Supply Concerns Keep Oil Prices Elevated
Crude oil prices inched lower on Monday but remained elevated following a six-week winning streak. Supply concerns spiked when Ukrainian forces attacked two Russian oil tankers in the Black Sea over the weekend. “The Ukrainian naval drone attack on a Russian vessel over the weekend does make for some unease in a market already dealing with tightening supply,” energy analyst Vandana Hari told Bloomberg. Despite a slight decline in prices earlier in the day, these remain higher than last week’s, still being boosted by curbs in OPEC+ production, Reuters noted in a report earlier today. “The bullishness is in line with our expectations of a stronger second half for oil compared to the first half,” the report quoted DBS Bank energy analyst Suvro Sarkar as saying. “But we think further upside may be limited and oil prices could consolidate around the $85 a barrel level (Brent) for a while, capped by ongoing concerns about the pace of China’s recovery and doubts about how long Saudi and Russia will continue to curb production and exports, respectively, given the spare capacity on hand,” Sarkar added. Last week, Saudi Arabia provided an additional boost for prices when it announced it would extend its voluntary production cuts of 1 million bpd for another month in September. Days after the announcement, the Kingdom also raised its official selling prices for most buyers. Neither move was a surprise to traders, who have regained some of their bullishness on expectations the U.S. Federal Reserve will sometime soon end its rate hikes. Russia, meanwhile, said it would reduce exports in September by 300,000 bpd, adding to the Saudi curbs. These, by the way, Riyadh said might deepen at some point. An additional prod for prices came from the U.S. shale patch where drilling rigs fell for the eighth week in a row to the lowest since March last year.
Reliance plans crude unit maintenance at Jamnagar complex
Reliance Industries Ltd plans to shut a crude unit and some secondary units at its 704,000 barrels per day (bpd) export focused plant for maintenance in September-October, three sources familiar with the plan said. Reliance is the operator of the world’s biggest refining complex which houses two plants with a combined capacity of about 1.4 million barrels per day. The crude unit and secondary units including hydrotreater will be shut for 3-4 weeks from mid-September, they said, adding the refiner also plans to shut a fluid catalytic cracker at its 660,000 bpd site for 47 days. The shutdown of units would curtail Reliance’s crude imports and may push up gasoline margins, trade sources said.
Russian oil to India in June the cheapest since war in Ukraine
The average cost of Russian crude landing on Indian shores in June was the lowest since Moscow’s invasion of Ukraine more than a year ago. The price for each barrel including freight costs was $68.17, down from $70.17 in May and $100.48 a year earlier, according to the latest figures from India’s Ministry of Commerce and Industry. While that’s higher than a $60 cap imposed by Western nations on Moscow, the threshold doesn’t include shipping. India has become one of the world’s top consumers of cheaper Russian crude since the war, along with China. Data from Kpler shows Indian imports dipping over the past two months, with flows expected to fall further in August as the OPEC+ producer fulfills a pledge to trim exports. The analytics firm sees shipments to the South Asian nation rebounding from October, however.
Gas Prices Inch Higher As TotalEnergies Shuts Down Port Arthur Refinery
French supermajor TotalEnergies was forced to shut down a unit at its 225,000-barrels-per-day refinery at Port Arthur in Texas due to a leaky pump, adding to other refinery outages that have pushed U.S. gasoline prices higher in recent days alongside the rise in crude oil prices. Total’s U.S. unit of the French energy major, said in a statement, carried by Dow Jones, that “A pump located in unit 825 developed a leak that reached the reportable quantity of un-speciated volatile organic compounds.” “The unit is being shut down in order to isolate the pump and stop the leak,” the refinery operator added. The emissions from the incident ended on Thursday night after 11 hours. The refinery, 95 miles east of Houston, is one of TotalEnergies’ six refining and petrochemicals platforms worldwide, and the company’s largest facility in the United States. Last week, the same refinery reported an operational disruption and gas emissions after the cogeneration unit at Port Arthur experienced a unit upset due to a loss nitrogen oxides steam injection. The latest incidents at TotalEnergies’ Port Arthur refinery add to other disruptions and outages at refineries on the U.S. Gulf Coast in recent days. Last week, an unexpected shutdown at the gasoline-making unit of ExxonMobil’s refinery at Baton Rouge, Louisiana, sent U.S. gasoline futures rallying to the highest since October 2022. Repairs at the Exxon refinery could take weeks and last for the rest of the driving season, thus reducing gasoline supply to the market. Gasoline prices are also responding to the recent rise in crude oil prices. This summer, gasoline prices are rising amid heatwave-related outages at some domestic refineries and WTI Crude jumping back to above $80 per barrel.
Saudi Arabia Is Cooking Up A Surprise For The Oil Markets
Recent production cuts by Saudi Arabia are beginning to take a toll on the nation’s economy, according to the IMF’s latest World Economic Outlook. The Kingdom’s 2023 GDP growth projections have been significantly reduced, now expected to reach only 1.9%, down from the previously projected 3.1% in May. The IMF attributed this downgrade to the production cuts announced in April and June as part of the OPEC+ agreement. Despite efforts to diversify the economy with Vision 2030, Saudi Arabia remains heavily reliant on hydrocarbon revenues, with the impact of oil market developments still outweighing the growth potential of non-hydrocarbon sectors. Although the Kingdom has taken strides in economic diversification, all new projects, including the ambitious Giga-Projects, continue to be tied to oil and gas funds. Aramco’s substantial revenue base remains crucial for driving economic activity. While this analysis may not sit well with Saudi officials, the IMF downgrade could potentially be followed by similar reactions in the financial markets. The unilateral production cut presented by Saudi Energy Minister Prince Abdulaziz bin Salman, which was extended during the recent OPEC+ meeting, is now showing negative consequences. The Kingdom’s official stance is that Riyadh is the sole entity capable of controlling and stabilizing markets, particularly oil prices. However, many analysts have expressed skepticism about the true motives behind the Saudi move, as a tighter demand-supply situation is expected in the latter half of 2023. Some argue that price fluctuations and speculation are part of the market’s natural dynamics, and intervention may not be necessary. Evidence supporting the effectiveness of the Saudi cut is debatable. When the cut was initially announced, markets showed minimal reaction, and prices remained weak. The slow economic recovery in China and marginal global demand growth have kept oil prices within the range of $75-85 per barrel. The recent price rally can be attributed to factors unrelated to Saudi Arabia’s actions, such as stock withdrawals and reduced fear of a global recession. Saudi Arabia’s progress in economic diversification projects requires higher foreign direct investments (FDI) and increased government revenues, as well as access to international financial markets. The IMF report has cast some doubt on these aspirations. With the MENA region experiencing lower GDP growth projections and some countries facing financial crises, Saudi Arabia must reevaluate its short-term economic strategies. While non-oil GDP growth is robust, it cannot fully compensate for the current reliance on oil revenues. The low FDI inflow during Q1 2023 raises concerns, especially when compared to the expectations set in Vision 2030. Market analysts and media should closely monitor Riyadh’s actions in the coming weeks, as a significant change may be on the horizon. Although no immediate changes are expected at the upcoming JMCC meeting, a Saudi production hike before October 2023 is highly plausible. Signs of a new demand-supply crunch in oil and petroleum product storage volumes, along with positive indicators in Asia, Europe, and the USA, could lead to a dramatic shift in the Kingdom’s production volume strategies. A surprise move to prevent oil prices from surpassing $90-100 per barrel in Q4 could be in the works. While the media may not be informed, it is likely that Crown Prince Mohammed bin Salman and his brother are preparing a new Saudi surprise after the summer season.
Russia Anticipates $11 Billion Energy Revenue Boost Despite Embargos
Russia is expecting extra oil and gas revenues to reach 1 trillion rubles, or $11 billion, in the last five months of the year despite sanctions, embargos, and price caps, two people with knowledge of the situation told Bloomberg. The Finance Ministry hopes to put the fat revenues toward covering its budget deficit, which has bloomed thanks to the war in Ukraine, the anonymous sources suggest, although fiscal rules dictate that windfall revenues should be used to purchase foreign currency for the National Wellbeing Fund’s reserves. But those rules could change, according to a statement made this week by the Finance Ministry. “The government may consider reducing the use of the National Wellbeing Fund for financing additional federal budget expenditures in the transition period of 2023-2024,” a Thursday statement read. The $11 billion extra is in addition to the baseline level laid out in the country’s budget. So far this year, the ruble has weakened compared to the dollar—which means more rubles in additional revenue for the government. The extra windfall from oil and gas revenues comes even as Russia’s oil and gas revenues fell by 47% to 3.38 trillion rubles ($37.4 billion) in the first half of the year from the same period in 2022. In the first five months of the year, Russia’s budget deficit reached $42 billion, thanks in no small part to what it calls its “special military operation” in Ukraine. The United States still have a positive outlook on the G7 price cap on Russian oil—a price cap that was designed to curtail the country’s oil and gas revenues to give it less to spend on its efforts in Ukraine. “Our approach has struck at the heart of the Kremlin’s most important cash cow. Before the war, oil revenues constituted about a third of the total Russian budget, but in 2023 that number has fallen to just 25%,” a U.S. Treasury official said earlier this week. Despite its outlook for increased windfalls, for September, Russia said it had plans to cut exports by 300,000 bpd—an announcement that helped to send oil prices higher.
Oil Ministry and its PSUs lack seriousness in setting up CBG projects: Parliament panel
The parliamentary standing committee on petroleum and natural gas has come down heavily on the Oil Ministry and its PSUs for showing “lack of seriousness” in setting up compressed biogas (CBG) projects in the country. In a strong response, the committee said the Ministry of Petroleum and Natural Gas (MoPNG) failed to prevail upon its PSUs to set up CBG projects, which is important for demonstrating the viability of such projects and instilling confidence in investors, despite the same being recommended. “The committee are not happy with this lack of seriousness being exhibited by the Ministry and Oil and Gas PSUs. Besides, the committee are concerned to note that the Ministry have not shown any interest to issue orders to Oil and Gas PSUs for investing in creating and maintaining infrastructure for promotion of CBG projects which create a doubt that the Ministry itself is sceptical about the viability and success of the CBG projects,” it said. The panel emphasised that unless Oil and Gas PSUs “shed their reluctance” and come forward in investing in a few CBG projects, it will be difficult to persuade private entrepreneurs and investors to come forward and invest in the CBG sector. The report is on the action taken by the government on recommendations made in the 17th Report (17th Lok Sabha) of the standing committee on petroleum and natural gas on review of implementation of CBG (SATAT), which was placed in Parliament on December 21, 2022. The government’s Action Taken Replies were received on April 20, 2023, and the panel considered and adopted the report on July 27, 2023, which was then placed in Parliament on August 1. Lack of interest The committee in its original report had suggested that Oil PSUs should “aggressively” enter into CBG sector through company owned company operated (COCO) model or joint ventures with other OMCs/ entrepreneurs. In its response, the MoPNG said “oil and gas marketing companies (OGMCs) have been investing in creating and maintaining infrastructure for promotion of CBG projects which include development of Retail Outlet, laying of pipeline, purchase of equipment, etc. Further, they are also investing in establishment of CBG plants.” However, the panel was not happy with the response of the Ministry and countered that the Ministry is trying to “mislead” it. “The committee are not satisfied with the reply of the Ministry as it does not mention any new measure taken by Oil PSUs in this regard and has rather resorted to mislead the committee by furnishing the details of the CBG projects that are already being undertaken by IOCL, HPCL and GAIL,” it added.
How Long Will the Oil Price Rally Last?
It’s been a wild week for oil prices. First soaring on news of the biggest U.S. inventory draw in years, benchmarks later slumped just as sharply when Fitch downgraded the United States’ credit rating from AAA to AA+. Barely a day later, prices rebounded again after Saudi Arabia did what pretty much everyone expected, extending its voluntary production cuts of 1 million barrels daily into September. Where prices go from here is anyone’s guess, but analysts are saying the rally won’t last. That appears to be the opinion of the majority of analysts polled recently by the Wall Street Journal. Per that poll, Brent crude should average $87 per barrel in the current quarter and remain around this level until the second quarter of 2024. For West Texas Intermediate, the analysts see a price of $83 per barrel this quarter and into the first half of 2024. Even with continuing cuts from OPEC+ and a rebounding Chinese economy. The reason they don’t see prices much higher is that China’s recovery from the pandemic is moving more slowly than expected and, interestingly, that Saudi Arabia’s voluntary cuts have increased its spare production capacity. China has indeed been recovering more unevenly than analysts seem to have pictured it, but it is recovering, and its oil demand is at a record high. It may, however, have peaked earlier in the year, which would suggest slower growth in the next five months and possibly beyond. As for spare production capacity, that was a substantial concern a couple of years ago when demand for oil began to recover after the first wave of lockdowns. The concern was that, because of underinvestment, the global oil industry had not enough spare capacity to respond to a potential surge in demand. For now, this warning has not had to be tested, but Saudi Arabia is working on expanding its spare capacity over the medium term. While it does that, however, it is also limiting production. By limiting production, it is limiting the amount of oil immediately available to buyers, which renders the argument for greater spare capacity a little irrelevant. Saudi Arabia may boost its total production capacity to 13 million barrels daily, as it plans to do, but if it is only producing 9 million barrels daily to keep prices above $80, the size of its spare capacity has very little importance for day-to-day and even longer-term price developments. There is one more factor that is acting as a cap on prices, however, and that is the rebound in offshore drilling. Wood Mackenzie reported last month that deepwater rig utilization is on the rise as companies step up exploration offshore. Goldman Sachs also noted this rebound in a recent note, cited by the WSJ. “The significant rise in OPEC spare capacity over the past year, the return to growth in international offshore projects, and declining U.S. oil production costs limit the upside to prices,” the bank said. It’s worth noting that along with falling oil production costs in the U.S., production growth is also slowing down, which should boost the upside to prices. The EIA recently projected that shale oil production is set to decline this month after hitting a peak in July. The August decline, to 9.4 million bpd, will be led by the Permian, the most productive shale basin right now. Meanwhile, Saudi Arabia has indicated it may extend the cuts further or deepen them. Saudi Arabia appears back into “Whatever it takes” mode to keep prices at levels that are closer to its government spending plans. And there is little any other producer can do to counter the effect of those cuts in short order. The main drag on prices remains the economic outlook for the biggest consumers. Until recently, the fear of a recession in the U.S. held sway over traders, but recently the outlook brightened, which contributed to higher prices. Then came the Fitch downgrade and although Treasury Secretary Janet Yellen said it was “entirely unwarranted” and JP Morgan’s Jamie Dimon called it “ridiculous”, the downgrade rattled markets. In fact, Dimon said that the U.S. economy is doing so well that even if a recession does emerge, it will not be that big of a deal. “It’s pretty good, even if we go into recession,” Dimon said, as quoted by CNBC, this week. “The storm cloud part is still there.” It is this storm cloud, along with economic trends in Europe and Asia that will continue to shape oil prices over the coming months. Grave recession warnings have yet to materialize, if ever, and that fact has served to moderate the rise of oil prices. But if Saudi Arabia decides to deepen the cuts and Russia plays along with its own curbs, the current factors that cap oil prices may weaken enough to allow a stronger rally.
India’s energy consumption growing at three times the global average, says Oil Minister
India’s energy consumption is growing at three times the global average, the Minister for Petroleum and Natural Gas, Hardeep Singh Puri, said. By keeping domestic fuel prices “affordable” for consumers and by making fuel “available” to everyone, India’s energy consumption is now growing at a healthy three percent annually, compared to the global average rise of one percent. Speaking to a cross-section of correspondents in New Delhi, Puri said Prime Minister Narendra Modi had monitored domestic fuel availability during volatility in the global energy market and ordered cuts in central excise duties and value added tax on petrol and diesel. These made prices affordable for consumers. India also increased its sources for crude oil imports from 27 to 39 countries. “The challenges in the global energy market were there already, before the February 2022 Russia-Ukraine conflict. But we have navigated our way through this global turbulence.” Puri said India imports five million barrels of crude oil in a day. “We bought from wherever we could when shortages were feared.” As a result of these steps, price rise of fuel for domestic consumers in India was only 2.36 percent in the last two years, while the comparative price rise in many developing and developed countries was around 30 percent. “Domestic prices were last changed in May 2022,” the Minister said. India’s oil marketing companies (OMCs) may cut petrol and diesel prices if global crude oil prices remain stable at current levels because the OMCs have posted robust earnings for the April-June 2023 quarter.
LNG project: China-Pakistan company out, India in
The Government of Sri Lanka has decided to cancel a tender awarded to a China-Pakistan consortium to supply Liquefied Natural Gas (LNG) and lay a pipeline network after being selected through an international open competitive bidding process and instead consider an offer by an Indian company. The China-Pakistan Engro Consortium was selected last year as part of a step towards reducing the cost of power production. However, last Monday, Power and Energy Minister Kanchana Wijesekera submitted a Cabinet paper titled “Revisiting the National Energy Policy Related to the Development of Natural Gas Infrastructure in the Country,” to suspend the ongoing LNG procurement process. Accordingly, the suspension covers the Development of a Floating Storage and Re-gasification Unit (FSRU) off Kerawalapitiya on a Build, Own, and Operate basis and a compatible mooring system on Build, Own, Operate and Transfer basis. It also covers the associated projects – the development of Offshore and Onshore Re-gasification Liquefied Natural Gas (RLNG) Transmission Pipeline Network with an Onshore Receiving Facility (ORF) and an associated System from the Floating Storage and Re-gasification Unit (FSRU) to existing and future Kerawalapitiya and Kelanitissa Power Plants on Build, Own, Operate and Transfer (BOOT) basis. After following the proper tender process, the Cabinet-Appointed Negotiating Committee (CANC) in August last year granted approval to award the tender to the Engro Consortium. Accordingly, although the Power and Energy Ministry had to submit a cabinet paper to enable the tender to be awarded thus, the ministry delayed the process, Ministry sources said. The Sunday Times learns that the process had been delayed as the Indian government strongly objected to awarding this tender to the China-Pakistani company. However, finally, the subject minister had requested cabinet approval to suspend this officially permitted tender, under these circumstances. The Ministry had instead attempted to award this tender to Petronet LNG Ltd. of India, as an unsolicited procurement, but since the company did not have any experience regarding FSRU, the ministry had rejected the request and said if the Indian government supported the company, they would be able to supply LNG in containers. “This will badly hamper the investor confidence and no genuine investor will come forward in future to this country,” the official said. A Ceylon Electricity Board (CEB) top official said, “It will be a costly solution as there would be no competition, with prices being determined by the Indian company”. He said it could have an impact on the electricity tariff which would be increased and all costs would be passed on to the consumers. The CEB’s Least Cost Long Term Generation and Expansion Plan (LCLTGEP) (2018-2037), which was approved by the Public Utilities Commission of Sri Lanka (PUCSL) in 2018, identifies the need for converting furnace oil and diesel power plants to LNG power plants to reduce power generation costs. Accordingly, the CEB called for international competitive open tenders from February 18, 2021 to June 25, 2021, and two bidders came forward. At that point, the US-based New Fortress Energy Company which gave rise to much controversy in 2021, had, without submitting an open bid for this tender, presented an unsolicited proposal to the government. The then Gotabhaya Rajapaksa government which supported this unsolicited proposal had even signed an agreement to sell 40% of the shares of the 300 MW Treasury-owned Kerawalapitiya Yugadhanavi Diesel Power Plant to the New Fortress Energy. However, due to strong objections to the deal, the agreement had not been implemented up to now. Against this backdrop, the CANC granted approval on August 4 last year to award the tender to the China-Pakistan Consortium, one of the two companies which had submitted proper bids for the tender.