Analysts May Have Overhyped America’s Largest Oil Basin
Current forecasts of U.S. crude oil production growth may have to be significantly revised as the recent slide in active drilling rigs in the top shale basin, the Permian, suggests that output may disappoint due to supply chain constraints and cost inflation in the double digits. The rig count in the Permian Basin dropped by 2 to 340 last week, as the number of total active drilling rigs in the United States dropped by 1, according to new data from Baker Hughes published on Friday. The active oil rigs in the Permian now number 316 – the lowest in four months. This suggests that the most prolific U.S. shale basin, which continues to drive America’s oil production growth, is going through “a significant slowdown,” Bloomberg Opinion columnist Javier Blas argues. The slowdown in activity, as evidenced by the drop in active oil rigs from 331 in July to 316 now, points to the fact that forecasts of Permian output, and by extension, U.S. crude oil production growth, need to be recalibrated lower. As shale drillers prioritize returns to shareholders and paying down debts, they are not rushing to drill even at $90 or $100 oil. Even those planning an increase in drilling activity face supply chain delays and up to 20% higher costs. At the same time, the Energy Information Administration said in its latest Drilling Productivity Report this week that crude oil production in the Permian is set to hit a record high next month, adding 66,000 bpd from September to reach 5.413 million bpd in October. Yet not everyone is so optimistic: Pioneer Natural Resources CEO Scott Sheffield said last week that U.S. oil production growth would likely disappoint both this year and next. Sheffield has forecast that U.S. oil production will add 500,000 bpd this year but in 2023 the production gains may be lower than this, due to constraints, Reuters reported last week. The EIA forecasts production growth of 800,000 bpd for 2023.
China And Russia Move To Disrupt The Dollar’s Dominance In Oil Markets
The long-mooted prospect of the end of the U.S. dollar’s hegemony in the global oil and gas markets took another step towards realisation last week with the announcement that Russian and Chinese hydrocarbons giants, Gazprom and China National Petroleum Corporation (CNPC) have agreed to switch payments for gas supplies to rubles (RUB) and renminbi (RMB) instead of dollars. In the first phase of the new payments system, this will apply to Russian gas supplies to China via the ‘Power of Siberia’ eastern pipeline route that totals at minimum 38 billion cubic metres of gas per year (bcm/y). After that, further expansion of the new payments scheme will be rolled out. It is apposite to note at this point that although ongoing international sanctions against Russia over its invasion of Ukraine in February has provided the final impetus for this crucial change in payment methodology, it has been a core strategy of China’s from at least 2010 to challenge the U.S. dollar’s position as the world’s de facto reserve currency. China has long regarded the position of its renminbi currency in the global league table of currencies as being a reflection of its own geopolitical and economic importance on the world stage. As analysed in depth in my latest book on the global oil markets, an early indication of China’s ambition for the RMB was evident at the G20 summit in London in April 2010, when Zhou Xiaochuan, then-governor of the People’s Bank of China (PBOC), flagged the notion that the Chinese wanted a new global reserve currency to replace the U.S. dollar at some point. He added that the RMB’s inclusion in the IMF’s Special Drawing Right (SDR) reserve asset mix would be a key stepping-stone in this context. At that time, at least 75 percent of the then-US$4 trillion daily turnover in the global foreign exchange (FX) markets, as determined by the Bank for International Settlements (BIS), was accounted for by the ‘Big Four’ international currencies: the U.S. dollar (USD), the Eurozone’s euro (EUR), the British pound (GBP), and the Japanese yen (JPY). Aside from dominating daily FX markets turnover, currencies in the SDR also dominate in the payment, reserves, and investment currency functions in the global economy. Enormous media fanfare in China followed the RMB’s inclusion in the SDR mix in October 2016, when it was assigned a weighting of 10.9 percent (the USD had a 41.9 percent share, the EUR 37.4 percent, GBP 11.3 percent, and JPY 9.4 percent). As of 2022, the RMB’s share in the SDR mix has risen to 12.28 percent, which China still regards as not truly befitting its rising superpower status in the world. China has also long been acutely aware of the fact that, as the largest annual gross crude oil importer in the world since 2017 (and the world’s largest net importer of total petroleum and other liquid fuels in 2013), it is subject to the vagaries of U.S. foreign policy tangentially through the oil pricing mechanism of the U.S. dollar. This view of the U.S. dollar as a weapon has been powerfully reinforced since Russia’s invasion of Ukraine and the accompanying U.S.-led sanctions that have followed, the most severe of which – as with sanctions on Iran from 2018 – relate to exclusion from use of the U.S. dollar. The former executive vice-president of the Bank of China, Zhang Yanling, said in a speech in April that the latest sanctions against Russia would “cause the U.S. to lose its credibility and undermine the [U.S.] dollar’s hegemony in the long run.” She further suggested that China should help the world “get rid of the dollar hegemony sooner rather than later.” Russia itself has long held the same view on the advantages for it of removing the U.S. dollar’s hegemony in global hydrocarbons pricing, but, while China was unwilling to overtly challenge the U.S. during the height of its Trade War under the highly unpredictable former U.S. President Donald Trump, it could do little about it on its own. A sign of Russia’s intent, though, came just after the U.S. reimposed sanctions in 2018 on its key Middle Eastern partner, Iran, when the chief executive officer of Russia’s Novatek, Leonid Mikhelson, said in September of that year that Russia had been discussing switching way from US$-centric trading with its largest trading partners such as India and China, and that even Arab countries were thinking about it. “If they [the U.S.] do create difficulties for our Russian banks then all we have to do is replace dollars,” he added. At around the same time, China launched its now extremely successful Shanghai Futures Exchange with oil contracts denominated in yuan (the trading unit of the renminbi currency). Such a strategy was also tested initially at scale in 2014 when Gazpromneft tried trading cargoes of crude oil in Chinese yuan and rubles with China and Europe. This idea again resurfaced following the latest international sanctions imposed on Russia following its invasion of Ukraine. Almost as soon as they were introduced, Russian President Vladimir Putin signed a decree requiring buyers of Russian gas in the European Union (EU) to pay in rubles via a new currency conversion mechanism or risk having supplies suspended. This threat nearly succeeded in exploiting existing fault lines running through the U.S.-led NATO alliance, as major EU consumers of Russian gas scrambled to work out how to appease Putin’s ruble payment demands, without overtly breaking any sanctions. Since then, Russia has simply toyed with the EU over ongoing gas supplies, most recently last week with its statement that it has scrapped the resumption of on/off supplies from the Nord Stream 1 pipeline – one of the main supply routes to Europe – after “discovering a fault during maintenance.” The scale and scope of this implicit threat was underlined again last week when Putin said that Russia might cut off all energy supplies to the EU if price caps are imposed on Russia’s oil and gas exports. The further expansion of
UAE beats India to become Kenya’s second-largest source market
The UAE has surpassed India to become Kenya’s second-largest source market, Business Daily newspaper reported, citing Kenya National Bureau of Statistics. Imports from the UAE surged 132% to 177.88 billion Shillings ($1.47 billion) in H1 2022 from 77.39 billion Shillings a year earlier. Fuel and lubricants worth 305.19 billion Shillings were imported in the first six months, a 91.86% jump from 159.07 billion Shillings in the prior year. The bulk of petroleum products in Kenya are sourced from the UAE, the newspaper said. Imports from India climbed 36.61% year-on-year to 150.25 billion Shillings during the same period. Total expenditure on petroleum products were higher than pharmaceuticals, vehicles, steel and iron, which are primarily imported from India. China, however, continued to hold the top position, with imports rising at 9.12% year-over-year to 227.95 billion Shillings.
Government may offer $2.5 billion to fuel retailers Indian Oil, HPCL and BPCL
India plans to pay about 200 billion rupees ($2.5 billion) to the state-run fuel retailers, such as Indian Oil Corp., to partly compensate them for losses and keep a check on cooking gas prices, according to people familiar with the matter. The oil ministry has sought a compensation of 280 billion rupees, but the finance ministry is agreeing to only about a 200 billion cash payout, the people said, asking not to be identified as the discussions are private. The talks are at an advanced stage but a final decision is yet to be taken, the people said. The three biggest state-run retailers, which together supply more than 90% of India’s petroleum fuels, have suffered the worst quarterly losses in years by absorbing record international crude prices. While the handout could ease their pain, it would add pressure to the government’s coffers that are already strained by tax cuts on fuels and a higher fertilizer subsidy to tackle mounting inflationary pressures. Shares of state-run retailers gained, with Hindustan Petroleum Corp. rising 1.7%, Bharat Petroleum Corp. adding 1.2% and Indian Oil closing 0.1% higher, after falling as much as 0.8% earlier in the session. The government had earmarked oil subsidy at 58 billion rupees for the fiscal year ending March, while fertilizer subsidy was pegged at 1.05 trillion rupees. These refining-cum-fuel retailing companies, which use more than 85% of imported oil, benchmarked the fuels they produce to international prices. Those shot up after a global recovery in demand coincided with reduced fuel-making capacity in the US and fewer exports from Russia. State oil companies are obligated to buy crude at international prices and sell locally in a price-sensitive market, while private players such as Reliance Industries Ltd. have the flexibility to tap on stronger fuel export markets.