OPINION: Where are the oil prices headed in 2021?
Since the Oil Crisis of 70’s and early 80’s, the price of crude oil has remained, mostly, in a $10-$30 band before breaking out of it in 2004. This breakout was primarily due to China-led oil demand growth and its impact on OPEC’s surplus oil production resulting in concerns about the tighter supply-demand situation. The 2008 financial crisis led to global recession which resulted in an unprecedented fall in oil prices by over $100, from its all-time highs in $140s before resuming an uptrend due to economic recovery. For the next 5 years, the prices hovered around the $100 mark whilst the shale boom in the US continued. The 2014-15 plunge in the oil prices was, primarily, driven by years of increase in oil supply from unconventional sources and the missing price support by OPEC as the oil producing nations continued to flood the market with their produce at highest rates, ever. OPINION: Where are the oil prices headed in 2021? This time around the price drop was a first-time visit of the negative territory when the WTI futures contract for May 2020 delivery dipped to a low of -$37 in April this year. The onset of pandemic, earlier this year, led to travel curbs and a sharp drop in the economic activity causing an oversupply situation in the market. This coupled with a lack of availability of storage, at exchange designated location in Cushing, Oklahoma, effectively made the price of the commodity worthless. Where do we go from here? There’s a renewed optimism for a global economic recovery in 2021 on the news of distribution of vaccines in major economies across the world starting in few weeks’ time. A high confidence in global economic recovery is, typically, considered to bring weakness in the US dollar, which has fallen by around 12% against a basket of top currencies since March of this year when it topped due to ‘flight to safety’. It’s also anticipated to buoy the demand for US exports. The US Federal Reserve has announced that it will keep interest rates low and continue to provide the stimulus required to support the US economy. President-elect Joe Biden’s nomination of former Fed Chairwoman Janet Yellen for Treasury Secretary is reassuring of stimulus spending, promoting faster economic growth in the US. A falling US Dollar on the back of global economic recovery & continued stimulus spending in the US, as well as other major economies, are bullish for oil prices. In addition, vaccines would allow people to resume life in a normal way supporting more consumption-led spending that would drive up the oil prices. In their latest Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration or EIA indicates an average of $49/b for Brent in 2021 which is around 14% higher than the expected average for the fourth quarter of 2020. EIA expects that while inventories will remain high, its anticipated that they will decline because of the rising global oil demand and lower than expected increase in OPEC+ oil supply. EIA forecasts Brent prices will average $47/b in the first quarter of 2021 and rise to an average of $50/b by the fourth quarter. OPINION: Where are the oil prices headed in 2021? Other key driver for the recent increase in oil prices has been the deal to slowly cut the OPEC production cap in the first quarter instead of a hard 2 million barrels a day. OPEC+ agreed to raise oil supply by 500,000 barrels a day in the next month, well below the 2 million barrels mark. A positive outlook for the next year doesn’t necessarily support a low volatility environment for crude oil prices as over the medium to long term period the uncertainties remain, mainly, in terms of impact of (a) consumption patterns due to changes in behaviors caused due to multiple lockdowns across the globe, (b) a slower than expected economic recovery, (c) changes in global production of crude oil – OPEC & non-OPEC, (d) shape & structure of US-China Trade related alignment and (d) the pace of Energy transition, primarily led by leading global economies, towards green energy. Crude oil prices will continue to demonstrate volatility. Companies that can adapt, deploy and harness the benefits of data and modern risk management processes, tools & technologies will thrive and be best placed to respond to challenges posed by the evolving global economic & political situations.
At over Rs 80 per litre, diesel at two-decade high in Mumbai
The price of diesel, which stood at Rs80.51 on Monday, is the highest in Mumbai in two decades, leaving transporters and motorists fuming. Between April and December, the rates of fuel —both diesel and petrol —have increased by around Rs 14, making it one of the biggest hikes in recent years. While petrol price zoomed from Rs 76.31 on April 2 to Rs 90.34 on December 7, diesel prices saw a gradual hike from Rs 66.21 in April to Rs 80.51 per litre on Monday. At over Rs 80 per litre, diesel at two-decade high in Mumbai The record high price of diesel is likely to increase freight charges on transportation by 7-8% and drive up prices of essentials. Transporters from All India Motor Transport Congress (AIMTC) have threatened a repeat of their 2018 nationwide agitation if the hikes are not curtailed. Sources said diesel was at its lowest in two decades on June 4, 2002 when the rate was Rs 22.84 a litre at the pumps. The increase has been over 250% since then. “Also, the 21% hike in diesel rates during Covid months between April and December and 18% hike for petrol during the same period are uncalled for. We strongly protest the hikes and want the government to give relief on taxes, VAT and excise — the rates for which are highest in our state,” said a leading transporter from Masjid Bunder, requesting anonymity. According to statistics obtained by TOI, diesel cost around Rs 23 a litre in June 2002, and had increased to Rs 33 in December 2004 after which it was hiked to Rs 40 in June 2006. In a subsequent dip, diesel was around Rs36 in January 2008. The prices went up again — from Rs 44 a litre in March 2011 to Rs 66 in May 2014, followed by a slide to Rs 57 in July 2017. After this, fuel prices witnessed a record hike. By October 2018, it had peaked to Rs 80.10 a litre. Exactly a year later, prices were brought down and it was retailing at Rs 70.76 in October 2019. By April 2, 2020, the prices were further reduced to Rs 66.21. During the initial two Covid months, prices remained steady. “Prices have been fluctuating since June, and the present rate is unwarranted,” said Bal Malkit Singh, core committee member of AIMTC. “When international crude prices are considerably down, diesel has soared above Rs 80 per litre in Mumbai. The mathematics of decontrol regime is not understandable. It is adversely impacting the common man, farmers and the transport sector,” he said in a statement released on Monday. Transporters have warned that if pushed to the wall, they may agitate again. In 2018, they had protested with a nationwide chakka jam, which crippled transportation of manufacturing and industrial goods and affected operations at the ports.
Post-stake sale, BPCL’s LPG business to be in new SBU; new owner to take call after 3 yrs
Privatisation-bound Bharat Petroleum Corporation Ltd’s (BPCL) new owner will after three years of takeover get a right to decide on retaining the business of selling subsidised LPG, which in the intervening period will be transferred into a new unit to continue the flow of government subsidy, a top official said. Government subsidy will continue to be given to BPCL customers if the new owner chooses to retain the business after three years, the official said. The firm’s cooking gas LPG customers will be transferred to other state-owned firms, Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation Ltd (HPCL), in case the new owner does not want to continue with such a business, the official added. The government is keen to continue providing subsidy to 7.3 crore domestic cooking gas (LPG) consumers of BPCL even after the firm’s privatisation. To resolve the conflict of paying the dole to a private company, it has been decided to transfer the LPG business of the firm into a new strategic business unit (SBU). The SBU will maintain separate accounts, with records of subsidy received and digitally transferred to user accounts, the official said. The accounts will be audited to ensure no pilferage, he said. Subsidy to privatised BPCL will not result in similar payout to other private LPG retailers. “BPCL is a legacy company and overnight subsidy flow to users cannot be stopped,” he said. There will be a three-year lock post-government exit from BPCL, the official said. “The new owner cannot sell any asset or the SBU for three years. Post three years, the new owner will have a right to decide on retailing the LPG business.” The government gives 12 cooking gas (LPG) cylinders of 14.2-kg each to households in a year at a subsidised rate. The subsidy this month is about Rs 50 per cylinder, which is directly paid into the bank accounts of the users. The subsidy is paid in advance and consumers use this to buy LPG refills that are available only at market price from dealers of oil marketing companies — IOC, BPCL and HPCL. The moment a refill is bought using the subsidy, another instalment is transferred into the user bank accounts. On November 27, Oil Minister Dharmendra Pradhan had told that government subsidy to BPCL customers will continue after the privatisation of the nation’s second-biggest fuel retailers. “Subsidy on LPG is paid to consumers directly and not to any company. So the ownership of the company that sells LPG is not of any material consequence,” he had told . Pradhan had said the LPG subsidy payment is done digitally to all verified customers. “Since it is paid directly to consumers, it does not matter if the servicing company is public sector or private sector,” he said. “LPG subsidy will continue as before to BPCL consumers even after disinvestment.” The government is selling its entire 53 per cent stake along with management control in BPCL. The new owner will get 15.33 per cent of India’s oil refining capacity and 22 per cent of the fuel marketing share. It also owns 17,355 petrol pumps, 6,159 LPG distributor agencies and 61 out of 256 aviation fuel stations in the country. BPCL services 7.3 crore out of 28.5 crore LPG consumers in the country. Privatisation of BPCL is part of plans to raise a record Rs 2.1 lakh crore from disinvestment proceeds in 2020-21 (April 2020 to March 2021). BPCL operates four refineries in Mumbai (Maharashtra), Kochi (Kerala), Bina (Madhya Pradesh), and Numaligarh (Assam) with a combined capacity of 38.3 million tonnes per annum, which is 15.3 per cent of India’s total refining capacity of 249.8 million tonnes. While the Numaligarh refinery will be carved out of BPCL and sold to a PSU, the new buyer of the company will get 35.3 million tonnes of refining capacity — 12 million tonnes Mumbai unit, 15.5 million tonnes Kochi refinery and 7.8 million tonnes Bina unit.
2021 Oil prices would hover in the $40-45 per barrel range: Moody’s
Global oil prices will hover in the $40-$45 per barrel range in 2021, remaining in the lower end of the $45-$65 Brent medium-term price range, with implications for capital spending by producers, according to Moody’s Investors Service. “Oil prices are set for only modest gains and will remain at lower end of our $45-$65 per barrel medium-term range, with uneven demand recovery and market rebalancing,” the top rating agency said in a report on the 2021 outlook for the oil and gas sector. The modest improvement in 2021 oil prices will lead producers to limit capital investment, with negative knock-on effects for drilling, oilfield services and midstream companies, while fuel demand will rise, but not to pre-downturn levels. The report said the spending in new drilling will remain limited as producers will keep capital spending low , focusing on balance sheets, maintaining volumes and shareholder returns. Also, the downturn will promote strategic reviews as consolidation will continue among companies with higher credit quality and lower leverage. Natural gas prices in 2021 – at benchmark Henry Hub – will stay largely within $2.00-$3.00 per million British thermal units (MMBtu) medium-term range. However, final decisions on LNG expansion projects face delays from oversupply, changing pricing models in Asia and rising competition from renewables.
India’s GSPL surrenders licence to build gas link to Jammu-Srinagar
Gujarat State Petronet (GSPL) wants to pull out of a northern India gas pipeline project that would link Punjab state to the hilly areas of Jammu and Srinagar due to high construction costs, officials said. GSPL in August wrote to the Petroleum and Natural Gas Regulatory Board (PNGRB) to surrender authorisation to extend the pipeline beyond Punjab to Jammu and Srinagar citing low gas demand and technical complexities, according to a letter seen by Reuters. “The difficult terrain (in Jammu and Srinagar) and demand assessment for gas shows that the pipeline is not commercially viable,” Sanjeev Kumar, Joint Managing Director of GSPL, told Reuters. Gujarat state-promoted GSPL won a licence in 2011 to lay the 740km pipeline from Bathinda in Punjab state, with the condition that extension to Jammu and Srinagar would depend on a technical and commercial feasibility report. The PNGRB asked GSPL in February to build part of the pipeline from Bathinda to the border of Punjab by the end of this year and extend it to Jammu and Srinagar by Feb. 24, 2022. The PNGRB has not yet accepted GSPL’s offer to surrender its licence, Kumar said, adding that his firm could consider laying the pipeline to Jammu and Srinagar if the federal government provides financial support. An oil ministry official said the government is considering giving financial assistance for the project to help kick-start economic growth and the use of gas in a region that has trailed the rest of the country. India is strengthening gas infrastructure to raise the share of the cleaner fuel in its energy mix to 15% by 2030, up from 6.3% now. The federal government has provided financial aid to two projects — the 2,500km pipeline linking the states of Uttar Pradesh, Bihar, Jharkhand, West Bengal and Odisha; and the 1,656km grid in the north east.
Quarter of forecast LNG supply needed by 2040 to meet 2C global warming limit – Wood Mac
Only a quarter of forecast new liquefied natural gas (LNG) supply will be needed to meet demand by 2040 under measures aimed at curbing global warming below 2 degrees Celsius, a report by consultancy Wood Mackenzie showed on Wednesday. Under a climate pact to cut global warming, nations have committed to a long-term goal of limiting the average temperature rise to below 2C above pre-industrial levels and to pursue efforts to limit it even further to 1.5C. Wood Mackenzie said tougher government measures to curb warming will increase renewables investments and energy efficiency, putting gas demand under pressure. Green hydrogen fuel, extracted from water with electrolysis powered by renewable electricity, will become a major competitor to gas towards the end of 2040 and achieve a 10% share of total primary energy demand by 2050. This will be a challenge for companies considering final investment decisions (FID) on new LNG projects. “In a 2 degree world, only about 145 billion cubic metres (bcm) per annum of additional LNG supply is needed in 2040 compared to 450 bcm/yr in our base case outlook,” said Wood Mackenzie principal analyst Kateryna Filippenko. The consultancy’s “base case” scenario implies 3C warming. “If we consider the imminent FID for the Qatar North Field East expansion, the space for new projects shrinks down by 77% to 104 bcm/yr by 2040 compared to our base case,” she added. In stark contrast to last year’s record level of approvals for LNG production plants, this year’s oil and gas price drops have forced companies to delay decisions on new projects and write down investments in existing plants. However, industry executives in September said they expected LNG demand to increase steadily for several decades, helped by economic growth in Asia. Wood Mackenzie said only a few Australian backfill projects – those which commit new gas to existing projects to allow them to continue operating beyond their expected life – will go ahead, pushing the country down the list of top LNG exporters. The expansion of Canadian and Mozambique LNG capacities is unlikely to materialise, it added. Backfill projects do not add new capacity but prevent volumes from leaving the market. Low LNG prices could wipe out any new investment in more economically challenging projects, and only the most cost-efficient and flexible ones will survive. Around 12 trillion cubic metres of undiscovered gas resources could be stranded – more than three times the amount of gas produced worldwide this year.