Why Oil Crashed Back Below $100
After a torrid three-week rally, energy markets have entered correction mode, with prices moving sharply lower. Over the past week, Brent has slipped 30% from the 7 March intra-day high while European gas prices have declined 65%. Brent for May delivery settled at USD 106.90 per barrel (bbl) on 14 March, a w/w fall of USD 16.31/bbl, and moved below USD 100/bbl in early trading on 15 March. WTI for April delivery fell USD 16.31/bbl w/w to USD 106.90/bbl at settlement on 14 March, while the value of the OPEC basket fell by USD 15.84/bbl to USD 110.67/bl and by EUR 15.40/bbl to EUR 101.16/bbl. You can blame speculative overshoot for the unfolding scenario though the overall outlook remains bullish. According to Standard Chartered commodity analysts, the correction tells us more about market positioning and the effect of extreme volatility than it does about changes in fundamentals over the past week. The increase in volatility across financial and commodity markets has led to a sharp rise in the level of risk held by traders, and an associated incentive to close out some positions to lower the risk. Oil traders have mostly been positioned with a highly bullish bias in terms of both outright positions and spreads in recent weeks, meaning optimization in a higher-risk environment has mostly involved closing out prompt longs. With speculative shorts being very thin on the ground currently, there have been few natural buyers, and the downside has quickly opened up. While the price ranges involved have been rather extreme, recent price dynamics bear all the hallmarks of a textbook speculative overshoot followed by the correction necessary to reset extreme positioning. The irony of the situation is that the dominance among oil traders of the belief that prices could only move higher has led to a position from which market dynamics dictated that in the short term, prices could only go lower. Replacing Russian Oil Despite the positioning-led price fall, StanChart says that the key fundamentals are largely unchanged and are also subject to an unusually high level of uncertainty. According to commodity analysts at Standard Chartered, Russian oil flows to Europe can be replaced in the short term, with the short-term price implications of that displacement potentially capable of being minimized by the extent to which OPEC members increase output beyond their current OPEC+ targets, and also by the possibility of a successful conclusion to talks in Vienna that results in higher volumes of Iranian exports. The analysts have projected that consumer reluctance to buy from Russia coupled with shortages of capital, equipment, and technology will continue to depress Russian output over at least the next three years. Russian output is expected to fall by 1.612 million barrels per day (mb/d) y/y in 2022, and by a further 0.217mb/d in 2023, with the y/y decline peaking at 2.306mb/d in Q2-2022. To avoid significant upside price pressure, StanChart reckons that the market would require around 2mb/d extra supply for the remainder of 2022, and an additional 2mb/d in Q2 to ease the dislocations caused by the displacement of Russian oil. The temporary 2mb/d Q2 boost could come from strategic reserves, but the 2mb/d additional flow for the remainder of 2022 would likely need to come from OPEC sources (including potentially Iran). Market tightness is, however, being helped by the fact that withdrawal from Russian markets has been less dramatic than anticipated. So far, there are indications that some of the larger EU countries are less keen than countries in the east of the EU to pursue the fastest possible reduction in Russian oil flows. Outside of the EU, the UK’s ban on the import of Russian oil has proved less dramatic than the headlines that accompanied the initial announcement, as it does not take effect until the end of 2022. In the private sector, while several companies have given assurances they will buy no more Russian oil on the spot market, there have been very few indications given about if, when, and how they will cut the volume of Russian oil purchased through their term contracts. Meanwhile, statements from some governments and some companies do appear to have become less hawkish over the past week, with an apparent lengthening of the timespan envisaged for the process of reducing dependence. StanChart says that Russian oil trade into Europe appears to be moving further into the shadows of term contracts and a greater reliance on third-party trading intermediaries. That does not make trading with Russia any less distasteful for European public opinion, but it does make the trade less visible and thus likely keeps oil flows from Russia higher than they would have been with more direct government targeting of those flows.
BPCL delays 25-day crude unit shutdown to May
India’s Bharat Petroleum Corp (BPCL.NS) has deferred a maintenance shutdown of a crude unit at a 240,000 barrels per day (bpd) Mumbai refinery to May as its seeks to gain from strong fuel cracks, two sources aware of the plan said.
EIA: Oil Prices Will Remain Above $100 For Months
Oil prices will remain higher than $100 per barrel in the coming months, reflecting the geopolitical risk from Russia’s war in Ukraine and the tight energy markets with the current and potential future sanctions against Russia, the Energy Information Administration (EIA) said on Wednesday. Brent Crude prices are expected to average $105.22 per barrel this year, the EIA said in its latest Short-Term Energy Outlook (STEO) last week, significantly raising its February forecast of $82.87. In its March STEO last week, the EIA said it expects Brent Crude prices to average $117 a barrel in March, $116 for the second quarter of this year, and $102 per barrel in the second half of 2022. WTI Crude, the U.S. benchmark, is set to average $113 a barrel this month and $112 per barrel for the second quarter of 2022. Early on Wednesday, before the EIA inventory report, WTI was up 2% at over $98, and Brent was rising by 1.6% to $101.46. EIA’s oil price forecast, however, “is subject to heightened levels of uncertainty due to various factors, including Russia’s further invasion of Ukraine, government-issued limitations on energy imports from Russia, Russian petroleum production, and global crude oil demand,” the administration said. The current forecast Brent price also increased the forecast for the U.S. retail gasoline price, which the EIA expects to average $4.00/gal this month and continue rising to a forecast high of $4.12/gal in May before gradually falling through the rest of the year. The U.S. regular retail gasoline price is now seen to average $3.79/gal this year and $3.33/gal in 2023. If realized, the average 2022 retail gasoline price would be the highest average price since 2014, after adjusting for inflation, the EIA said. As of March 16, the national average gasoline price was $4.305/gal, according to AAA data. “This war is roiling an already tight global oil market and making it hard to determine if we are near a peak for pump prices, or if they keep grinding higher. It all depends on the direction of oil prices,” Andrew Gross, AAA spokesperson, said on Monday.
No sanctions but think about where you stand: US on India buying Russian oil
The White House said India taking up Russia’s offer of discounted crude oil would not be a violation of US sanctions, but appealing to all countries amid the ongoing Russia-Ukraine war, White House Press Secretary Jen Psaki said ‘think about where you want to stand’. “But also think about where you want to stand when history books are written at this moment in time. Support for the Russian leadership is support for an invasion that obviously is having a devastating impact,” Psaki said after she was asked about a report on the possibility that India could take up the Russian offer of discounted crude oil. “Our message to any country would be abide by the sanctions,” she said. Think where you want to stand when history books are written in this moment in time. Support for Russian leadership is support for invasion having devastating impact: WH Press Secy on report about possibility that India could take up Russian offer of discounted crude oil. Russian Deputy Prime Minister Alexander Novak reportedly told Indian Petroleum minister Hardeep Puri in a phone call that the country is keen to increase its oil and petroleum product exports to India along with Indian investments in the Russian oil sector, according to a statement issued by Moscow. Reuters reported New Delhi was mulling the option of buying Russian oil on which Putin is offering a heavy discount. “The officials, who declined to be identified, did not say how much oil was on offer, or what the discount was,” the Reuters report said. India’s stance in the ongoing war between Russia and Ukraine is being internationally watched as India has abstained from voting at the United Nations condemning Russia’s aggressions but have urged for an immediate cessation of violence and also sent humanitarian aid to Ukraine. US officials have said in recent weeks they would like India to distance itself from Russia as much as possible. Commenting on the war situation, Jen Psaki said China’s actions are being watched and if they violate US sanctions, there will be consequences, if China violates those sanctions. “The decisions that China makes are going to be watched by the world. But in terms of any potential impacts or consequences, we will leave those to private diplomatic channels at this point,” Psaki said.
Russia-Ukraine war spells trouble for CGD, power companies in India
On March 7 and 8, Reliance Industries Ltd and Hindustan Oil Exploration Company (HOEC) sold natural gas to companies like Gujarat State Petroleum Corp (GSPC) and GAIL in two separate auctions. The price discovery in both these bids, around $22 per million British thermal unit (mBtu), is the highest ever in India for domestic natural gas supply, said two officials close to the development. “Had it not been for the war between Russia and Ukraine, these deals would have been capped at $15 per mBtu or even lesser. RIL will supply gas from its coal bed methane fields while HOEC gas will be sourced from HOEC B-80 field,” said one of the two officials who is involved in the deal. In a recent communication to city gas distribution (CGD) companies in the country, GAIL India said it will cut the gas supplies by 20% due to the prevailing scenario. A communication by GAIL to the CGD entities has been reviewed by Hindustan Times. Earlier this week, Gujarat Gas, the largest CGD company in terms of volumes, wrote to ceramic companies in Morbi to put constrain on their consumption else they will have to pay for 20% of their total consumption at spot prices, said an official close to the development. “Asian spot LNG prices jumped $3 per mmbtu (week on week) to $40.5 per mmbtu for Apr’22 delivery as they tracked the continued high European gas prices (to $50-60/mmbtu) as buyers move away from Russian gas/LNG in response to its invasion of Ukraine,” according to a JM Financial report dated March 7. European gas price continues to be volatile at ~$61.9/mmbtu amidst ongoing geopolitical tensions between Russia and Ukraine posing supply side concerns, it said. Morbi is the country’s largest industrial hub for consumption of natural gas, consuming about 6-7 million metric standard cubic per day (mmscmd). Presently there are about 900 ceramic units run on natural gas and the retail price in Morbi is around ₹60 per scm or about $21 per mBTu. The soaring natural gas prices in the wake of war between Russia and Ukraine has put constraints in the supply with industries that are dependent on imported gas coming under pressure. For companies like Gujarat Gas, high spot LNG prices could pose near term concerns given their dependency on spot LNG, according to the JM Financial report. It said that there could be an impact on Petronet LNG, the country’s largest natural gas importer, due to the high spot LNG prices. “The CGD companies are facing 25% of shortfall in natural gas supplies in the last few days following the sudden uptick in international prices. The LNG imports to India has dropped 35% in recent times. From about 22 per mBtu two weeks ago, the international spot prices went up to USD 89 per mBtu following the geopolitical situation,” said an executive working with a leading CGD company. He spoke on conditions of anonymity. Power Struggle India consumption about $160 mscmd of natural gas of which 90 mscmd is through imports that largely consists of spot purchase and the remaining 70 mscmd is from domestic supply. The country’s dependence on Russia for sourcing gas is about 10-15% of the total imports, said Harsh Dole, energy analyst, IIFL Securities. “The spot LNG prices had gone to $50 per mmbtu and cooled down to $22-24/mmbtu by mid/end February. The prices have climbed to $55 per mmbtu amid fears of supply disruptions. Back home, the administered price mechanism (APM) gas prices were revised to $2.9 per mBtu in October, up by 62%, reflecting the global LNG price trends. They are up for revision in April and given the current scenario it could go up to $6 per mBtu. This will further disrupt the country’s power sector and lead to a sharp price hike in CNG and domestic gas prices,” said Dole. The government, according to APM, fixes the price of natural gas produced by domestic exploration and production firms like Oil and Natural Gas Corporation (ONGC) every six months. The international spot gas prices which hit rock-bottom at about $2-2.5 per MBtu in the second half of 2020 amid coronavirus pandemic, leading to a revival of the country’s many idle gas-based power plants, are once again under pressure due to the rise in imported natural gas prices. Gujarat, which imports 85% of the country’s natural gas through the three operational LNG terminals, houses about 7,700 MW of the total 24,000 MW power generated from gas-fired units in the country. In October 21, the plant load factor of gas-based power plants in the country was 20.2% and this has come down to less than 12% presently, shows data on Central Electricity Authority website. “In September 2020, gas-based power plants in Gujarat, many of which were earlier lying idle and facing viability issues, had seen a revival, operating at 50% capacity due to the low prices of spot LNG then. From the past one and half year they have again been under pressure and the recent hike in international prices could lead to issues of load shedding,” said a government official aware of the matter.