Friday, November 30, 2018

ENERGY: Oil report for November 30, 2018

Saudi Arabia Squeezed As OPEC Meeting Nears


By OILPRICE.COM

Oil prices fell in trading on Friday morning, with a falling rig count unable to halt bearish sentiment.















Friday, November 30, 2018

Oil prices dipped in early trading, but the next few days will be volatile. First, any news from the G20 summit on the Trump-Xi meeting regarding the trade war could have ramifications for the global economy and oil demand heading into 2019. But much of next week will be characterized by whatever jawboning or rumors come out of upcoming OPEC meeting. For now, oil is downbeat but awaiting direction.

U.S. Senate vote hamstrings Saudi Arabia. Saudi Arabia is aiming to cut oil production in order to boost prices, but the recent vote by the U.S. Senate to end the war in Yemen, even if it doesn’t become law, heightens the pressure on Riyadh to assuage American concerns. That gives President Trump more leverage as he demands lower oil prices from Saudi officials. Riyadh faces a choice between accepting painfully low oil prices or defying Washington by cutting production. Reports suggest they are going to try to thread the needle, opting for modest cuts that at least put a floor beneath crude prices. “President Trump has effectively put a ceiling on oil prices -- arguably this ceiling is about $70 a barrel Brent, maximum $75,” Thibaut Remoundos, founder of Commodities Trading Corporation Ltd., told Bloomberg. “It will be interesting to see if Saudi-Russia can keep the floor in place.”

Saudi Arabia struggling to convince others to cut. Many members of the OPEC+ coalition want Saudi Arabia to do all of the heavy lifting when it comes to production cuts. After all, they argue, Saudi Arabia was the one that added 1 million barrels per day of fresh supply since May. The Saudis “made this mess. They need to clean it up,” a Middle Eastern oil official told the Wall Street Journal. On Wednesday, Saudi oil minister Khalid al-Falih indicated that Saudi Arabia would not cut alone.

Trump administration to advance seismic drilling in Atlantic. The Trump administration is taking an early but critical step that could pave the way to oil exploration in the Atlantic Ocean. According toBloomberg, the National Marine Fisheries Service could allow seismic surveying by five companies in the Atlantic, a precursor to exploration. Seismic testing is essential to exploration, but is highly controversial because of its effect on marine animals such as whales and dolphins.

Russia shows signs of support for OPEC+ cuts. Russia indicatedthat it could support an OPEC+ production cut next week in Vienna. Russia’s deputy foreign minister said that Russia wants more predictability and “smooth price dynamics.” However, Russia, and its oil firms, are not scared of lower prices. “Russian crude producers will feel comfortable in the $50 to $60 per barrel band,”said Dmitry Marinchenko, oil and gas director at Fitch Ratings.

Canadian oil discounts leading to layoffs. Oil prices for Western Canada Select (WCS) are trading below $15 per barrel, inflicting pain on the entire sector. Oilfield services companies in Alberta are issuing layoffs as activity slows down. Investment broker Peters & Co. said in a note that drilling activity has fallen by 10 per cent in recent weeks and could “weaken further over the course of December, a function of budget exhaustion and the curtailment of capital spending.”

Permian natural gas prices fall below zero. Natural gas prices at the Waha hub in the Permian fell into negative territory this week amid a worsening glut. A lack of pipelines to ferry away natural gas has some producers essentially paying other companies to take the product.

Shale industry could cut spending. The U.S. shale industry could cut budgets for the first time since the last downturn years ago. Shale companies are formulating their 2019 budgets right now, and the latest crash in prices could force a more cautious approach. “Something has to give,” Andy McConn, an analyst at Wood Mackenzie, told Bloomberg. “We expected some minor increases in budgets going into next year but now we see risk to the downside, with budgets flat or down year on year.”

China buying oil while it’s cheap. Bloomberg reports that China may be stepping up its purchases of oil as prices hit one-year lows, although data is spotty.

EPA to send ethanol blending requirements. The Trump administration’s EPA is set to announce ethanol blending requirements for 2019, which will include an increase in advanced biofuels by 15 percent while conventional corn ethanol levels will be kept flat. The implication is that the EPA has decided not boost the corn ethanol requirement to compensate for the rush of waivers it granted to oil refiners over the past two years, which ethanol producers have blamed for sinking the market for ethanol credits.

Iran’s nuclear chief warns that time is running out on nuclear deal.Iran’s top nuclear official warned the European Union that it could exit the 2015 nuclear deal if it does not begin to see some of the benefits from European efforts to rescue the accord. “If we cannot sell our oil and we don’t enjoy financial transactions, then I don’t think keeping the deal will benefit us anymore,” Ali Akbar Salehi, head of the Atomic Energy Organisation of Iran, told Reuters. “I think the period of patience for our people is getting more limited and limited. We are running out of the assumed timeline, which was in terms of months.” Meanwhile, the U.S. State Department saidthat Iran’s oil exports would fall further “very soon.”

Refining margins sink to five-year lows. Flat U.S. gasoline demand and high refinery output have combined to push refining margins down to five-year lows, according to the EIA.

Pemex triples estimated reserves for oil field. Pemex more than tripled the estimate reserve figure for its Ixachi field, saying the field in Veracruz could now hold 1.3 billion barrels of oil equivalent in proven, probable and possible (3P) reserves. “Without doubt this news will allow Pemex to contribute with more production in the future and stabilize the production platform,” outgoing Pemex CEO Carlos Trevino said.

LNG from Africa set to surge. New LNG capacity from Mauritania and Senegal in West Africa, operated by Kosmos Energy (NYSE: KOS), is set to come online in December. Other projects will come online in Cameroon, as well as Mozambique in East Africa, in the coming years. Many projects are using floating LNG, cutting costs and lead times relative to conventional onshore fixed facilities. “Africa is the hot spot for floating LNG,’’ said Lucas Schmitt, a senior gas analyst at consultants Wood Mackenzie Ltd., according to Bloomberg. “Confidence in floating facilities is firming up.’’

Volkswagen plans EV plant in U.S. Volkswagen is considering a plant in North America to manufacture electric vehicles. “We are 100 percent deep in the process of ‘We will need an electric car plant in North America,’ and we’re holding those conversations now,” Scott Keogh, the newly appointed CEO of Volkswagen Group of America, told journalists at the Los Angeles auto show. Earlier this month, VW said it would spend $50 billion by 2023 to remake itself, with a focus on EVs.

Unexpected Anomalies In Oil Markets
Some trends are just impossible to predict because before they take place, the mere idea of them materializing seems like outlandish. Yet, sometimes the market takes everyone by surprise – the latest such instance which remains to be felt across global crude markets, is the weakness of gasoline margins and remarkable resilience of fuel oil margins. For all of November, gasoline at the Singapore trading hub traded at a discount to fuel oil, even though for much of the year the relation was converse – gasoline was at least 10-15 USD per ton more expensive. There are many factors at play, yet the palpable saturation of the market with light crudes and relative dearth of heavy ones following the second round of U.S. sanctions on Iran takes precedence over the others.

But it is not just the spectacular 1.5 mpbd year-on-year increase in American crude output that has brought this about. As we have established in our previous reports, Libya’s output has stabilized above 1mbpd and the Libyan NOC is working hard to boost production further. Nigeria, too, is reaping the rewards of several relatively calm months, with production reaching 2.16mbpd, a 300kbpd increase compared to May-June 2018 levels. Leading producers of heavy crudes, however, have been suffering – Iran is under U.S. sanctions, whilst Venezuela tries to deal with a damaged pier, blackout-induced fires and property forfeiture at the same time. The narrow light-heavy margins will persist for some time as the demand for middle distillates (read: Diesel) is globally on the increase.

Expensive diesel fuel will contribute to many nascent trends – it would help Europeans turn in even greater numbers towards gasoline-fueled cars (diesel still accounts for roughly 55 percent of all the fleet), it would change the way air carriers use their fleet, shipping companies distribute their cargoes and many more. Of course, it is necessary to add in these situations that this would not last forever and that at some point behavioral changes and unforeseeable external developments would change the current setup. However, if we are to concentrate on the now, we can clearly highlight a bevy of countries or producers that are thoroughly enjoying the current depressive state of gasoline margins.

Robust fuel oil margins have helped Urals (30-31 API, 1.6-1.7 percent sulphur) do the unthinkable – for more than a week Urals is traded in both the Baltic and Mediterranean regions with a premium to Dated Brent, the European benchmark which is superior to it in terms of quality. The 40 cent per barrel premium evidenced in the Baltics trading window early this week is a feat unseen since 2013. Were it not for (the usual) protests in France – the Gilets Jaunes (“yellow shirts”) movement has been causing some spectacular chaos all over the country, compelled by President Macron’s decision to levy a diesel tax in times when diesel prices are anyway rising – the Urals premium to Brent could have stayed at that level for longer, however, shutdowns in French refineries somewhat curbed demand for the Russian grade, pushing its premium over Brent to 10-15 cents per barrel.



Source: OilPrice data.

Moreover, the valuation of Urals came on the back of much more robust supply – during the last two weeks of October 31Mbbl of Urals was loaded from Primorsk, Ust-Luga and Novorossiysk (roughly 2.2mbpd instead of the yearly average of 1.85mbpd). The reason why higher volumes did not translate into price weakening lies in Asian, largely Chinese, demand for the grade – October loadings destined for China rose to some 350kbpd, more or less evenly spread out between the Baltic and Black Sea loading ports. As Singapore fuel oil refining margins just reached their highest level in the 2010s (the European ones peaked a couple of weeks ago) and with only limited volumes of Venezuelan crude around, Urals was the answer to the Chinese conundrum. Urals reached 10 Chinese ports this year, with the most of it delivered to Qingdao (6 million barrels so far with at least one 270kt VLCC arriving in December).

Yet the spread of Urals touched other regions, too - as we speak now, two 750kbbl cargoes are heading towards North America – one is destined to reach Philadelphia, Pennsylvania in 10-12 days, the other should offload at the KNOC-owned Canadian Come by Chance refinery on the island of Labrador in 6-7 days. Interestingly, last year Europe accounted for 91 percent of all Urals supplies, now it slipped a bit to 89 percent, partially because the second half of 2018 finally saw some movements of Urals to North America (in all six months of H1 2018, there was only one cargo destined for North America, in H2 there are already seven). If there are winners, however, there must be also those who lose out on the current trend.

Naphtha-rich grades have struggled recently, especially so since mid-November when front-month CIF NWE naphtha crack swap assessments broke four-year lows on the back of refinery maintenance and weak gasoline margins. For instance, the Algerian Saharan Blend traded this week with a 70 cent per barrel discount to Dated Brent (the December OSP stipulates a 55 cent per barrel discount even though November official prices were set at a 30 cent per barrel premium to it), a more than a dollar’s decrease when compared to trading late September – early October. Thus, in retrospective one can say that under current circumstances it is not enough to have a sweet grade – the sweet crude also has to be rich in mid-distillates.

The Libyan Es Sider represents the other side of the shield – refiners were offering a 50 cent per barrel premium to the official November OSP price just to secure a cargo of it. A competitor on the Mediterranean market, gasoil-rich Azeri Light premiums reached a four-year record at 2.85 USD per barrel against the BTC Dated Strip. All the recent developments notwithstanding, the end of winter and refinery maintenance will put an end to this weirdest of times. Demand for fuel oil will weaken over time – take South Korea, which has restarted three fuel oil-fueled power plants to cope with possible winter colds. Yet after the winter comes to an end, these power plants will be most likely plugged off for another five-month hiatus, just like they were last year. The permanent crude flux never really ends.



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