exports, except for upgraded oil, whose output was suspended in 2019 due to accumulation of stocks. Only Petropiar, one of four upgrading projects in the Orinoco, has recently resumed operations. 

To avoid violating Venezuelan law, the joint ventures that are not allowed to market their output for exports first sell the oil to PDVSA, which then allocates the cargoes to its joint venture partners, according to two of sources and documents. 

The private partners take possession of the cargoes at Venezuelan ports and transport them in chartered vessels to refineries around the world, according to the documents and tanker tracking data from Refinitiv Eikon. 

Proceeds from these sales to ultimate buyers are being transferred to the joint venture’s trustees to fund operational expenses as well as paying debt and dividends owed to partners. 

“It is a matter of life or death for joint ventures to achieve this so operations can restart,” said a top executive from one of the joint ventures that accepted the mechanism. 

According to the PDVSA documents and sources, Chevron took two cargoes of Venezuelan Boscan and Merey crudes in the last quarter of 2019, before lifting a cargo of Hamaca crude in January. Suelopetrol’s cargo, on tanker Ace, set sail on Jan. 5.


Several of PDVSA’s more than 40 oil producing joint ventures owe hundreds of millions of dollars to minority partners as PDVSA demanded from 2013 to 2017 they extend funding to the projects. 

Minority stakeholders put the money through credit lines and loans backed by supply contracts so sale proceeds would go to trustees for paying the projects’ costs while amortizing the loans. 

But U.S. sanctions deprived PDVSA and some joint ventures of the supply contracts used to guarantee the loans, leaving the projects without sources of cash and freezing the credit lines. 

The new mechanism is intended to unfreeze cash flow to continue production, the sources said. It could also make it easier to trade Venezuelan oil by using joint-venture partners as buyers or traders while sanctions are in place. 

Very high freight tariffs for transporting Venezuelan oil, the difficulty in finding willing buyers, and problems at oilfields and shipping terminals remain obstacles to implementing the mechanism, the sources added. 

Lawyers consulted by some PDVSA partners interested in lifting Venezuelan crude told them the sales are allowed under sanctions as long as proceeds paying off debts remain out of Maduro’s reach, which is the main intention of the measures, one of the sources said. 

Reporting by Marianna Parraga in Mexico City, Mircely Guanipa in Punto Fijo, Venezuela, and Deisy Buitrago and Luc Cohen in Caracas. Additional reporting by Timothy Gardner in Washington; Editing by Daniel Flynn, Gary McWilliams and David Gregorio

Friday, January 10, 2020

Venezuelan oil exports fell by a third in 2019 as U.S. sanctions bit: data

(Reuters) - Venezuela’s oil exports plummeted 32% last year to 1.001 million barrels per day, according to Refinitiv Eikon data and state-run PDVSA’s reports, as a lack of staff and capital drove output to its lowest level in almost 75 years and U.S. sanctions shrank exports markets.

The drop would have been steeper if some of PDVSA’s largest customers had not bought Venezuelan oil through intermediaries or trans-shipped cargoes off several ports around the world so the country of origin was blurred, according to industry sources, vessel trackers and Eikon data. 

In terms of customers, Russia’s Rosneft was the largest receiver and intermediary of Venezuelan oil with 33.5% of total exports, followed by state-run China National Petroleum Corp (CNPC) and its units with 11%, and Cuba’s state-run Cubametales with 7%, the data showed.

PDVSA did not reply to a request for comment. 

China emerged as the first destination for Venezuelan oil in 2019 as sanctions deprived PDVSA of its primary market, the United States. That was despite CNPC and its units halting the loading of crude at Venezuelan ports in the second half. 

Venezuela sent an average of 319,507 bpd to China in cargoes covering direct routes as well as in vessels chartered by intermediaries that ended up reaching Chinese refiners after trans-shipping the oil off countries like Malaysia, the Eikon vessel tracking data showed. 

U.S. sanctions on Venezuelan and Iranian oil, which along with lower output affected global supply of heavy crude, contributed to driving oil prices up more than 20% last year. But prices are expected to remain rangebound this year as U.S. supplies have swelled. 

OPEC-member Venezuela produced 1.01 million bpd of crude from January through November, according to official numbers. The collapse in output under President Nicolas Maduro has dragged what was once Latin America’s wealthiest nation into an economic tailspin. 

Analysts monitoring Venezuela forecast a further decline in crude production this year due to the combination of sanctions and lack of investment and staff. Market intelligence firm Kpler expects Venezuela’s production to average 600,000-800,000 bpd in 2020, said its global energy economist, Reid I’Anson. 

Analysts said it was hard to predict how sharply exports would fall this year. 

“Washington wants more sanctions but PDVSA’s customers are looking for formulas to continue buying,” said Francisco Monaldi, of Rice University’s Baker Institute, who forecasts output will fall this year at least at the same rate as the years preceding sanctions. 

“The main questions are how much the United States will enforce sanctions on Venezuela? Is Washington ready to act against PDVSA’s partners and customers?,” Monaldi added.


A frozen trade relationship with the United States allowed Asia in 2019 to strengthen its position as the main destination for PDVSA’s oil with China, India, Malaysia, Japan and Singapore receiving cargoes, sometimes only for blending and transferring. 

Venezuela’s oil shipments to Asia averaged 647,000 bpd, or 65% of total exports in 2019. 

India was the second-largest receiver of Venezuela oil last year with 217,739 bpd. Refining firm Reliance Industries suspended direct purchases from PDVSA in the second quarter, but resumed them later in 2019 after reaching a new swap deal allowing PDVSA to receive fuel cargoes in exchange. 

Europe was the third-largest destination for Venezuelan oil, also through swaps allowed under U.S. sanctions. European refiners, mainly Spain’s Repsol, received an average of 118,980 bpd last year, according to the data. 

Cuba was fourth with 70,359 bpd, a number below the average of recent years, but high considering that other Caribbean nations stopped receiving Venezuelan oil even before sanctions hit, due to PDVSA’s declining output. 

Former PDVSA executives and union leaders attribute the slump in oil production to a lack of capital and a recent exodus of about 30,000 workers, around a quarter of total staff reported in 2016, the last year the firm published its annual report. 

PDVSA and its joint ventures also struggled to export oil that had accumulated in storage tanks amid a shrinking portfolio of customers due to the sanctions announced by Washington a year ago to oust Maduro. 

The mounting stocks forced the firm to cut output while converting oil upgraders into blending stations designed for producing the crude grades demanded by Asian clients. 

Venezuela, which has the world’s largest crude reserves, imported an average of 155,674 bpd of fuel and diluent naphtha in 2019, in line with recent years but too little to cover the gap left by PDVSA’s very low domestic refining, resulting in intermittent shortages of motor fuel during the year. 

Reporting by Marianna Parraga in Mexico City, with additional reporting my Mircely Guanipa in Punto Fijo, Venezuela; Editing by Daniel Flynn, David Gregorio and Dan Grebler