Further OPEC+ Production Cuts Could Be Looming
OPEC+ reversed on Monday this month’s increase in oil production targets and cut the group’s collective quota by 100,000 barrels per day (bpd) for the month of October. While the move is totally negligible in terms of actual supply to the market, considering not only the slight change in the overall target but also the massive underperformance from the producer group in the region of 2.9 million bpd below quota, the decisions of OPEC+ from Monday sent a strong message to the oil market that the group is ready to meet at any time and decide on any cuts it deems appropriate to “stabilize” oil prices. It’s a message to the market that analysts are largely interpreting as the resolve of the alliance and its de facto leader, Saudi Arabia, to continue intervening on the market and not let prices fall too low from current levels. The OPEC+ meeting on Monday endorsed a decision to cut the collective oil production target by 100,000 bpd for October, despite Russia reportedly resisting such a move. In another super-short meeting, the energy ministers of the OPEC+ production pact agreed to return the targeted production levels to the August quotas, saying that last month’s increase was intended only for September. But more importantly, OPEC+ decided that it could call a meeting at any time to discuss other actions. The meeting, OPEC said, decided to “Request the Chairman to consider calling for an OPEC and non-OPEC Ministerial Meeting anytime to address market developments, if necessary.” By giving the alliance’s chairman, Saudi Energy Minister Prince Abdulaziz bin Salman, the power to call a meeting at any time if needed, OPEC+ sent a strong message to the oil market: cuts could come at a short notice, “in any form”, which could mean that unilateral cuts may not be off the table, either. While the token cut for October doesn’t change anything in fundamental supply/demand balances, OPEC+’s readiness to intervene whenever it deems necessary suggests that Saudi Arabia and other influential OPEC+ members believe that oil prices have seen enough sell-offs in recent months already. “The action from OPEC+ does seem to confirm that the floor for Brent is not too far below US$90/bbl. And while little changes in the supply/demand balance, it does not send a great message to the US administration, which has been putting pressure on OPEC for much of the year to increase output more aggressively,” Warren Patterson, Head of Commodities Strategy at ING, commented on the OPEC+ meeting’s outcome. The U.S. Administration, for its part, commented on the latest OPEC+ decision with White House press secretary Karine Jean-Pierre saying “The President has been clear that energy supply should meet demand to support economic growth and lower prices for American consumers and consumers around the world,” as carried by AP. “President Biden is determined to continue to take every step necessary to shore up energy supplies and lower energy prices,” the White House added. But Saudi Arabia thinks of market “stability” – or in OPEC+ parlance higher oil prices – with its most recent messages to the market. Last month, Prince Abdulaziz bin Salman said that OPEC+ was ready to cut production at any time in any form if it believes it would bring stability to the “schizophrenic” oil market. After the 100,000-bpd cut was agreed upon on Monday, the energy minister of the world’s top crude oil exporter told Bloomberg in an interview “This decision is an expression of will that we will use all of the tools in our kit.” “The simple tweak shows that we will be attentive, preemptive and pro-active in terms of supporting the stability and the efficient functioning of the market to the benefit of market participants and the industry,” Prince Abdulaziz bin Salman said. The small cut in October quotas is “intended to send the signal that OPEC+ is back into a price-watch mode,” Bill Farren-Price, head of global oil and gas macro research at Enverus, told Bloomberg. According to Jason Bordoff, an energy and climate policy expert at Columbia University: “Oil (and pump) prices have been falling. 100kbd may seem negligible but the message from today’s cut is clear: OPEC+ thinks they’ve fallen enough.” An OPEC source told Reuters after Monday’s OPEC+ meeting that “The price movements up and down is raising concern,” while another source at a Gulf country said that “The members have trusted that the chairman can intervene whenever necessary to bring more stability and this can be beyond October until the end of the (OPEC+) agreement.” What’s Next? OPEC+ will seek stability and keep its thinly-stretched spare capacity untouched amid heightened uncertainty in both supply and demand in the coming months. In supply, it’s not certain how the planned price cap on Russian oil would impact markets, especially if Russia follows through ons threat to stop exporting its oil to importers that will have joined that cap mechanism. Then, there is the possibility of a revival of the Iranian nuclear deal, although the latest developments point to a move “backwards” in the indirect EU-mediated U.S.-Iran talks on a final draft of a possible agreement. On the demand front, economic slowdown in major economies, including China and the United States, could dent oil demand growth. But an acute shortage of natural gas in Europe and sky-high gas prices in both Europe and Asia could prompt more gas-to-oil switching as winter approaches.
Energy Independence Will Not Solve The Global Gas Crunch
The Russian war in Ukraine has sent a devastating domino effect rippling through the global economy that has left nations across the world wirth devastating energy shortages right as the hard-hit northern hemisphere prepares for the cold winter months. While Europe has been trying to wean itself off of Russian energy so it can slap sanctions on the imports without pyrrhic consequences, Moscow has responded by indefinitely cutting off the flow of natural gas to the continent far before Europe was ready. The result is an energy crisis that threatens to become a global economic crisis if mismanaged. For years, world leaders have been warning of the dangers of depending too much on Russian energy because of the country’s political volatility and mercurial relationship with the European Union. In fact, the Nord Stream 2 pipeline delivering natural gas straight from Russia to Germany by way of the Baltic Sea has been stalled for years due to condemnation from the United States, who felt that the move would “strengthen Russia’s hand in Europe and isolate Ukraine.” We now know that these concerns were far from unfounded. But despite the warning signs, Germany couldn’t seem to resist the cheap and abundant flow of Russian oil and gas, especially as it tried to shut down its own coal and nuclear sectors to appease environmentalists and meet climate pledges. As of 2020, more than half of natural gas and a third of oil consumed in Germany came from Russia. Now, the chickens have come home to roost. For many, the knee-jerk response to this major geopolitical misstep has been to highlight the importance of domestic energy autonomy. After the pandemic laid the vulnerabilities of globalized supply chains bare and Russian aggression bit back against those who tried to make nice with the Kremlin in the interest of trade, a retreat to nationalism and self-sufficiency seems to be the natural solution. But a new op-ed from the Financial Times warns that this is an extremely dangerous and reactionary approach that only serves to further global economic woes. The real lesson should be that the mistake is to rely too much on any one country or any one energy source to keep the lights on. Just look at France – the French did not share Germany’s reliance on Russian energy, but issues in their own nuclear sector have left the country in a similarly energy-strapped state heading into the winter. The only real recipe for resilience against energy shocks is diversification. However, this kind of preemptive and preventive investment can be a hard sell for governments. “Given the financial and political cost of drilling wells, laying pipelines, creating nuclear power stations, building gas terminals, covering the countryside in wind turbines and so on, governments are reluctant to incur the costs of diversifying against as yet unrealised risks,” the Financial Times reports. What’s more, in many places the re-prioritization of energy autonomy stands in direct opposition to national and global climate commitments. In China, a coal renaissance and a focus on energy independence is making the Paris accord drift further out of reach for all of us. In Mexico, President Andrés Manuel López Obrador’s desire to keep foreign interests out of the Mexican energy market has pushed for a resurgence of fossil fuels, dangerous coal mining practices, and outright derision of global cooperation to fight climate change. In short, while globalist approaches to energy security have their shortcomings, retreating to domestic silos often makes systems less innovative, less climate-friendly, and less diverse and therefore even more vulnerable to shocks. “The reality is that governments have to manage rather than avoid international relationships in energy supply,” FT opines. “Given the interdependencies involved, the answer is to undertake a realistic assessment of risks and continue to widen the range of energy sources, not to embark on a widespread reshoring campaign.”
Demand Concerns Drag Oil Prices Lower
Oil demand concern and weaker than expected economic news from China have reversed the gains oil prices booked on Monday after OPEC+’s meeting, with both Brent crude and WTI opening trade on Wednesday with losses. Brent, the international benchmark, slipped from $92.83 per barrel at the end of day Tuesday to $91.72 per barrel at the time of writing, down by more than a percentage point. West Texas Intermediate was down from $86.88 per barrel at close on Tuesday to $85.62 per barrel in early trade on Wednesday. “The OPEC+ news is now in the market and the focus has temporarily shifted to economic and inflationary concerns amongst which the two relevant factors are the extended COVID lockdowns in China and Thursday’s ECB rate decision,” PVM oil analyst Tamas Varga told Reuters. “Fundamentally we’re probably moving in the right direction in terms of calming the oil market, but all of that friction out there related to Russia seems like it’s only going in one direction,” FGE president Jeff Brown told Bloomberg following the OPEC+ meeting. “OPEC is essentially signaling that we don’t like US$90 a barrel. They’re pretty much at production limits, so let’s defend a high price,” he also said. It seems the decision to cut production by 100,000 bpd, however, was not enough to prop up prices under the pressure of demand destruction concerns amid continuing Covid lockdowns in China. Also, the market may have already factored in the production curb, which would hardly even need to materialize: OPEC+ has been undershooting its production quota by more than a million barrels daily over the past few months. In the latest sign that demand concerns have a solid foundation, Saudi Arabia, OPEC’s largest producer, said it would cut its prices for Asian and European buyers for October deliveries, after hiking them to record highs earlier this year.
The Oil Giant Planning To Make Russian Gas Irrelevant By 2025
Italian Eni has vowed to fully replace Russian gas by 2025 thanks to major developing LNG projects from Africa to the Middle East and major discoveries in the Eastern Mediterranean. Eni’s Chief Operating Officer Guido Brusco told attendees of the Gastech conference in Milan on Tuesday evening that the Italian energy giant “plans to fully replace Russian gas by 2025 helped by east med fields”. At the same time, deputy COO Cristian Signoretto told the conference that Eni would also invest nearly $4.5 billion every year for the next three years in upstream activities in several venues, including Qatar, Congo, Egypt, and Algeria. “We are fully committed to invest 4.5 billion per annum in the upstream to bring on line new gas supplies,” reporters cited Signoretto as saying, particularly referencing LNG projects in Africa and the Middle East, and also indicating that Indonesia will be a key investment arena. From Algeria, Eni said, gas would double to 18 billion cubic meters per year by 2024. From Northern Europe, Eni plans to get an additional 4 billion cubic meters of gas. In its 2022-2025 strategic plan, unveiled in February, Eni said it would invest seven billion euros per year on average in its different businesses. The gas riches of the Eastern Mediterranean will also play a role in Eni’s plan to save Europe from Russian gas. In late August, Eni and its partner, French TotalEnergies, confirmed a major gas discovery in a wildcat well in the Eastern Mediterranean, offshore Cyprus. The Cronos-1 well, in Cyprus’ deepwater Block 6, may have 2.5 trillion cubic feet of gas in place, based on preliminary estimates, and the partners are drilling another well in the same block. And back in 2018, Eni also hit success with the Calypso-1 well in Block 6, with that well has been confirmed as an extension of Egypt’s massive Zohr gas fields discovered in 2015.
LNG market in record divergence between spot and long-term prices
The spot price of liquefied natural gas (LNG) is poised for another surge with the global market tightening as Russia turns the screws on Europe’s supplies of pipeline natural gas. New York-traded contracts, based on S&P Global Commodity Insights Asian benchmark JKM price, ended at $55.25 per million British thermal units (mmBtu) on Sept. 2, prior to Russia’s announcement that it won’t be restarting the Nord Stream 1 pipeline as planned, citing an oil leak. Such is the fog now surrounding Russia’s pipeline supplies to Europe that it wasn’t immediately clear whether the failure to resume shipments on the pipeline, which runs under the Baltic Sea to Germany, was a genuine technical issue that can be resolved, or part of a wider pressure campaign by Moscow in retaliation to Europe’s support of Ukraine, which was invaded by Russia on Feb. 24. A fresh record high above the all-time peak of $69.955 per mmBtu is definitely possible for spot LNG prices, as European utilities will likely be desperate to ensure sufficient natural gas for the upcoming winter peak demand period. In effect, Russian pipeline supplies to Europe are now likely to be viewed by market participants as inherently unreliable, even though some gas is still flowing through pipelines through Ukraine and to Turkey. While any surge in spot LNG prices in Asia as European buyers seek to draw cargoes away from the top-importing region of the super-chilled fuel is likely to grab the media headlines, it masks important shifts in the overall market dynamics. In Asia, only about one-third of LNG volumes are traded at spot prices, with the majority of LNG being priced against crude oil in long-term contracts. Notwithstanding a surge in crude oil prices in the aftermath of Russia’s attack on Ukraine, the cost of LNG priced against oil is now substantially below the spot price, and the discount is the widest ever in Refinitiv data going back to 2012. Long-term LNG contracts tend not to be publicly disclosed, but most work on the basis of being priced as a percentage of a benchmark crude oil, known as the slope and a typical contract might be pegged at about 14.5% of the Japan Crude Cocktail (JCC), which is a price based on the customs cleared cost of crude oil in Japan. As of the end of August, this LNG price was around $16.63 per mmBtu, or less than one third of the JKM spot price of $53.95 on Aug. 31. So far this month crude prices have weakened amid concern of a global economic slowdown, while spot LNG prices have been volatile, tending to trade based on media headlines about the state of European storages and Russian pipeline supplies. But the trend has been clear since the invasion of Ukraine, namely that spot prices are now at a substantial premium to long-term, oil-linked LNG contracts. This is a reversal of the trend that has prevailed for most of the past decade, where spot prices tended to trade below the JCC, except for relatively brief periods during the peak LNG winter demand season. In practical terms this means that buyers that had in the past been able to take advantage of lower spot prices on average, such as India and Pakistan, are now finding themselves priced out of the market. Conversely, importers such as Japan and South Korea, the world’s second- and third-biggest LNG buyers, are relatively better placed given the bulk of their purchases are under long-term deals. MIXED CHINA China, which overtook Japan as the world’s top LNG importer last year but may surrender the title this year, is an interesting case, as it is maintaining imports under long-term contracts but seemingly cutting back on spot cargoes. China imported 4.81 million tonnes of LNG in August, according to Refinitiv data, down from 5.11 million in July, while year-to-date arrivals were 41.0 million tonnes, down 22% from the 52.4 million tonnes in the first eight months of 2021. India’s LNG imports are forecast at 1.47 million tonnes in August, the lowest since February, while year-to-date arrivals are estimated at 13.4 million tonnes, down 15.7% on the same period in 2021. In contrast to China and India, Japan’s LNG imports are remarkably stable so far in 2022, with Refinitiv data showing arrivals of 51.3 million tonnes in the January-August period, down marginally from the 52.1 million over the same period in 2021. With Europe’s LNG imports up some 63% in the first eight months of 2022 to 85.3 million tonnes, it’s clear that LNG cargoes are being drawn to the countries most able to pay high spot prices. But the existence of the long-term, oil-linked contracts means that Europe probably won’t be able to draw as much LNG as it would probably want, no matter what price it is prepared to pay.
India’s LNG imports seen at multiyear lows in August as prices undermine demand
LNG imports by India — the world’s third-biggest energy consumer — likely hovered near multiyear lows in August while natural gas inflows so far this year are also seen falling over 10% on the year, sources said citing the impact of shrinking global supplies and elevated prices. Buyers in the country, which meets nearly half of its annual LNG demand through imports, haven’t awarded most of their buy-tenders for spot cargoes this year and have neither made an outright spot purchase since July, according to industry participants. The most recent buy-tenders awarded were by GAIL and GSPC concluded in late-July for August and September deliveries, respectively. The only other tenders awarded in the past month by GAIL were swap arrangements for its existing US FOB contracts in exchange for India-delivered cargoes, sources said. As a result, the weak spot demand has significantly reduced the country’s import of LNG. India’s August LNG imports were only around 1.45 million mt, the lowest since at least 2018, compared to 1.84 million mt in July, according to shipping data from S&P Global Commodity Insights. The official Petroleum Planning and Analysis Cell data for August will likely be released later this month. Indian buyers attributed their unwillingness to purchase expensive LNG spot cargoes to the inability to pass down costs to industrial and residential customers, as well as lower domestic gas prices due to existing price ceilings. “In 2022, we expect LNG imports to decline by 13% from 2021 and average just below 30 Bcm/year,” said Ayush Agarwal, LNG analyst at S&P Global. “For the remainder of the year, we expect LNG imports to average at 81 mcm/d, 4 mcm/d below last year’s levels. We believe there is still some downside risk to our present forecast,” he added. The PPAC data for the April-July period showed LNG imports fell 7.9% on the year to 9.97 Bcm. “The demand destruction has already happened in price-sensitive sectors like power and refining, where users can easily switch to cheaper alternate fuels. However, these prolonged levels of high prices have started to affect demand in other industrial sectors as well, where switching is a cost and time-intensive process,” Agarwal said. The Platts JKM for October was assessed at $62.77/MMBtu Sept. 5, S&P Global data showed. Asian spot prices have more than doubled since the beginning of the year, with the LNG West India marker assessed lower at $58.275/MMBtu. With India LNG prices remaining over $4/MMBtu lower than delivered prices in Northeast Asia and Europe, suppliers have been pushing spot volumes to destinations where buyers are willing to pay a price premium. An industry source noted that Europe had the ability to pay a much higher price compared to India after Russia limited supplies. “It’s all high and dry,” another source said, noting that India was shying away from imports due to prevailing high prices. Mulling options as spot market heats up Buyers in India are looking to sign term contracts to meet the growing demand and reduce their spot exposure. In August, India’s largest LNG importer Petronet LNG said it was negotiating with Qatar for the extension of its long-term LNG deal to beyond 2028 and a task force had already been formed to advance these talks. The existing long contract with Qatar is for 8.5 million mt/year. Meanwhile, GAIL — India’s largest gas distributor and operator of pipelines — has reduced supplies to ‘take or pay’ basis to the user industries. The company cut LNG supplies to user industries by a tenth while supplies to its own petrochemical unit at Pata in northern state of Uttar Pradesh were reduced by a half to avoid spot buying of the clean fuel due to high global prices, Rakesh Kumar Jain, Finance Director GAIL, said at an investors’ call in August. “Companies don’t have many options other than rationing or optimizing their current term supplies to meet the demand. Indian importers like GSPC awarded last outright buy tenders around $35/MMBtu. GAIL is leveraging its US contracts to meet domestic demand,” Agarwal said.
In Bid to Control Inflation, Govt Sets Up Panel To Review Gas-Pricing Formula
India has set up a panel to review the pricing formula for locally produced gas to ensure a “fair price to the end consumer,” according to a government order seen by Reuters, a move aimed at lowering inflation and boosting use of the cleaner fuel. Prime Minister Narendra Modi wants to raise the share of gas in India’s energy mix to 15% by 2030 from 6.2%, helping it progress towards meeting a 2070 net zero carbon-emission goal. To incentivise gas producers and boost local output, since 2014 India has linked local gas prices to a formula tied to global benchmarks, including Henry Hub, Alberta gas, NBP and Russian gas. In 2016, the country began fixing the ceiling prices of gas produced from ultra-deep water and challenging fields and allowed marketing freedom to the operators of these fields. The state-set local gas prices and ceiling rates are at a record high and are expected to rise further due to a surge in global gas prices triggered by the Ukraine-Russia conflict. The panel has to submit its report by end of this month, according to the order. The committee, headed by energy expert Kirit Parikh, will include members from the fertiliser ministry, as well as gas producers and buyers. Apart from ensuring fair prices to end consumers, the panel will also suggest a “market oriented, transparent and reliable pricing regime for India’s long term vision for ensuring a gas based economy,” the order said. A government source said the panel’s recommendations will not be reflected in the next six-month revision of local gas prices from October, as cabinet approval is required for implementation. India’s fertiliser and oil minister did not immediately respond to an emailed request for comment. Higher gas prices tend to boost the earnings of producers like Oil and Natural Gas Corp Ltd (ONGC.NS), Oil India Ltd (OILI.NS) and Reliance Industries (RELI.NS) but also stoke inflation as prices turns costly for households, industries, and the fertiliser, power and transport sectors. India’s inflation peaked at 7.79% in April before easing in the last three months, but has remained above the Reserve Bank of India’s mandated target band of 2%-6% for seven consecutive months. Economists expect inflation to remain above the central bank’s upper tolerance band in the coming months.
U.S. Natural Gas Futures Shed Over 5% On Soaring Output
U.S. natural gas futures shed around 5% on Tuesday, hitting a four-week low as soaring output coupled with lower demand forecasts drags prices down, despite the fact that inventories are 11% lower than their five-year norm. U.S. natural gas was down 5.2% at 1:10 p.m. EST, to $8.38. Output is still holding strong after the latest report from the Energy Information Administration (EIA) for the week ending August 26, which showed a natural gas inventory build of 61 billion cubic feet. While that brings inventory to 2,640 Bcf, it is still 228 Bcf below levels at the same time last year–heading into the winter season. Also prompting the decline is the outage at the key Freeport LNG export plant on the Gulf coast. That outage means traders are calculating some 2 billion cubic feet of gas per day that is not being consumed by Freeport for export and is remaining on the domestic market. Freeport–which accounts for some 20% of U.S. LNG export capacity–looks set to remain offline until sometime in the first half of November, at which point we could see only a partial startup, ramping up to full capacity by the end of that month. Freeport, however, has already pushed back a restart date several times since declaring force majeure–and then revoking it–in June. On June 8, Freeport suffered an explosion, causing the plant to shut down for damage assessment and repairs. So far in September, even with the Freeport outage, Refinitiv data showed a rise in the average volume of natural gas being pumped into American LNG export plants to 11.2 Bcfd, up from the average of 11 Bcfd last month. Globally, natural gas prices continue to soar on the twin developments of supply disruptions and sanctions on Russia for its invasion of Ukraine. Prices continue on a fast upward trajectory in the aftermath of Russia’s cutoff of flows to Germany through Nord Stream 1 last week.
Europe’s Reaction To The Energy Crisis Is Turning Into A ‘Ponzi Scheme’
The leadership of the European Union has been hard at work these days, trying to find a lasting solution to an energy crisis that is worsening by the day. Yet the way they are approaching the solution is unlikely to produce any lasting results. And so far, it has been compared to a Ponzi scheme. “One of the easiest policy levers if you will, is that you can pass a bill, appropriate money and give money to citizens to pay their electricity bills,” former Energy Secretary Dan Brouilette told CNBC this week. He went on to agree when asked whether the approach could be compared to a Ponzi scheme. Yet the windfall tax and energy subsidies are only the beginning, it seems, and the final product might turn out to be much worse than a Ponzi scheme. The Financial Times reported this week that the EU is seeking sweeping powers over businesses in member-states that would basically allow Brussels to tell these companies what to produce, how much of it, and whom to sell it to in times of a crisis. The definition of a crisis would be the prerogative of the same EU. “We would be very concerned if this proposal was adopted in such an interventionist shape,” said Martynas Barysas, an executive for BusinessEurope, an employer association. “It could oblige member states to override contract law, force companies to disclose commercially sensitive information, and share their stockpiled products or dictate their production under any type of crisis the commission decides upon,” he explained. Another report, by Bloomberg, focused on direct energy market intervention measures that are being mulled over by Brussels. The report cited several bailouts that the governments of Germany, Sweden, and Finland had to resort to in order to avoid utilities going under because of the price crisis as the events that spurred the bloc into action. The action itself, to be discussed at a Friday meeting of energy ministers, consists in capping Russian gas imports, temporarily capping the price of gas used in electricity generation and suspending power derivatives trading in a bid to boost liquidity on the troubled electricity market. Natural gas prices in Europe have soared by some 400% over the past year. The crunch actually started this time last year and the Ukraine events from this year only served to severely aggravate an already bad situation. Solutions are tricky. For Dan Brouillette, president of Sempra Infrastructure, active in the LNG business, the solution is easy, though: Europe just needs to invest in more oil and gas dependency on the U.S. For Europe itself, replacing one dependency with another is hardly the best course of action, even if political relations with the U.S. are vastly different from relations with Russia. “Home-grown” clean energy, as EC President Ursula von der Leyen called it last week, however, is also not a solution, for purely physical reasons. There are not enough raw materials in the world to make Europe 100% wind and solar reliant. And that’s without mentioning the global dependency on China’s rare earths and lithium processing capacity. Europe has a difficult winter ahead to cope with. As attempts at coping become increasingly desperate before the first heating season bills start coming in, this desperation is driving into an increasingly interventionist direction. This has already prompted some to accuse the EU of being authoritarian and comparisons with the Soviet Union have appeared on social media. People are already protesting European countries’ energy policies and there will be more protests as autumn advances to winter. Sadly, besides direct intervention on energy markets and “a Ponzi scheme” for households, European governments do not have many cards to play.