The U.S. Is Preparing Its Response To The “Short-Sighted” Strategy Of OPEC+
The United States is considering “response options” in its relations with OPEC+ members and its de facto leader Saudi Arabia after the group announced a large 2 million bpd nominal cut in its collective oil production target earlier this week, U.S. Secretary of State Antony Blinken said. “As to the relationship going forward, we’re reviewing a number of response options. We’re consulting closely with Congress,” Secretary Blinken said at a press conference in Peru late on Thursday. “We will not do anything that would infringe on our interests – that’s first and foremost what will guide us – and we will keep all of those interests in mind and consult closely with all of the relevant stakeholders as we decide on any steps going forward,” Secretary Blinken added. Asked to comment on the OPEC+ production cut, he said, “We see the decision as both disappointing and short-sighted, especially as we have a global economy that is dealing with the implications of recovering from COVID, as well as the aggression from Russia in Ukraine, the consequences that’s having.” “We’ve said all along that supply needs to meet demand, and we’ve been clear about that and we’ve been working on that,” Secretary Blinken said. Following the OPEC+ decision, U.S. National Security Advisor Jake Sullivan and National Economic Council (NEC) Director Brian Deese said in a statement, “The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of Putin’s invasion of Ukraine.” “In light of today’s action, the Biden Administration will also consult with Congress on additional tools and authorities to reduce OPEC’s control over energy prices,” Sullivan and Deese added. President Joe Biden has directed the Department of Energy to deliver another 10 million barrels from the Strategic Petroleum Reserve (SPR) to the market next month, they added. “The President will continue to direct SPR releases as appropriate to protect American consumers and promote energy security, and he is directing the Secretary of Energy to explore any additional responsible actions to continue increasing domestic production in the immediate term.”
CNG price hiked for seventh time this year
With global prices of natural gas rising sharply and in India by 40% from October 1, a hike in the price of compressed natural gas (CNG) was only to be expected. Effective midnight of October 3, 2022, Mahanagar Gas announced a price hike of Rs 6 per kilogram in Mumbai, up 7.5%. This takes the price of CNG to Rs 86 per kg in what is the seventh price hike in the year till date, and also returns to the same price level 46 days after CNG prices were reduced to Rs 80 on August 17. CY2022 till date has seen two CNG price reductions, the last one on August 17 – by Rs 6 per kg – and the previous one – also by Rs 6 a kg – on April 1 (see data table below). October 5’s Rs 6 hike takes CNG price to Rs 86 per kg in Mumbai and returns to the same level 46 days after CNG prices were reduced to Rs 80 on August 17. Over a 20-month period, from February 2021 through to September 2022, CNG prices (in Mumbai) have risen by 74%: from Rs 49.40 per kg to Rs 86. Given the global firming up of energy prices, it is likely there could be further price hikes in the future too. Why the latest price hike? On October 1, the Oil Ministry hiked natural gas prices to US$ 8.57 per million British thermal units (per mmBtu) from the previous US$ 6.1. This makes for a substantial 40.50% increase, necessitating the latest price hike. In its communication dated October 4, Mahanagar Gas said: “The price of domestically produced APM gas has been revised by Petroleum Pricing & Analysis Cell (PPAC) with effect from October 1, 2022. The revised price reflects an increase of 40%. Besides, allocation of APM gas to MGL for CNG and domestic PNG segments has also been concurrently reduced by 10% due to which MGL is required to source RLNG at a substantially higher cost in order to cater to the increasing requirement of CNG and D-PNG in MGL’s license areas.”
OPEC+ Production Cut Adds To Uncertainty In Oil Markets
This week’s decision from OPEC+ to cut the alliance’s collective oil production target by 2 million barrels per day (bpd) isn’t helping the already uncertain outlook of oil supply and oil trade flows, refiners and traders tell Bloomberg. Earlier this week, OPEC+ announced the biggest cut to its collective target since 2020, slashing the production target by 2 million bpd. In reality, the actual cut from the current oil production level would be half that figure, at around 1 million bpd-1.1 million bpd, and shouldered mainly by Saudi Arabia and other Gulf producers, most analysts have estimated. Yet, the oil output cut is set to raise costs for refiners and potentially tighten supply to the key oil-importing region, Asia. The OPEC+ group’s move is expected to raise the cost of crude oil imports amid a rising U.S. dollar and expected higher fuel consumption during the winter, Kim Woo Kyung, a spokesperson for South Korean oil refiner SK Innovation, told Bloomberg. However, the spokesperson noted that overall oil demand could be hit as economies slow. India, the world’s third-largest crude oil importer, sees the OPEC+ production cut as a setback, government officials and sources at refineries told Bloomberg. The OPEC+ production cut for November would come into force weeks before the EU embargo on imports of Russian crude oil by sea takes effect on December 5. These two factors create major supply uncertainty in the oil market in the near term. India is already said to be looking to lock in term purchase contracts with crude producers, expecting a redirection of trade flows and a tighter market when the EU embargo on imports of Russian crude enters into force. For oil prices, the OPEC+ cut is bullish, analysts said after the group’s meeting. Morgan Stanley said oil prices would rise again to $100 per barrel faster than previously estimated, and lifted its price forecast for the first quarter of 2023 to $100 from $95 per barrel. Goldman Sachs raised its Brent Crude forecast for this quarter by $10 to $110 per barrel.
ONGC Plans to Invest $1 Billion in Brazilian Offshore Block Held by Petrobras
India’s largest government-owned-oil producer ONGC Videsh Ltd (OVL), is likely to invest USD 1 billion in a Brazilian offshore hydrocarbon block and raise its stake. Brazil’s Petroleo Brasileiro SA (Petrobras) currently owns a 75 per cent stake in the block, and OVL holds the remaining 25 per cent. As per the reports, the block was discovered in 2019 and is expected to start production by 2026. Bharat Petroleum Corporation Ltd (BPCL) inked an agreement with Petrobras to import crude oil. The Indian oil companies are more focused on Latin America. Indian Oil Corporation (IOL) has also inked an agreement with Colombia’s Ecopetrol SA to procure oil. OVL, Indian Oil Corp (IOC), and Oil India Ltd are also planning to invest jointly in the Vostok project of Russian integrated energy company Rosneft. According to the media, India has also been looking to invest in Novatek’s Arctic LNG-2 project as part of its energy security efforts. To protect from future disruptions, the central government and companies have been endeavouring to diversify the sources of oil. Currently, India imports 85 per cent of its oil requirements from abroad and 55 per cent of all its natural gas needs.
How will high global natural gas prices affect India?
Ahead of the winter, Europe is making desperate attempts to purchase natural gas from sources other than Russia, putting Asia in a tight spot. What does it mean for India? Let us find out. Why do we need natural gas? Natural gas is used to generate electricity and make fertilisers. It is also converted into CNG which is used to run automobiles. It is converted to LNG and is imported by countries to meet their energy requirements. So natural gas is as essential as oil. Why is it in short supply? Russia was the largest exporter of natural gas in 2021. But its invasion of Ukraine changed the equations, and plunged Europe into an energy crisis. And the effect of Europe’s energy crisis is slowly being felt in India too. It is threatening to derail its gas economy. Russia used to supply 40% of Europe’s gas requirement before the Ukraine invasion, but it came down to 9%. Gas supplies to Germany were also hit as Russia cited Nord Stream 1 maintenance. The pipe, which runs under the Baltic Sea, is Germany’s gas supply backbone and accounts for over one-third of Europe’s gas supplies. This means that Europe is looking to get gas from other sources, which leaves very little for Asia. For instance, Russian gas producer Gazprom’s supply to India has been dwindling since the start of the war. Europe is now expecting 90% more LNG on the spot market than they have secured under long-term contracts. Compared with last winter, European LNG imports are expected to be up 16%. So the spot LNG prices have soared and hit price-sensitive emerging markets badly. European gas futures are more than four times the price a year ago, according to ICE data. Europe’s TTF gas futures benchmark, a gas trading platform in the Netherlands, went as high as €346.5 per megawatt hour (Mwh) on August 26, jumping over 23 times from Covid-affected October 2020. According to reports, India is now looking for alternatives and has reached out to Iraq, Saudi Arabia, UAE, and the US to secure liquified natural gas (LNG) at affordable prices. Although the price declined towards the later end of September, it was still 27 times more than what Indian importers paid for spot supplies of the fuel in late 2020. In India, spot LNG prices were around Rs 742 per million British thermal units at August end, 135% higher than a year ago and 285% higher than two years ago. According to analysts, strong demand for LNG will make it difficult for India to compete in the global natural gas market. Matthew Carr, head of CarrZee, a London-based clean energy intelligence provider, said that crazy high prices will slow the developing world’s attempt to improve access to energy and electricity. Research analyst Sumit Pokharna tells more Sumit Pokharna, Research Analyst and Vice-President, Kotak Securities says 50% of India’s gas requirements is met from imports. Situation may get grave in the coming winter. Double whammy is that rupee has also depreciated. High gas prices have dent India’s imports as Europe is sourcing most supplies by paying record prices ahead of the winter. In April-August period, India’s LNG imports fell 10 per cent. Domestic natural gas production rose to 34 billion cubic meters in FY22, from 28.3 billion cubic metres in FY21. Gas consumption too fell by 10 per cent in August from a year earlier. In the first quarter of current fiscal, gas consumption fell 2.5 per cent. India’s gas consumption is largely accounted by fertilisers, city gas distribution, power and other sectors. Meanwhile, in India, local gas prices, which are revised twice every year, are linked to global benchmarks. So, higher global benchmark prices mean that domestic prices would also rise. In line with that, the price of natural gas has been raised by 40% to a record high last Saturday. The record high local natural gas prices are likely to make CNG and PNG cost more. PNG prices have already risen 70 per cent in the last one year. According to a report in the leading financial daily, Indian automakers have cut their production target for CNG-powered vehicles by 25 to 30 per cent. City gas distribution companies are deliberating whether to pass on the cost or absorb it and worried that the hike would impact sales volume, due to lower offtake by industrial units. At present, around 85 per cent of city gas distribution segment consumption is being met through domestic gas and the rest through imports. Research analyst Sumit Pokharna tells more. Sumit Pokharna, Research Analyst and Vice-President, Kotak Securities says government could have deferred the price hike. The current hike will add to India’s inflation. CGD companies may have to increase CNG prices. Meanwhile, the steep hike in gas prices is expected to increase Centre’s annual fertiliser subsidy bill. According to a Business Standard report, the fertiliser bill was estimated to have last risen to Rs 2.3 trillion as against budgeted Rs 1.05 trillion. On the upside, the rise in gas prices will likely boost earnings of ONGC, the key producer of domestic APM and others like Oil India. Going forward, as we head towards winter, the gas prices are expected to remain elevated, impacting margins of CGD players and adding to inflation. In the longer term, India may need to expedite its shift to alternative sources of energy and reduce dependence on hydrocarbons.
Goldman Sachs Boosts Oil Price Predictions In Bullish Update
Goldman Sachs raised its 2022 price forecast for Brent crude from $99 to $104 per barrel. The increase was driven by the OPEC+ decision to reduce output by 2 million bpd. Although the 2-million-barrel figure is nominal and the actual output cut would be smaller, at around half that, the bank believes the physical oil market is tight enough to justify such price forecast updates. On a quarterly basis, Goldman sees Brent trading at $110 this quarter and rising to $115 per barrel in the first quarter of 2023. In arguably the most bullish part of Goldman’s update, the bank said that there could be a $25 upside to their Brent forecast if OPEC+ maintains its output reduction through to 2023. Yesterday, Morgan Stanley also raised its price forecast for Brent crude, to $100 for the first quarter of 2023. According to Goldman’s latest forecast, the average for Brent next year could be $110 per barrel as a result of the cuts. The bank’s analysts commented that such a deep cut would prompt a response from the United States and that this response would most likely be a further release of strategic reserve crude. According to Goldman, even the International Energy Agency might join the reserve release to keep a lid on oil prices. Some media commentators have criticized the reduction of physical supply of oil at a time when most big consumers are struggling with inflation and an already short supply of energy. Bloomberg’s Javier Blas suggested it was a mistake. The OPEC+ camp, on the other hand, motivated the move with market circumstances, with Saudi energy minister Abdulaziz bin Salman saying he did not want to gamble with the market. The remark likely refers to recession expectations that caused oil prices to decline by about a quarter between July and September. “The oil market’s buffers (stocks and spare capacity) remain critically low, and higher prices remain the key viable, long-term solution to increased inventories in the short term and higher supply capacity medium term,” Goldman analysts said. While oil prices had cooled off slightly early on Friday morning, they were still set for the largest weekly gain since Spring.
Russia Claims Natural Gas Could Still Flow Through Nord Stream 2
Russia could restart the supply of natural gas to Germany and its neighbors via an undamaged section of the Nord Stream 2 pipeline, Deputy Prime Minister Alexander Novak told Russian media. “Unfortunately, due to sabotage, a string [of Nord Stream 2] was damaged, and an investigation is required to make further decisions about the fate of the string,” Novak told RIA Novosti. “As for the second string, it is ready, fully built, and if the necessary legal decisions are made by our European colleagues regarding certification and removal of restrictions, I believe that Russia could provide adequate supplies through this string of the gas pipeline in a short time,” he explained. The statement comes a couple of weeks after a German politician said that gas will never flow via Nord Stream 2 because Germany could never again see Russia as a reliable energy supplier. Soon after, the Nord Stream 1 and 2 pipelines became the target of sabotage that seems to have damaged the older pipeline beyond repair. An investigation launched by the Swedish authorities earlier this month confirmed there were detonations at the pipelines, strengthening suspicions of serious sabotage, per a statement. Four leaks, two in each of the Nord Stream 1 and 2 pipelines, were discovered last week after gas started leaking earlier this week from the infrastructure just outside Swedish and Danish territorial waters in the Baltic Sea. Nord Stream 2 was never put into operation after Germany axed the certification process following the Russian invasion of Ukraine. Russia, for its part, shut down Nord Stream 1 indefinitely early this month, claiming an inability to repair gas turbines because of the Western sanctions. Meanwhile, Germany, which was the main beneficiary of the gas flow via Nord Stream 1, is struggling to secure enough gas for the winter, with a number of officials warning demand reduction would be key to making it to spring without too much pain.