G-7 price cap on Russian oil tested as India pays record premium
Refiners in India are buying cargoes of Russian oil at the widest premium above a G-7 imposed cap since the curb was introduced, highlighting the market’s importance to Moscow and a gap that may intensify scrutiny of the controversial mechanism. Crude processors in the key importer paid an average of $86 a barrel for Russian shipments in August, according to the Ministry of Commerce and Industry. That’s the biggest spread in dollar terms since the $60-a-barrel limit came into force after Moscow’s invasion of Ukraine in the first quarter of 2022. Oil rallied in the third quarter as OPEC+ leaders Russia and Saudi Arabia choked off some supply to tighten the market. That rally lifted benchmark prices even further above the price set by the cap — which is designed by the Group of Seven to meet the twin needs of seeking to limit the Kremlin’s crude-based income, while at the same time keeping Russian flows on the global market. The cap is constructed to bar access to critical western financing and insurance services for crude cargoes if shipments are valued above $60. Beyond that level, they are permitted, as long as buyers and sellers make alternative arrangements. India, a vast oil buyer, has been adept at doing so. US Treasury Secretary Janet Yellen recently warned that the US is preparing to crack down on evasion of the G-7 cap on Russian oil, as recent market prices signal the mechanism may no longer be working as hoped. The US is looking at enforcement very carefully, Yellen told the Wall Street Journal.
IEA cuts forecast for growth in oil demand in 2024; no impact of Israel war yet
The International Energy Agency (IEA) on Thursday lowered its forecast for growth in oil demand in 2024, suggesting harsher global economic conditions and progress on energy efficiency will weigh on consumption. In its monthly report, the IEA forecast demand for oil will rise by 880,000 barrels per day (bpd) in 2024, down from its previous forecast of 1 million bpd, based on broader economic concerns and a faster adoption of electric vehicles among other energy efficiency measures. However, the Paris-based agency that advises the United States and other industrialised countries, raised its 2023 demand forecast to 2.3 million bpd, from a previous estimate of 2.2 million. OPEC and its allies, known as OPEC+, began limiting supplies in 2022 to support prices. In September, global benchmark Brent hit 10-month highs after Saudi Arabia and Russia extended their combined 1.3 million bpd cuts until the end of the year. “If extra cuts are unwound in January, the balance could shift to surplus, which would go some way to help replenish depleted inventories,” the agency said. Although Russia pledged to cut crude exports until the end of 2023, according to the IEA’s estimates Moscow’s total exports of crude oil and products in September rose by 460,000 bpd to 7.6 million bpd, with crude accounting for 250,000 bpd of the increase. The jump in exports highlights the difficulty the West has faced in trying to reduce Russian exports and revenue to Moscow amid its war with Ukraine. Last year, the IEA predicted harsh Western sanctions would lead to a collapse in Russian energy exports. ECONOMIC HEADWINDS, GEOPOLITICAL RISK Oil prices fell sharply last week as a darkening economic outlook intensified fears of slower growth in demand, eclipsing supply concerns. But prices spiked early this week after Palestinian Islamist group Hamas’ attack on Israel, which has ignited fears that a wider conflict could exacerbate the existing supply deficit. So far, however, there has been no direct impact on supplies, the IEA said, adding that it stood ready to act if needed to ensure adequate supplies. Meanwhile, as 2024 beckons, a high interest rate environment in key Western economies aimed at bringing down inflation and the consequential stronger U.S. dollar is dampening demand in lower-income emerging markets like Nigeria, Pakistan and Egypt, the IEA said. Still, so far, major oil consumers, particularly China, India and Brazil, continue to see solid growth in demand, it said.
India will invite bids for gas distribution licences, official says
India will invite bids for city gas distribution licences in five north-eastern states and two union territories, A. K. Jain, chairman of the Petroleum and Natural Gas Regulatory Board, said on Thursday. India is seeking to boost the use of cleaner fuel to cut its carbon emissions, and has set a 2070 goal for net zero carbon emissions.
Shift In U.S. Policy On Iran Oil Could Swing Global Markets
Back in August, we reported that Iran oil exports had hit record highs thanks in large part to the Biden administration opting to look the other way as Tehran boosts production ostensibly in a bid to keep markets well supplied and oil prices low. The price response to the escalation in the Middle East tensions has so far been modest; however, the Israel-Gaza war is likely to cause a significant shift in U.S. policy on Iran due to its open support and backing for Hamas. Commodity analysts at Standard Chartered have noted that the decision towards the end of the first Obama administration to link trade policy to imports of Iranian oil by key consuming countries effectively cut Iran’s output by over 1 million barrels per day (mb/d). Constraints were later eased after the signing of the Joint Comprehensive Plan of Action (JCPOA) in 2015. However, constraints were tightened again after the U.S. withdrew from the JCPOA during the Trump administration, with output falling below 2mb/d in 2020 when waivers given to consuming countries were withdrawn. Iran’s oil output and exports have increased sharply under the Biden administration, with production hitting 3mb/d, including 500,000 b/d in the current year, while exports sit just under 2mb/d. Earlier, reports emerged that the U.S. and Iran were making progress after resuming talks on a nuclear deal, a move that could ease sanctions on Iran’s oil exports. Israel’s Haaretz newspaper reported that the talks are moving forward more rapidly than expected, with the possibility of a deal being struck in a matter of weeks. Deal terms are likely to include Iran ceasing its 60% and higher uranium enrichment activities in return for permission to export as much as 1M bbl/day of oil. A successful nuclear deal could change the oil markets, with former Iran oil minister Bijan Namdar Zanganeh saying that his biggest dream has always been to increase Iran’s oil output to as much as six million barrels per day. But recent allegations that Iran helped Hamas plan the Israel attack is very likely to seriously strain relations between Washington and Tehran. StanChart has opined that The U.S. has three broad policy options in relation to Iran’s oil output: (1) the status quo, with output at 3mb/d or higher, (2) the pre-2023 plateau of close to 2.5mb/d, or (3) near-zero exports with output below 2mb/d as reached at the end of the Trump administration. The analysts note that option #1 was the most expedient policy for the U.S. in terms of both market influence and geopolitics just a week ago. However, the latest developments in the Middle East have brought options #2 and #3 into focus as potential policy targets. Europe Gas Prices Soar After Israel Shuts Gas Field Whereas oil markets do not appear to have been affected much by Israel’s crisis, the precautionary closure of Israel’s Tamar gas field by Chevron Inc. (NYSE:CVX) has sent Europe’s gas prices rocketing despite the continent being flush with the commodity. StanChart estimates that the shutdown has cut Israel’s domestic output by about 28 million cubic meters per day (mcm/d) and sent Europe’s natural gas prices 15% higher. StanChart notes that whereas exports from Israel to Egypt usually come from the Leviathan field, the Tamar outage is likely to have knock-on effects, with early indications suggesting that exports have been reduced by about 5 mcm/d from the usual 23 mcm/d. Theoretically, the reduction of exports to Egypt could have implications for European markets as it reduces the likelihood of Egypt loading LNG cargoes. StanChart has observed that those fears are somewhat overblown since the number of cargoes at risk is small, if not zero. Indeed, Egypt’s domestic demand has been so strong that no cargoes were exported in September. In their defense, Europe’s gas markets are facing other supply risks beyond Tamar including renewed concerns over strike action in some Australian LNG facilities, as well as an outage in a two-way interconnector pipeline between Estonia and Finland. The damage to the Balticconnector pipeline and an adjacent telecommunications cable is being treated as potential sabotage by the Finnish investigation. While the pipeline itself is of relatively minor significance within the EU supply system, market concerns are likely to be heightened about the potential sabotage of other vital pipelines. Europe’s gas inventories have continued to rise even as concerns about potential supply losses have dominated. According to Gas Infrastructure Europe (GIE) data, inventories hit a new all-time high at 112.92 billion cubic meters (bcm) on 8 October, good for 97% of storage capacity. The y/y increase stands at 9.41 bcm and the build above the five-year average is 11.75 bcm. According to StanChart, it seems likely that the start of significant inventory draws will be delayed, and the EU is likely to finish the withdrawal season with very high inventories and potentially well above 70 bcm with early forecasts suggesting that the European winter will be extremely warm. In contrast, inventories finished the 2021-22 withdrawal season four weeks after the invasion of Ukraine at just 29 bcm and the 2017-18 withdrawal season ended with less than 20 bcm in inventory.
India September oil product demand up 1.5% sequentially
The demand for oil products in India grew 6.7% year-on-year and 1.5% sequentially in September on the back of healthy auto sales and factory activities, according to a report by S&P Global Commodity Insights. All products, including petrol and diesel, saw a growth in demand in September over August. Naphtha and kerosene were the exceptions. “Middle distillate demand to drive 53% of total Indian oil demand growth in 2023 with gasoline and naphtha together to contribute 28% of the growth,” it said. India’s oil products demand increased by 73,000 bpd in September owing to robust auto sales and factory activity ahead of the upcoming festival season while the rainfall lagged by 5.6% below the long-period average for this season. Along with the growth in gasoil, jet fuel and gasoline, LPG also posted strong growth as the government had reduced prices of domestic cylinder by ₹200 per cylinder. Diesel consumption reported during September was higher by 0.4% on month and up by 3.8% YoY. Demand remained strong in the mobility sector as evident from the data of e-way bill generation and daily average highway toll transactions. There was some slowness from the agriculture sector and contraction in sales of tractors leading to lower diesel consumption. The monsoon season ended with a deficit in total rainfall received by 5.6% largely affecting the sowing and harvesting activities. Gasoil demand is expected to be close to 7% above pre-COVID-19 levels this year. Himi Srivastava, analyst, South Asia Oil Markets, S&P Global Commodity Insights, said: “India’s gasoline demand saw a September increase to 869,000 b/d due to lower rainfall and strong auto sales keeping mobility demand strong. As the temperatures rose, the requirement of running air conditioners in cars also increased thereby increasing the consumption of gasoline. India’s gasoline demand rebounded to above pre-covid-19 levels in 2021 and is expected to be some 23% higher than 2019’s level in 2023.”
ONGC Videsh keen on Sri Lankan oil and gas blocks
Oil and Natural Gas Corp is interested in the exploration of oil and gas blocks in Sri Lanka, a company executive said on Wednesday. The company was awaiting an announcement of the oil and gas ‘roadmap’ of the island nation, Rajarshi Gupta, managing director of ONGC Videsh, told reporters at an industry event. ONGC Videsh is an overseas investment arm of state-run ONGC. ONGC Videsh is open to having deals through government-to-government negotiations as well as through competitive bidding depending on Sri Lanka’s yet-to-be-announced exploration policy, Gupta said.
Qatar Signs 27-Year Gas Supply Deal With France’s Total
Qatar has agreed to supply France’s TotalEnergies with natural gas for 27 years, its state energy company announced on Wednesday Qatar will supply 3.5 million tonnes of gas a year under the deal, QatarEnergy said, following two agreements with Total last year for a share of the Gulf state’s huge north field gas expansion project. “These two new agreements we have signed with our partner TotalEnergies, demonstrate our continued commitment to the European markets in general, and to the French market in particular, thus contributing to France’s energy security,” Qatari Energy Minister Saad Al-Kaabi said. Total signed a $1.5 billion deal with QatarEnergy in September last year giving it a 9.3 percent stake in Qatar’s north field South project, the second phase of the field’s expansion. In June 2022, the French energy giant became the first partner in the first phase of the expansion, north field east, investing more than $2 billion for a 6.25 percent total share.
Tellurian Asks For Three-Year Extension To Complete Its Driftwood LNG Facility
Tellurian has applied for a three-year construction permit extension with the Federal Energy Regulatory Authority to complete the construction of the Driftwood LNG facility. The Driftwood LNG plant, currently under construction, would be one of the biggest in the world, with a capacity of up to 27.6 million tons of liquefied natural gas annually. The price tag of the project is $25 billion at the moment. The reason for the extension request is that construction appears to be moving forward more slowly than expected. Tellurian said it would only receive key equipment for the first phase of the plant in 2027 and further equipment for the second phase of development in 2029, which would push the launch date for the facility to 2029 as well. In all, Driftwood LNG will comprise five liquefaction trains, with the first phase of development to add 11 million tons of LNG annually to the U.S. total. Earlier this month, Tellurian’s president and chief executive told Petroleum Economist that first production was scheduled for 2027. “Driftwood LNG is under construction and we are comfortable with the FERC processes and procedures,” a spokesperson for the company said, as quoted by Reuters. Currently, LNG export facilities in the United States have a combined operating capacity under real-world operating conditions of 11.4 billion cubic feet daily, the EIA said in its Annual Energy Outlook 2023 earlier this year. There is an additional 7.3 billion cubic feet daily of capacity under construction, while a further 18.3 billion cu ft of possible LNG export capacity has received full regulatory approval from the U.S. Department of Energy and the Federal Energy Regulatory Commission but has not yet received a final investment decision. In the short term, U.S. LNG exports are also expected to increase, from 10.59 billion cubic feet daily last year, when Freeport LNG was shut down after June 2022, to 12.07 billion cubic feet daily this year, and to 12.73 billion cubic feet daily in 2024, per the Energy Information Administration.
China Saved $10 Billion By Buying Cheap Oil From Sanctioned Exporters
China is likely to have saved $10 billion on crude oil imports so far this year as it has imported record volumes of cheaper oil from Russia, Iran, and Venezuela—all three under U.S. and Western sanctions, a Reuters analysis showed on Wednesday. As international benchmark prices rose from July due to tightening supply, China has managed to save billions of U.S. dollars from its crude oil import bill, taking advantage of cheaper crude cargoes from the three oil exporters under sanctions. China imported a record-high volume of 2.765 million barrels per day (bpd) of crude from Russia, Iran, and Venezuela between January and September, per the Reuters analysis of data by vessel flow trackers Kpler and Vortexa. If China had bought those volumes from non-sanctioned oil exporters, it would have paid $10 billion more on its crude imports, according to Reuters’ calculations. Those imports are estimated to have accounted for 25% of overall Chinese crude oil purchases in the first nine months of 2023. Russia, Iran, and Venezuela made up around 21% of China’s crude oil imports in the same period of 2022, and just 12% in the same months of 2020, according to the Reuters analysis. Despite higher oil prices in recent months and narrower discounts of Russian crudes to international benchmarks, Russia remains the single largest crude oil supplier to China. During the first half of 2023, Chinese imports of Russian crude oil averaged 2.13 million bpd, which helped Russia oust its OPEC+ partner Saudi Arabia from the top spot as the single biggest supplier to the world’s top crude importer so far this year, per Financial Times estimates based on Chinese customs data. China has also boosted imports of crude from Iran, amid increased competition with India for cheap Russian oil and a more lenient U.S. sanction enforcement on Iranian oil trade so far this year.
U.S. Treasury: G7 Price Cap Has Significantly Reduced Russia’s Oil Income
The U.S.-led price cap on Russian oil exports has “significantly” cut revenues from oil sales for Russia, U.S. Treasury Secretary Janet Yellen said on Wednesday. The G7 price cap on Russian oil has “significantly reduced Russian revenue over the last 10 months while promoting stable energy markets,” Reuters quoted Yellen as saying at a news conference during the International Monetary Fund (IMF) and World Bank meetings in Morocco. The price cap of $60 per barrel of Russian crude oil set by the G7 and the EU says that Russian crude shipments to third countries can use Western insurance and financing if cargoes are sold at or below the $60-a-barrel ceiling. The measure took effect at the end of 2022 when the EU imposed an embargo on imports of Russian crude oil. “We must continue to impose severe and increasing costs on Russia and continue efforts to ensure Russia pays for the damage it has caused,” Yellen said today. The U.S. Treasury Secretary also said that the U.S. government had not in any way relaxed sanctions on Iran’s oil exports, Bloomberg’s energy and commodities columnist Javier Blas reported. Analysts have attributed the recent surge in Iranian oil production and exports – especially increased shipments to China – to weaker enforcement of the U.S. sanctions. If the Hamas-Israel war escalates and Israel is to blame Iran for either direct or indirect involvement in this weekend’s attack by Hamas on Israel, the enforcement of the U.S. sanctions against Iranian oil trade could be tightened, according to analysts. “The softer approach from the US is likely due to concern over rising energy prices. However, it would be difficult to see the US maintaining this stance if Iran is connected to these attacks, whether directly or indirectly,” Warren Patterson, Head of Commodities Strategy at ING, said earlier this week.