Saudi output cut unlikely to lift oil prices to high $80s-low $90s, Citi says
Top crude exporter Saudi Arabia’s one million barrel per day (bpd) oil output cut is unlikely to underpin a “sustainable price increase” into the high $80s-low $90s with weak fundamentals pointing to lower prices by year-end, Citi analysts said in a note on Tuesday. Brent gained as much as $2.60 on Monday after Saudi Arabia, OPEC’s de facto leader, said its output would drop by 1 million bpd to 9 million bpd in July. However, oil prices came off those gains to edge lower on Tuesday. “We see average quarterly prices fairly range-bound for the year, averaging $81 for Brent in both H1 and H2 but with the potential to range between $72 and $90,” Citi said in the note. Citi analysts cited factors such as weaker demand and stronger non-OPEC supply by year-end, potential recessions in the U.S. and Europe, and lower growth in China which could see prices end up lower rather than higher this year and in 2024. OPEC+, which groups the Organization of the Petroleum Exporting Countries and allies led by Russia, currently has cuts of 3.66 million bpd in place, amounting to 3.6% of global demand, to limit supply into 2024 as the group seeks to boost flagging oil prices. But “it would take surprisingly better coordinated action among OPEC+ producers to tighten markets… The likelihood that Saudi Arabia would tackle this on its own on a sustained basis is quite low,” Citi said. Citi said if Saudi Arabia kept production at 9 million bpd throughout the third quarter of this year, the deficit during the period would widen to above 1 million bpd and leave global oil markets finely balanced in 2023 – however, markets would still face a large surplus in 2024. Other analysts said a global shortfall in supply is set to deepen in the third quarter following the kingdom’s output cuts and could push Brent towards $100 a barrel by year-end.
Saudi Oil Output Cut Unlikely To Hurt India As Russia Leaps Ahead
Saudi Arabia’s decision to further cut crude output is unlikely to hurt India as Russia, with its discounted oil, has trumped all other nations to emerge the largest supplier with 42% share in India’s fuel imports. The cheap Russian supply in May scaled another record and is now more than the combined oil bought from Saudi Arabia, Iraq, UAE and the U.S., PTI reported citing data from energy cargo tracker Vortexa. India took 1.96 million barrels a day from Russia in May, 15% higher than April. The additional supply cut of one-million barrels a day from July by Saudi Arabia will not lead to any substantial impact as India has an extraordinarily good pricing deal from Russia, according to Ashwin Jacob, partner Deloitte India. “The price increase in coming months will be compensated by the Russian discounts to large extent.” The impact on India will be minimal,” Jacob said. In FY23, barring Russia, crude imports from all other geographies including Saudi Arabia, Iraq, UAE, US, and others countries, fell. “In 2022-23, there was a change in the sources of India’s crude imports. Russia’s share in India’s crude imports soared to 19.1 per cent from 2.0 per cent a year ago,” the Reserve Bank of India said in its FY23 annual report. India imported 232.73 million tonnes of crude in FY23, an increase of 9.58% year-on-year, according to Petroleum Planning & Analysis data. The increase in value terms was 37% year-on-year to $157 billion. According to Director General of Commercial Intelligence and Statistics, India imported Petroleum Crude worth $162.2 billion and petroleum products worth $47.21 billion in FY23. It exported petroleum products worth $97.4 billion in FY23. Kotak Securities, in a report said, markets are likely to tilt into a deficit in the second half of 2023, if Chinese demand recovery materialises. “With rising odds of a Federal Reseve pause in June coupled with tightening supplies, we might see oil prices trading with an upside momentum.”
Oil Prices Fall Back After A Short-Lived OPEC+ Rally
This Monday saw what was perhaps one of the shortest oil price rallies following an OPEC+ meeting. The announcement of an additional production cut of around 800,000 bpd by the oil-producing group pushed Brent crude and West Texas Intermediate slightly higher during the day but by Tuesday morning the momentum had fizzled out and both key benchmarks were down. At the time of writing, Brent crude was trading at $76.52 per barrel, with West Texas Intermediate at $71.93 per barrel, both down, although by less than half a percentage point from yesterday. During the Monday session, Brent crude added some $2.60 per barrel and WTI jumped by over $3 per barrel. It appears that traders are unconvinced about the importance of any further cuts from OPEC+ as worry about the state of the global economy prevails. On Sunday, Saudi Arabia announced that it would implement voluntary cuts of 1 million bpd but the UAE was allowed to raise its output by about 200,000 bpd. “Supply side issues took centre stage following OPEC’s production cuts. However, the gains were limited amid ongoing concerns over the economic backdrop,” analysts from ANZ said in a note cited by Reuters earlier today. On the other hand, “the U.S. economy is about to show a very robust summer travel season that should mean gasoline and jet fuel demand is going to be very strong,” according to Edward Moya from OANDA, also cited by Reuters. According to U.S. manufacturing sector data, the industry has been shrinking for seven months in a row, which fits in with the definition of a recession, which has dampened demand for fuels and reinforced a bearish sentiment among oil traders. On the other hand, summer driving season is peak demand season and with prices at the pump much lower than they were this time last year, it could live up to its name, possibly changing traders’ sentiment.
Law may be updated for adequate oil assets compensation
The government is considering reforming the law governing the petroleum sector to protect investors against the expropriation of their assets, a measure that would directly address a key concern raised by energy giant ExxonMobil. The oil ministry has drawn up a proposal, which would entitle investors to reasonable compensation if the government expropriated their assets, according to people familiar with the matter. The oil ministry has completed consultations with the law, finance and other ministries on the matter, they said, adding that the proposal may soon be presented to the Cabinet. After the Cabinet’s approval, the proposal may be introduced in Parliament. India has introduced a slew of reforms in the past decade but has struggled to attract foreign investors to the exploration and production sector, primarily because some of the key issues have been left unaddressed creating uncertainties for oil and gas investors who already face enormous challenges due to climate change. ExxonMobil, which has spent years studying India’s geological data and expressed willingness to invest in the country, wants policies to be made more investor friendly. “India should offer globally competitive fiscals, enable those to stay intact, provide protection against expropriation, and (permit) neutral arbitration,” Monte Dobson, lead country manager-South Asia at ExxonMobil, told ET in January. The company wants exploration contracts to provide a legal shield against any move by the government to expropriate assets. “It’s really rooted in experience,” he said, citing the company’s experience in Venezuela where it faced expropriation after a change in government. Expropriations are rare but companies still want protection against those rare events, a person aware of the oil ministry’s thinking said. The ministry’s proposal is aimed at assuring investors that they are not going to lose money in the event of expropriation, he said. The windfall tax imposed on domestic oil production last year after crude prices sharply rose has also acted as a dampener for investors who see it as a government effort at making return on investment uncertain. Windfall taxes do not work in the long run, Dobson had said in the interview. “Such steps can shift investments away from a country over the long term,” he said.
High Court dismisses govt plea to enforce arbitral award against RIL
The Delhi High Court has dismissed the government’s petition seeking enforcement of a 2016 final partial award (FPA) of an arbitral tribunal, in a dispute with Reliance Industries over cost recovery provisions and reimbursement of royalties and taxes related to the Panna, Mukta and Tapti gas fields. The high court rejected the petition holding it to be “premature and not maintainable”. The 2016 FPA is “not an executable arbitral award” as it does not award any amount to the government, it said in the order on Friday. Reliance and Shell-owned BG Exploration & Production India had in December 2010 dragged the government to arbitration over cost recovery provisions, profit due to the government and also statutory dues including royalty payable. The companies wanted to raise the limit of cost that could be recovered from the sale of oil and gas before profits are shared with the government. However, the government raised counter claims over expenditure incurred, inflated sales, excess cost recovery, and short accounting. A three-member arbitration panel headed by Singapore-based lawyer Christopher Lau by majority issued an FPA on October 12, 2016, upholding the government view that the profit from the fields should be calculated after deducting the prevailing tax of 33% and not the 50% rate that existed earlier. It also upheld the cost recovery in the contract, fixed at $545 million for the Tapti gas field and $577.5 million for the Panna-Mukta oil and gas field in the Arabian Sea off the Mumbai coast. The two firms wanted that cost provision to be raised by $365 million in Tapti and $62.5 million in Panna-Mukta. Subsequently, the tribunal with the consent of parties agreed to decide the dispute including various components of the cost recovery formula through a series of partial awards. It was only after all the FPAs were passed that the actual amounts to be paid were to be computed in the final award. The most critical issues to be decided were the cost recovery limit following which the investment multiple had to be recalculated. While the 2016 FPA, one in a series of FPAs passed by the arbitral tribunal, had not awarded any amount to the government, the oil ministry used this award to claim $2.31 billion from Reliance and partner BG Exploration & Production India by filing an execution petition in the HC.
India continues with May 16 windfall tax notification as prices haven’t changed much
Government has decided to continue with the May 16 windfall tax rates, as there hasn’t been much change in prices since then and now , sources tell CNBCTV-18. “Since there is not much change in prices, the earlier notification continues. It has not been withdrawn”, sources tell CNBCTV-18. The May 16 windfall tax notification had reduced the special additional excise duty on petroleum crude to nil from Rs 4,100/tonne. While SAED on diesel, petrol and ATF had continued at nil. This nil windfall tax regime will now continue till government notifies new rates. “We issue a notification only if there is a change,” a source told CNBCTV-18. The government has kept $75 as the trigger for windfall tax levy, below which the tax is nil. India’s crude oil basket has been consistently averaging below $75/bbl. It averaged $74.98 a barrel in May and so far in June it has further fallen to below $73/bbl . Given the present scenario it might just be possible there will be a zero windfall tax, unless crude oil prices make a comeback. The government reviews windfall tax levies every fortnight and it is likely the next review will happen around mid June.
Adani and Total bet on India’s LNG recovery
India’s liquefied natural gas imports are picking up after years of weak demand, as companies such as Total and Adani bet heavily on a turnround in a market that has so far defied lofty expectations. India has set ambitious targets to become one of the world’s biggest LNG importers by more than doubling the share of gas in its energy mix to 15 per cent by 2030, helping attract a wave of infrastructure investment. But the LNG import market has shrunk since the Covid-19 pandemic and Russia’s invasion of Ukraine, which pushed prices far higher than domestic fuels such as coal. India’s LNG imports rose for three consecutive months starting in March, with imports in May reaching 2.7bn cubic metres, according to Refinitiv. While still below pre-pandemic levels, companies argue the 66 per cent growth in imports in May compared to February heralds the beginning of a boom for India’s LNG sector. Petronet, the country’s largest importer, said last month it expects a “huge jump” in demand, while Adani Total, a joint venture between the French energy major and the embattled Indian group, said it expected “momentum and boost in the demand across India”. Adani Total in late May opened a new LNG terminal in Dhamra, on India’s eastern coast, with 5mn metric tonne per annum regasification capacity. It is the most significant development between the pair since US short seller Hindenburg Research in January accused Adani of engaging in fraud and market manipulation. Adani vehemently denies the allegations. Total and Adani struck the agreement to build Dhamra in 2018, their first project together. Total went on to invest more than $3bn across city gas distribution and solar power with Adani, though it paused a planned $4bn investment in a green hydrogen venture following Hindenburg’s allegations. The French company has defended its continued relationship with Adani. The Dhamra terminal “reflects TotalEnergies’ ambition to support India’s energy transition and supply security”, Total said in April. Analysts said the Dhamra terminal is poised to capture gas demand in India’s less developed but populous east. “It’s a crucial terminal [as] India is trying to achieve 15 per cent gas,” said Ayush Agarwal, an analyst with S&P in India. Yet the outlook for India’s LNG market remains uncertain. Agarwal said he does not expect demand to pick up significantly until next year onwards, while India’s existing LNG infrastructure remains heavily underutilised.
GAIL infuses Rs 2,100 crore in JBF Petrochemicals
India’s largest gas firm GAIL has infused Rs 2,100 crore in insolvent private-sector chemical company JBF Petrochemicals Ltd that it had acquired in bankruptcy proceedings. The firm had in March won bankruptcy court approval for taking over JBF. In a stock exchange filing, GAIL (India) Ltd said it has “infused Rs 2,101 crore (equity – Rs 625 crore and debt – Rs 1,476 crore)” in the committed bankruptcy resolution plan. “Accordingly, JBF has become a wholly-owned subsidiary of GAIL with effect from June 1, 2023,” it said. GAIL had outbid a consortium of Indian Oil Corporation (IOC) and Oil and Natural Gas Corporation (ONGC) in the insolvency process run by IDBI Bank to recover Rs 5,628 crore of dues to financial and operational creditors. JBF Petrochemicals was incorporated in 2008 to set up a 1.25 million tonne per annum capacity purified terephthalic acid plant at Mangalore Special Economic Zone. IDBI and other banks had lent JBF money to build the PTA plant for USD 603.81 million with technology support from BP and 50,000 tonnes per month of the feedstock of paraxylene from state-controlled chemical producer OMPL. The plant, which is a backward integration project for JBF Industries’ polyester plants, was commissioned in 2017 but stopped operations after the company defaulted on its loans in the same year. The default led to the lenders dragging it to corporate insolvency and bankruptcy (IBC). Lenders and operational creditors, including employees, claimed Rs 7,918 crore in dues but only Rs 5,628 crore in dues, including Rs 712 crore towards operational creditors were admitted. Initially, three parties – a consortium of IOC-ONGC, MPCI Pvt Ltd and GAIL – submitted bids in August 2022 to acquire JBF. They were asked to improve their financial proposals and cure defects. At the last date on September 22, 2022, revised resolution plans were received only from the IOC-ONGC consortium and GAIL, the NCLT order said. GAIL has an existing petrochemical plant at Pata, Uttar Pradesh, with a polymers production capacity of 8,10,000 tonnes per annum. It is aiming to build a propane dehydrogenation plant in Usar, Maharashtra, by next year, which will have a nameplate capacity of 5,00,000 tonnes a year of polypropylene.
India’s Imports Of Russian Oil Hit A Record High
India’s oil imports from Russia continue to surge as cheaper Russian crude exports find more and more buyers in the world’s third-largest crude oil importer. India shattered its previous records of imports of Russian crude and took in May 1.96 million barrels per day (bpd) of crude from Russia—an all-time high, according to data from energy cargo tracker Vortexa. India’s Russian oil imports alone were higher than the 1.74 million bpd in India’s combined imports from the next four largest suppliers – Iraq, Saudi Arabia, the United Arab Emirates (UAE), and the U.S. Russian oil accounted for a massive 42% of all Indian crude imports, compared to negligible volumes India had imported before the Russian invasion of Ukraine. A year since the war began, India has turned from a marginal buyer of Russian crude to the most important market for Moscow’s oil alongside China. Indian refiners, not complying with the G7 price cap and looking for cheap opportunistic purchases, have snapped up many of the Russian Urals cargoes, which used to go to northwest Europe before the EU embargo. Record imports of cheap Russian crude into India have undermined OPEC’s share of supply so much that OPEC’s share of all Indian oil imports has hit the lowest in at least 22 years. Russia has been India’s top crude oil supplier for months now and overtook Iraq as the top supplier for the 2022/2023 fiscal year. Russia accounted for nearly a fourth of India’s crude oil imports in 2022/2023 as the world’s third-largest crude importer welcomed on average 1.6 million bpd of Russian crude out of a total of 4.65 million bpd of imports. In recent months, India’s spot purchases of crude from the Middle East have fallen, as cheaper Russian spot barrels are making their way to Indian refiners. Indian Oil, the largest refiner in the country by capacity, is committed to its term deals with Middle Eastern producers, but spot purchases from the Middle East have dropped amid the Russian competition, Shrikant Madhav Vaidya, chairman of Indian Oil, said last month.
Russia’s share in oil imports at record 42%
Russian oil accounted for 42% of India’s total crude imports in May, up 15% month-on-month, defying analysts’ expectations of a slowdown due to the Chinese competition. India imported a record 1.96 million barrels per day (mbd) from Russia in May, according to the energy cargo tracker Vortexa. This was more than the combined imports of 1.74 mbd from the next four largest suppliers – Iraq, Saudi Arabia, the UAE and the US. Supplies from Iraq, the UAE and the US increased marginally in May but Saudi exports to India fell nearly a fifth month-on-month. India’s overall crude imports expanded 1.5% in May. “India has wrestled more Russian crude supplies from its strongest contender, China, in May and could possibly set new records again in June/July with refiners’ voracious appetite for the discounted barrels,” said Serena Huang, an analyst at Vortexa. Chinese imports of seaborne Russian oil increased 6.5% month-on-month to 1.4 mbd in May while European imports rose 72% to 355,000 barrels per day (bpd). China also imports a substantial volume from Russia using pipelines. The share of Urals in India’s imports of Russian crude remained steady at 71% in May. Urals is the flagship Russian crude that has almost always been available below the G7 price cap of $60 per barrel. Imports of Varandey and Sokol, two other Russian grades, increased in May. Urals is currently trading around $56 per barrel while Sokol is available for around $62. Indian refiners have been paying in US dollars for Russian oil priced below the G7 cap while using the UAE’s Dirham for higher-priced trades. India’s imports of refined products from Russia increased 40% to 174,000 bpd, with private refiners importing almost all of it. Naphtha, diesel and petrol accounted for less than 40% of the imported refined products. India’s fuel exports to Europe fell 12% to 236,000 bpd on lower overall demand in the continent and higher supplies from the US. India’s exports to the US more than doubled to 118,000 bpd from 50,000 bpd, spurred by the summer driving season in the world’s largest oil consumer.