Standard Chartered Sees Oversupplied Gas Markets, Tightening Oil
Last year, the month of January recorded an oil mega-surplus of 3.4 mb/d, the third biggest surplus in the first month of the year over the past two decades. January is a seasonally slow month for oil markets due to weak demand. The entire first quarter of 2023 saw oil markets oversupplied with global oil inventories growing by 151 million barrels. Thankfully for the oil bulls, market fundamentals have kicked off the new year on a high note. Commodity experts at Standard Chartered estimate that last month’s oil demand clocked in at 99.939mb/d, just 61 thousand barrels per day (kb/d) short of 100mb/d. Oil markets even managed to post a small surplus to the tune of 10 kb/d, marking only the third January surplus in 20 years. StanChart has predicted an inventory draw of 99mb in Q1-2024, with the relative y/y swing from surplus to deficit coming in at 250 mb or 2.7 mb/d. Unfortunately, oil markets have been rather slow to react to tightening fundamentals despite the twin tailwinds of the strong improvement in overall balances as well as strong OPEC+ compliance with voluntary cuts and quotas. Brent futures for March delivery have gained 8.3% so far this month to trade at $83.75 per barrel, still some distance away from the $90+ fair value by StanChart. The recent pattern has been a slow upward trend as oil prices powered through a series of strong technical resistance levels, coupled with large rapid intra-day movements that the experts believe is the work of algorithmic traders. Many of the more fundamentally driven funds remain on the sidelines thus giving greater sway to algorithmic trading. The experts have argued that whereas physical traders appear increasingly convinced of the underlying strength of the oil markets, financial traders are not yet buying the bullish thesis due to a variety of potential headwinds including top-down concerns based on the economic outlook and potential currency movements. After a sharp fall in the final months of 2023 due to falling interest rates, the dollar has been steadily gaining against the major world currencies in the current year after interest rates reversed course thanks to the Fed signaling it will cut rates by a smaller-than-expected margin. Last month, at the Federal Reserve’s January policy meeting, the Fed kept rates unchanged at a range of 5.25 to 5.5% and reiterated that policymakers expect to cut rates only three times this year. Prior to the meeting, the market had been pricing in as many as five cuts in the current year and even seven cuts just a few months earlier. Higher interest rates correlate with a stronger dollar, which acts as a headwind for oil and commodity prices. Oversupplied gas markets Unfortunately, the same cannot be said for natural gas markets. Two years since Russia invaded Ukraine, Europe’s gas supply security has grown significantly more robust. EU gas inventories remain on track to finish the withdrawal season at a record high, setting the scene for a summer of low prices. Gas markets tightened considerably in mid-January when a cold snap pushed weekly draws above six billion cubic meters (bcm), narrowing the surplus above the five-year average. However, this tightening was only short-lived, and inventories have since climbed against the five-year average on 30 of the past 31 days while weekly draws have fallen below 1.7 bcm. StanChart has forecast that Europe’s gas inventories will set a new record of at least 67.5 bcm by the end of the current withdrawal season, above the previous record at 63.9 bcm. That’s more than twice the 29.1 bcm inventory level recorded at the end- of the withdrawal season in 2022, shortly after Russia invaded Ukraine. Not surprisingly, Dutch Title Transfer Facility (TTF) prices are 68% lower than they were at that period and a full 93% lower than the August 2022 peak. Many experts have predicted that high inventory levels in the pivotal European market will keep global prices depressed, with the upshot being that low prices might allow some lost demand to return. StanChart has noted that whereas a diversification of sources has played a key role in improving Europe’s supply security, weak demand has also played a part in rising inventories. According to StanChart’s calculations, EU gas demand for the first 16 days of February came in 12.4% lower y/y and 18.4% lower than in February 2022. The analysts have warned that there’s been some permanent demand destruction with demand unlikely to return no matter how low prices fall due to some industrial capacity shutting down, shifting to other regions or switching to other feedstocks.
Woodside to Sell $1.4 Billion Stake in LNG Project to Japan Power Giant
Australia’s Woodside has struck a deal to sell a 15.1% stake in the Scarborough LNG project to JERA—the biggest power utility in Japan. The deal is valued at $1.4 billion and will secure long-term liquefied gas supply to JERA’s clients. Per Woodside, the sale would include a payment of $740 million as a price tag plus reimbursement for the money the Australian company had already spent on the development of the offshore project since 2022. This is the second stake in Scarborough that Woodside sells to a Japanese utility in less than a year. In August 2023, the Australian energy major sold 10% in Scarborough to LNG Japan for $880 million. In addition to the stake, LNG Japan was set to get as part of the deal 12 LNG cargoes of 900,000 tons each annually from Scarborough. The JERA deal also includes LNG cargo deliveries, to the tune of six annually for a period of ten years, beginning in 2026, Woodside said in the news release on the deal. Japan is almost exclusively dependent on energy imports for its consumption and liquefied natural gas is one of the country’s chief forms of energy imports. The country is also the largest buyer of LNG from Australia because of its proximity, which makes the purchases more affordable. After the second stake sale, Woodside will remain the holder of a 74.9% stake in the Scarborough project. Investment in the facility is seen at $12 billion, with first cargo targeted for 2026. The Scarborough facility will have an annual capacity of 8 million tons of liquefied natural gas. Woodside recently forecasted that LNG demand will continue growing on a global scale driven by Asia’s rising consumption, the need for security of energy supply, and decarbonization. “The world’s demand for Woodside’s products is expected to be resilient in the coming decades as populations and economies grow, with our target markets in Asia driving primary energy demand,” chief executive officer Meg O’Neill said on the company’s investor briefing day in November last year.
China Seeks Cheap Spot LNG Supply as Prices Dip to Three-Year Low
Chinese LNG importers are on the lookout for cheaper supply of liquefied natural gas on the spot market as prices in North Asia have halved from October levels and slid to a nearly three-year low last week, traders familiar with the deals told Bloomberg on Thursday. Shenzhen Energy Group and China Gas Holdings Ltd have entered into talks with potential suppliers for more spot LNG cargoes for the coming months, while China Resources Gas Group has bought a shipment for delivery in the middle of March, Bloomberg’s sources said. China – the world’s top importer of the fuel after outstripping Japan, again – has returned to the spot market in search of cheaper LNG supply as prices tumble. Currently, spot LNG supply is competitive with local gas and oil products, according to Bloomberg’s sources. As natural gas inventories in Europe and Asia are at comfortable levels for a winter season, and demand is tepid in both continents, the average spot LNG price for April delivery into Northeast Asia plunged by 7.4% last week to $8.80 per million British thermal units (MMBtu), according to estimates from industry sources quoted by Reuters. That was the lowest Asian spot LNG price since the end of April 2021. Demand was weak in the past two weeks even in China, due to the Lunar New Year holiday, and overall demand in Asia is lower amid high inventories both in Asia and in Europe. As a result, spot LNG prices in Asia have now halved compared to the levels from October 2023, just before the 2023/2024 winter began. As the winter season in the northern hemisphere is drawing to a close, spot LNG prices are expected to further slide into the spring, analysts say. Chinese LNG imports have recovered from a decline in 2022 when a spike in prices and Covid restrictions hit demand, but they are still lower compared to the levels seen in 2021.
Natural Gas Price Drop Could Spell Doom for Producers
Natural gas prices have continued to fall, with a mild winter and overproduction that has seen producers in the American shale patch attempt to dial down output only to have oil companies producing gas as a byproduct throw a spanner in the plans. For commodities traders, the floor is probably around $1.50, with February prices now under $1.70 per MMBtu. This situation prompted Chesapeake Energy in its earnings report earlier this week to announce it would reduce its drilling rigs to lower production. Natural gas futures received a bump from that move, but were still hovering in the $1.66 range on Thursday afternoon, and down over 5% on the day. El Niño is a key culprit, weakening trade winds and pushing warm water toward the west coast, resulting in warm weather conditions that reduce the need for natural gas for heating. In the mid-1990s, El Niño caused a major slump in natural gas prices that led to significant layoffs, restructurings and mergers in the industry. Between 1986 and 1995, there were three El Niño winters–all of which coincided with low Henry Hub prices, but also with industry restructuring, according to historical research published by Offshore Magazine in the ‘90s. Since the shale boom in the U.S., this has become more complicated to deal with, with purely gas producers and oil producers producing gas as a by-product not necessarily on the same page in terms of output goals. While Reuters points out that American gas producers have been trying to stem output for a year, their counterparts in the oil patch have not played along. Last year, Reuters reports, U.S. gas firms slashed drilling by 22%; yet, the country is expected to produce 105 billion cubic feet per day this year–an increase of 2.5 billion cubic feet per day on an annual basis. In 2022, the average price of natural gas in the U.S. was $6.50 per million British thermal units. This year, it’s only a fraction of that. But while natural gas prices have shed 75% in the U.S., the West Texas Intermediate (WTI) U.S. crude benchmark has fared much better. The average WTI price for 2022 was $94.9 per barrel. Today, it’s $78.90, reflecting a loss of less than 20%. The main reason for the disconnect here is because there is a cartel interfering in oil prices, while there is none for natural gas. Global supply cuts by OPEC producers keep oil prices in check, while U.S. oil companies who produce gas as a byproduct are “relatively insensitive to prices”, Reuters cited Northern Oil and Gas GEO Nicholas O’Grady as saying earlier this week, adding that gas producers are also hesitant to reduce output because of the attractive prospects for feeding into new LNG plants in the future. The natural next leap in that line of thinking is that when all these new LNG projects launch, the high volume of exports would bring U.S. inventory back down to a level that gas companies can start thinking about big profits. It’s a longer-term game that is also now in flux in the aftermath of the Biden administration’s pause on new LNG projects.
ONGC slow on exploring reserves
A lone international contractor hired to delineate hydrocarbons in Bangladesh’s offshore blocks did little over the past two years, while the country suffers fuel shortages, sources say. India’s oil-and-gas-exploration company named ONGC Videsh Ltd (OVL) is currently the only international oil company (IOC) that has rights to explore untapped offshore in some blocks in the Bay of Bengal, says a senior Petrobangla official. “But, after a ‘failed’ attempt at Kanchan gas-well under the SS-04 block in Moheshkhali Island a couple of years back, the Indian company did not move forward with its exploration works,” he adds. The tenure of its production-sharing contract (PSC) with Petrobangla is set to expire in February 2025. Under the PSC, the oil-and-gas-exploration company has contractual obligations to drill two more wells -Titly in block SS-04 and Moitree in block SS-09. But the OVL management has yet to engage any contractor for the drilling of Titly and Moitree wells, they said. With only one year left from its PSC tenure, the Indian firm is not likely be able to complete drilling in the given time, said sources. The firm has a budget of US$65 million to drill the wells, they said. Previously, Petrobangla had extended OVL’s PSC tenure until February 2025 from February 2023 at the latter’s request, as it ‘failed’ to carry out the necessary exploration works within its previous stipulated timeframe. It was the third extra period of time that the OVL got from the Bangladesh Oil, Gas and Mineral Corporation or Petrobangla. The state corporation earlier had extended the company’s PSC tenure by two more years until February 2023 from February 2021 in its bid to boost offshore exploration. Meanwhile, Petrobangla signed two PSCs with OVL, the operator of shallow sea (SS) offshore blocks SS-04 and SS-09, on February 17, 2014 which was set to expire in February 2019 as per terms of the original PSC. At Kanchan gas well, OVL had drilled beyond its targeted depth of around 4,228 metres in search of a commercially viable gas deposit. But all its efforts ended up finding only huge deposits of clay and shell-stone sequence and no sandstone, meaning there is no gas-reserve prospect there. The Kanchan well was up for the first offshore drilling in the country’s maritime territory in last six years. Australian company Santos along with Bangladesh Petroleum Exploration and Production Company Ltd (BAPEX) in February 2017 drilled Magnama-02 well under block 16 only to find it dry. The joint venture drilled the offshore well into a depth of around 3,200 metres, which cost BAPEX an estimated $29 million. The country has no producing offshore gas well, and its entire natural gas output comes from onshore fields as well as import of liquefied natural gas (LNG). OVL is the operator of blocks SS-04 and SS-09, having a participating stake of 45 per cent. Block SS-04 covers an area of 7,269 square kilometres (sq-km), while block SS-09 stretches over an area of 7,026 sq-km. Water depth of both the blocks ranges between 20 metres and 200 metres. As per the PSC, the firm is committed to conducting 2,700 line-kilometre 2D seismic-data acquisition and processing as well as drilling one exploratory well in block SS-04. Also, it has to do the same for another 2,700 line-km 2D seismic- data acquisition and processing as well as drill two exploratory wells in block SS-09. The OVL owners will be allowed to operate and sell oil and gas for 20 years from an oil-field and 25 years from a gas-field under the deals. The company has already completed around 3,100 line-km 2D seismic survey for both the blocks.
Russia’s Disrupted Oil Trade Crimps Margins for Indian Refiners
India’s state-run refiners are facing a shift in fortunes as once cheap Russian oil becomes more expensive and less accessible, squeezing profits for companies that had been benefiting from Moscow’s war in Ukraine Attacks in the Red Sea have driven up freight rates, while tougher US sanctions have stranded some Russian cargoes destined for India, adding to costs. That may force some processors to buy more pricey barrels from suppliers in the Middle East, eroding profit margins even more, say traders and analysts. India has to import 88% of its crude needs and the nation took advantage of cheaper Russian oil following the war in Ukraine as others shunned Moscow’s barrels. But the trade, which has helped put the state-owned refiners on track for a rebound in net income this year, is under pressure. Gross refining margins for processors including Indian Oil Corp. dropped in the previous quarter due to higher freight rates, said Hardik Shah, director at credit ratings and analytics firm CareEdge Group. The company estimates lower margins for refiners so far this financial year, but they are still higher than pre-war levels. The state-run processors primarily sell fuel domestically and don’t get the benefit of higher prices overseas, unlike the export-focused private processors including Reliance Industries Ltd. — which also have more flexibility on buying and payments for Russian crude. Indian Oil, Bharat Petroleum Corp. and Hindustan Petroleum Corp. didn’t immediately respond to emails seeking comment on margins. CareEdge predicts overall margins should hold around $10 a barrel, as long as crude prices stay below $90, a level that global benchmark Brent hasn’t been above since October. Futures traded near $83 on Thursday. The attacks on shipping in the Red Sea by Houthi rebels have also spilled into global fuel trade. Arrivals of fuel from India to Europe averaged just 18,000 barrels a day in the first two weeks of February, a plunge of more than 90% compared with January’s average, according to Vortexa Ltd. The disruptions will likely lead to some impact for Reliance and Nayara Energy Ltd., although they still have export options across Asia and Africa. Cheaper Russian oil has allowed India’s refiners to be more competitive than their peers in South Korea, Singapore and across the world. If India loses the Russian advantage on crude, whatever marginal refining edge it had will be gone, according to Mukesh Sahdev, the head of oil trading and downstream research at Rystad Energy.
India’s January crude imports hit 21-month high
India’s crude oil imports jumped to a 21-month high in January as the world’s third-biggest oil importer and consumer shipped in more fuel to meet surging demand led by strong industrial activity. Crude oil imports in January rose 9.5% month-on-month to 21.39 million metric tons, and were up 5.7% on a year-on-year basis, Petroleum Planning and Analysis Cell (PPAC) data showed on Thursday. India’s fuel consumption rose 8.2% year-on-year last month, government data showed earlier this month. India’s manufacturing industry improved substantially at the start of 2024, with factory activity expanding at its fastest pace in four months in January, while carmakers reported record sales last month. Imports of crude oil products rose 5% from a year earlier to 3.97 million tons in January, while product exports rose 7.5% to 4.84 million tons, data from the PPAC website showed.
LNG tankers may be converted to floating storage in India
A Japanese-Indian consortium is considering turning two LNG tankers into floating storage and regasification units to help meet growing demand in the South Asian economy, according to two people familiar with the matter. The units, with a capacity of 138,000 cubic meters each, are currently being leased by Petronet LNG Ltd. to import the super-chilled fuel from Qatar. Since the Indian company doesn’t plan to renew the lease past 2028, the consortium — called India LNG Transport Co. — may put the vessels to use on India’s east coast after retrofitting them in South Korea, said the people, who asked not to be named as they are not authorized to speak with the media A spokesperson for the Indian partner, state-owned Shipping Corp of India Ltd., didn’t reply to requests for comment. India is investing heavily in liquefied natural gas import infrastructure to help meet Prime Minister Narendra Modi’s target of gas reaching 15% of the energy mix by 2030, from less than 7% now. The South Asian nation, currently the world’s fourth-largest LNG buyer, could see its imports rise to 150 million tons by 2030, a seven-fold increase from 2023, Petronet’s Chief Executive Officer Akshay Kumar Singh said in February.