Standard Chartered: Global Oil Demand Will Pick Up Strongly In May And June
Oil prices have held steady week on week despite a significant inventory build in U.S. crude two weeks ago, which was countered by a draw in U.S. crude stockpiles for the week ending April 19th. Next to this, traders have become less concerned about a potential supply disruption in the Middle East. The crude inventory build at the middle of the month triggered fears that oil demand could be weakening; however, Standard Chartered estimates that global inventories will increase by only 74,000 barrels per day in the month of April, a much smaller build compared with 2.2 million barrels per day (mb/d) build in April 2023 and the 1.4 mb/d build in April 2022. StanChart notes that the markets could be more sensitive to this change in trajectory following the strong counter-seasonal inventory draws during the first quarter of 2024. Even better for the bulls, StanChart has forecast that global oil demand will pick up strongly in May and June, exceeding 103 mb/d for the first time in May (at 103.15 mb/d), increasing further in June to 103.82 mb/d. The commodity experts have predicted global inventory draws of 1.53 mb/d in May and 1.69 mb/d in June, tightening physical spreads significantly. StanChart also says that OPEC is unlikely to increase output in the near-term thanks to the stall in the oil price rally despite having room for at least 1 mb/d of extra OPEC output in Q3 without increasing inventories. With the next key ministerial meeting just six weeks away, concerns about demand and the macroeconomic environment are likely to dominate the meeting. StanChart says we are likely to record a 1.6 mb/d Q3 draw in stocks if there is no increase in OPEC output, compounding the price effect of a H1-2024 draw of 1.1 mb/d. U.S. Sanctions on Iranian Oil Recently, the Biden administration passed new sanctions on Iran’s oil sector as part of the $95-billion foreign aid package to Ukraine, Israel and Taiwan. In a move aimed at reducing Iran’s oil trade with China, the broadened sanctions now target Chinese banks that conduct transactions involving Iranian crude and products. The sanctions now include foreign refineries, vessels, and ports that knowingly process, transfer, or ship crude oil in violation of existing sanctions. The new sanctions could prove significant in disrupting market fundamentals considering that Iran currently produces about 3 million b/d and is expected to increase output by a further 280,000 b/d this year. StanChart has predicted that whereas the upcoming U.S. presidential election may influence the timing of the next swing down in Iranian exports, Iran’s oil flows are bound to take a hit regardless of who ascends into the Oval Office in 2025. The analysts note that existing U.S. policy instruments were enough to drive Iranian exports down to close to zero in late 2020, before the international context, and the associated implementation policies, changed. StanChart has argued the Biden administration has room to start implementing the sanctions immediately despite the risk of increased fuel prices during an election year. StanChart notes that the record-high on the day of a U.S. presidential election is $3.492/gal in 2012 (when the incumbent won), equating to about $4.80/gal in 2024 money terms after adjusting for consumer inflation. That’s $1.14/gal higher than current prices, with the U.S. national gasoline price average at $3.66 per gallon. StanChart says that whereas recent U.S. international oil policy has clearly been designed with a view to moderating oil price effects, it does not mean that the U.S. has necessarily chosen a policy of minimum pressure on Iranian and Russian oil exports. Meanwhile, the natural gas outlook appears to be getting more bullish. A late cold snap has led to a sharp deceleration in European gas inventory builds, with EU inventories standing at 72.01 billion cubic meters (bcm) on 21 April according to Gas Infrastructure Europe (GIE) data. The w/w build was just 0.427 bcm, significantly slower than the 2.005 bcm build for the week to 14 April. StanChart, however, says the cold snap might not last long, meaning Europe is likely to still be faced with a gas glut in the summer. The U.S. gas outlook is, however, more bullish after National Weather Service (NWS) meteorologists forecast above-average summer heat across the vast majority of the country, setting the stage for increased cooling demand.
Indian Gas Exchange Launches Small-Scale LNG Contracts
The Indian Gas Exchange (IGX) having received approval from the Petroleum and Natural Gas Regulatory Board (PNGRB) launched contracts of Small-Scale Liquefied Natural Gas (ssLNG) on its platform. This move marks a significant step towards addressing the demand of natural gas in areas that are not connected to the national gas grid. The introduction of ssLNG contracts on IGX aims to address the growing gas demand from industries and CGD (City Gas Distribution) companies that do not have access to pipeline networks. Through ssLNG, they can now procure liquefied gas through LNG tankers at competitive rates under daily, fortnightly and monthly contracts. Initially, this contract is launched at Dahej & Hazira LNG Terminals. Later, it will be launched at other terminals namely Dhamra, Mundra, Ennore, Kochi, and on-land ssLNG stations at Vijaipur. Speaking at the occasion, Mr. Anjani Kumar Tiwari, Member, PNGRB said, “Small-scale LNG serves as the cornerstone for our gas-based economy, enabling us to expand our reach beyond traditional pipelines. On supply side, it can bring gas from remote and difficult fields and on demand side, it can help an industry source gas which is not connected to the gas grid. With this vision, we provided approval to IGX for launching ssLNG contracts on their platform. PNGRB endeavors to be a facilitator to support the growth of ssLNG in India by providing a comprehensive regulatory framework. We will also be continuously evaluating the present regulations and making amendments to support the industry in navigating challenges.” Speaking at the occasion, Mr. D.K. Saraf, Ex-Chairman, PNGRB said,” While pipelines stand as the optimal means for gas transportation, the geographical expanse of our nation poses challenges in reaching every corner. Small-scale LNG emerges as a solution, bridging this gap and enabling customers to access the advantages of natural gas, thus facilitating a transition towards cleaner energy sources. I extend my sincere compliments to IGX for collaborating with PNGRB in launching ssLNG in India. Together, we can pave the way for widespread adoption of small scale LNG and create a cleaner, more sustainable energy future for all.” Top of Form Speaking at the occasion, Mr. Rajesh K Mediratta, MD & CEO, Indian Gas Exchange said, “We envision IGX providing marketplaces for competition, flexibility and transparent price discovery. The introduction of ssLNG contracts is to fill the void in ssLNG space. With the demand for road-transported LNG projected to increase substantially over the coming years, our initiative will provide city gas distribution networks, industries & LNG dispensers a competitive gas pricing that will optimize their costs. By facilitating the trading of ssLNG contracts, we are not only enabling the efficient transportation of larger volumes of natural gas via trucks but also widening access to a cleaner fuel across the country.” Natural gas is primarily supplied through pipelines in the country. As a result, industries and commercial establishments without access to the grid primarily rely on trucks for LNG transportation. The demand for road-transported LNG is projected to increase to 5 MMSCMD over the next five years. ssLNG contracts presents a win-win situation for both the buyers as well as sellers. It would serve as a platform for sellers, who can come and trade LNG. Transporting natural gas in liquefied form via trucks will allow larger volumes to be transported, potentially making it economically viable for buyers not connected to pipelines. Further, it will also ensure a transparent and fair procurement process with enhanced payment security.
ONGC plans June drilling for India’s first geothermal project in Ladakh
Oil and Natural Gas Corp (ONGC) is planning to mount a fresh drilling campaign in June for India’s first geothermal project after suffering a setback two years ago. If successful, the project could open a source for emission-free electricity, space heating, and irrigation in the cold and harsh terrains of Ladakh. The company plans to begin drilling the first well in the second or third week of June and complete two geothermal wells of 1,000 meters depth each by September-end, ONGC energy centre director general Ravi, who is overseeing the project at Puga in Ladakh, told ET. If all goes well, a power plant of at least 1 MW capacity will be set up by next year, he added. The geothermal wells help pipe hot water or steam to the surface, which then is used to power a turbine to generate electricity. Water with a temperature of 220 degrees centigrade is expected at Puga. The steam could be first used to produce electricity and then for space heating, aqua farming and herbal spa. ONGC is being advised by consultants from Iceland, a country that depends on geothermal for two-thirds of its primary energy.
India reiterates its partnership with Opec
India has reiterated its long-standing and constructive partnership with the Organisation of Petroleum Exporting Countries (Opec). India is the second largest export destination for the Opec as a whole, reported WAM . The reiteration of “long-standing” partnership came in a 30-minute telephone conversation with the Opec Secretary General, Haitham Al Ghais and India’s Minister of Petroleum and Natural Gas, Hardeep Singh Puri, the Minister’s office said in a statement. Puri emphasised the “importance of balancing market stability and affordability of oil with pragmatism. The discussions, inter-alia, covered recent trends in the global oil markets and their implications for international energy stability,” the statement said. Puri assured Al Ghais that as one of the world’s fastest-growing economies, India is committed to supporting efforts to achieve such balance in global energy markets. The statement pointed out that as per updated final figures for the financial year 2022-23, India imported crude oil, liquefied petroleum gas, liquefied natural gas and petroleum products from Opec countries, amounting to $ 120 billion.
Iran-Israel conflict: Oil, LNG prices may rise if Tehran blocks Strait of Hormuz
Oil and LNG prices are likely to shoot up if Iran is to block Strait of Hormuz, through which countries like India import crude oil from Saudi Arabia, Iraq and UAE, leading to a spike in inflation, analysts said on the Iran-Israel conflict. The Iran and Israel conflict has escalated over the last few days. Iran first launched drone and rocket attacks on Israel, which retaliated by firing a missile. HT launches Crick-it, a one stop destination to catch Cricket, anytime, anywhere. Explore now! Crude oil prices have hovered around USD 90 per barrel since the conflict. In a note, Motilal Oswal Financial Services said while de-escalation efforts will likely control the crisis, oil and LNG prices will spike in case Iran completely or partially blocks the Strait of Hormuz. The Strait of Hormuz is a narrow sea passage between Oman and Iran. It is about 40 km wide at the narrowest point, with 2 km of navigable channels for incoming and outgoing ships. It is the key route through which crude oil is exported by Saudi Arabia (6.3 million barrels per day), the UAE, Kuwait, Qatar, Iraq (3.3 million bpd) and Iran (1.3 million bpd). Oil flow via the Strait was 21 million barrels per day or 21 per cent of global oil consumption in 2022. Also, about 20 per cent of global LNG trade moves through it, including almost all LNG exports from Qatar and the UAE. Unlike oil, for which alternative routes via the Red Sea are available, no alternative routes are available for liquefied natural gas, it said. India, which is more than 85 per cent dependent on overseas suppliers to meet its crude oil needs, imports oil from Saudi, Iraq and UAE as well as liquefied natural gas (LNG) from Qatar through the Strait of Hormuz. In the event of blockade of the Strait, “we anticipate materially higher crude oil prices, refining margins, and spot LNG prices”, it said. While alternative routes do exist, they may only be able to accommodate a fraction (around 7-8 million bpd of crude oil/refined products) of the volume currently passing through the Strait (21 million bpd), and that too at elevated freight costs. “While investors focus on oil, we believe that spot LNG prices will witness even sharper escalation if the Strait of Hormuz is closed due to the absence of alternative routes,” it said. Both Saudi Arabia and the UAE have alternative export routes, which avoid the Strait. Saudi Arabia has the East-West pipeline with a capacity of 7 million bpd, according to the IEA. However, this pipeline opens up into the Red Sea, where traffic flow has already been disrupted due to attacks by Houthi rebels.
Rising Middle East Risk Sparks Fear of $100 Oil
Despite Iran’s attack on Israel over the weekend, oil prices dropped on Monday as an Iranian response to the Israeli hit on the Iranian diplomatic mission in Syria was largely expected and priced in. The well-telegraphed-in-advance Iranian drone attack against Israel may have been peak escalation, for now, analysts and investment banks say. However, uncertainty over a potential Israeli retaliation and whether restraint will prevail continue to keep the oil market on edge. Risk premiums and fear will continue to be priced in Brent Crude for the foreseeable future. Uncertainty and risks have grown in the Middle East – a key oil-producing region, which is also home to the world’s most crucial oil chokepoint, the Strait of Hormuz. About 21 million barrels per day (bpd), or a fifth of the world’s daily consumption, is being transported out of the top Middle Eastern exporters via the Strait of Hormuz. ‘Well Above $100’ In case of further escalation, $100 oil is possible, analysts say, especially if this involves direct threats to oil supply. “What is not priced into the current market, in our view, is a potential continuation of a direct conflict between Iran and Israel, which we estimate could see oil prices trade up to +$100/bbl, depending on the nature of the events,” Citigroup in a note, as carried by Bloomberg. The worst-case scenario for oil supply is Iran attempting to disrupt tanker traffic in the Strait of Hormuz, which could send oil prices spiking to $130 per barrel, according to Lipow Oil Associates. “Any attack on oil production or export facilities in Iran would drive the price of Brent crude oil to $100, and the closure of the Strait of Hormuz would lead to prices in the $120 to $130 range,” Andy Lipow, president of Lipow Oil Associates, told CNBC. An escalation involving the U.S. could send oil surging to $140 per barrel, according to Societe Generale, which has raised its Brent price forecast by $10 a barrel to reflect continued geopolitical risk premium. Escalation Not the Base-Case Scenario While warning that oil prices could spike well above $100 per barrel in case of a major escalation, investment banks do not consider such escalation the base-case scenario. While Israel is weighing its response to the Iranian attack, the G7 has called for restraint and the U.S. has signaled it wouldn’t be part of any Israel offensive against Iran. U.S. President Joe Biden has assured Israeli Prime Minister Benjamin Netanyahu that the U.S. commitment to defend Israel is “ironclad,” but the U.S. would not participate in an offensive against Iran, a senior administration official has told NBC News. As of early Tuesday, Israel was still weighing its options. Iran has signaled that with the drone barrage against Israel it considers the matter closed, the permanent mission of Iran to the United Nations said on Sunday, but added that “should the Israeli regime make another mistake, Iran’s response will be considerably more severe. It is a conflict between Iran and the rogue Israeli regime, from which the U.S. MUST STAY AWAY!” In view of calls on Israel for restraint, the “most likely path from here (to be) de-escalation rather than further escalation,” Richard Bronze, co-founder and analyst at Energy Aspects, told CNN. “While Israel’s allies are pushing for a diplomatic response, it appears for now that Israel is considering a more direct response. If this is the case, it unfortunately means that this uncertainty and tension will linger for quite some time, as markets will then focus on how Iran further retaliates,” ING strategists Warren Patterson and Ewa Manthey wrote in a Tuesday note. “Iranian oil output is most at risk and even a strong diplomatic response from Israel’s allies could hit Iranian oil exports significantly with stricter enforcement of oil sanctions,” say the strategists, who see up to 1 million barrels per day (bpd) of Iranian oil off the market in such case. ‘The Worst Has Passed’ Morningstar sees “more downside risks than upside at the moment,” Stephen Ellis, an energy and utilities strategist for Morningstar, wrote on Monday. “[T]he ample public and private forewarning from Iran amid rising regional tensions means the attack was already reflected in oil prices via a higher geopolitical risk premium.” Most of the recent rise to $91 oil before the Iranian attack has been the result of geopolitical risks rather than supply risks, according to Morningstar, which notes that the OPEC+ group has ample spare capacity of about 5 million bpd – and probably more – part of which it can return to the market if oil prices surge above $100. “We expect more downside risks than upside at the moment, and see a higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel,” Morningstar’s Ellis said. Iran’s retaliation can now prompt profit taking and prices could be easing, but this is not the end of risk premiums, consultancy FGE said in a note on Monday. Despite pressure from allies on Israel to limit a possible response, further escalation is not entirely off the cards, but FGE says that “Our base case is that the worst has passed.” FGE’s base case is now for OPEC+ to decide to unwind some of the production cuts as of July. Even with another up to 1 million bpd from OPEC+ output back on the market, Brent is still expected to average $90-$95 a barrel in the third quarter with the ongoing political risk, the consultancy said.
Asian LNG Prices Soar on Fears of Wider Middle East Conflict
Spot LNG prices in Asia jumped to the highest level since the beginning of January amid concerns that the conflict in the Middle East could further escalate. After lingering at around multi-month lows for nearly the entire winter heating season in the northern hemisphere, spot LNG prices for delivery into north Asia have jumped in recent days amid fears that an Israeli response to the Iranian attack could escalate into a regional conflict that could obstruct LNG cargo flows around the Middle East, most notably via the Strait of Hormuz, where 20% of the world’s LNG trade passes. Analysts see a low probability that the Strait of Hormuz would be blocked. Yet, spot LNG prices for delivery into North Asia surged on Tuesday to above $11 per million British thermal units (MMBtu), traders told Bloomberg. That’s the highest spot LNG price in Asia since early January 2024 and a 40% surge since the end of February. European benchmark natural gas prices also jumped on Tuesday, closing 6.4% higher and recording a fourth consecutive daily increase, amid concerns about global LNG trade flows. Early on Wednesday, the front-month Dutch TTF futures, the benchmark for Europe’s gas trading, advanced by another 1.6% to the highest level so far this year. While a mild winter and full gas storage helped Europe through a second consecutive winter without most of the Russian pipeline gas it had previously received, the potential of a widening conflict that could obstruct LNG flows is keeping the European and Asian gas markets on edge. Europe has become more dependent on LNG imports for its gas supply after losing a large part of the Russian pipeline gas following Moscow’s halt of flows to several EU countries and the sabotage of the Nord Stream pipelines. European prices have also jumped in recent days amid lower pipeline flows from Norway – now Europe’s top gas supplier – due to unplanned outages. “The geopolitical environment will also support European gas prices, particularly given the EU’s larger dependence on LNG since the Russia-Ukraine war,” ING strategists Warren Patterson and Ewa Manthey wrote in a note on Wednesday. “However, fundamentals remain bearish with storage more than 62% full, well above the 5-year average of 43% full for this time of year,” they added.
GAIL plans to double capacity at its Dabhol LNG terminal
GAIL is planning to more than double the capacity of its LNG terminal at Dabhol, Maharashtra, and build new terminals in the country to tap opportunities expected to emerge from the future growth in gas imports. The nation’s largest natural gasmarketer and transporter plans to raise the capacity of its Dabhol terminal to 12 million tonnes per annum (mtpa) in a phased manner by 2030-31, GAILchairman Sandeep Kumar Gupta told ET. The Dabhol terminal has a nameplate capacity of 5 mtpa but operates at about 2.9 mtpa as it remains idle during the monsoon season. The company is building a breakwater infrastructure, which will help the terminal operate also during monsoon. GAIL is also drawing up plans for new LNG import terminals but those are in the preliminary stages, Gupta said
Brent Crude Prices Surge: Here’s How It Can Impact Indian Oil Companies
Brent crude prices continue their upward trajectory and have surged 19.5% on a year-to-date basis on the back of heightened geopolitical tensions, along with a tighter global supply-demand scenario maintained by OPEC+ allied countries. Brent crude futures had breached the $90 per barrel threshold on April 5, reaching the highest level since October. Prices now stand around $90.84 per barrel, compared to the $75.89 per barrel at the start of the year. While higher prices were in line with expectations of stronger summer crude prices, they crossed the $90 mark prematurely, according to Amrita Sen, research director at Energy Aspects. What Are The Factors Affecting Brent Prices? Increased Demand While growth is slowing, global oil demand is still on the rise, particularly in non-OECD countries. The International Energy Agency recently revised up its 2024 demand forecast, while reducing global supply estimates downwards. The first quarter of 2024 recorded a global oil demand growth of 1.6 million barrels per day. According to its latest report, non-OECD countries dominated its outlook, with forecast demand set to rise by 1.3 million barrels per day in 2024 and 1.2 million barrels per day in 2025. Tight Global Supply Production hasn’t been keeping pace with demand. This is on account of the OPEC+ keeping a tight grip on global supply via voluntary production cuts. As of January 2024, Iran’s crude oil production stood at around 31.6 million barrels per day, a slight from December 2023’s output of 31. 7 million barrels per day. This s is also notably lower than the 43.8 million barrels per day production in 2016. On March 3, OPEC+ countries like Saudi Arabia, Iraq, United Arab Emirates, Kazakhstan and Oman announced additional cuts of 2.2 million barrels per day, all the way till the second quarter of 2024. These production cuts removed around five million barrels a day, or around 5% of supply, away from the global market. Scepticism of whether OPEC will stick to cuts or slowly release supply into the market will potentially be cleared on the next committee review meeting on June 1. Geopolitical Tensions The year has been marked by a series of geopolitical tensions, especially in the Middle East, which contributes to over one-third of global crude supply. Prolonged matters of conflicts like the Russia-Ukraine and the Israel- Hamas wars, and the Red Sea crisis have sent Brent prices on a higher trajectory. The latest potential trigger for prices to continue to spike is the current Israel-Iran situation that potentially threatens a shutdown of the Strait of Hormuz, a key transport pathway for global crude supply. About 15 million barrels of crude oil flows through the Strait of Hormuz, which represents around 15% of global crude consumption. The market is currently factoring a risk premium of $3 per barrel on account of geopolitical tensions, according to energy markets expert Vandana Hari. How Higher Crude Prices Impact Indian Oil Companies? Upstream Companies: Oil Producers For upstream or oil production companies, like Oil and Natural Gas Corp. and Oil India Ltd., an uptick in global crude prices theoretically poses well. Higher crude or selling prices technically raise the revenue potential for oil production companies. However, the windfall tax on petroleum crude that the Indian government levies limits the upside potential the upstream companies could make. The Special Additional Excise Duty or windfall tax is applied when global crude oil prices are high. The government has set a threshold price at which the tax kicks in and, thereby, targets profits made by domestic crude oil producers due to high international prices. As of April 15, windfall tax on crude was raised 41% to Rs 9,600 per tonne from Rs 6,800 per tonne at the start of April. This marks an almost fourfold increase from the Rs 2,300-per-tonne tax levied at the start of January. Downstream Companies: OMCs Higher Brent crude prices potentially negatively impact the gross marketing margins for Indian oil marketing companies like Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp. While the pump fuel prices of petrol and diesel were cut by Rs 2 per litre on March 14, it had remained unchanged since May 2022. Oil marketing companies do not continuously change fuel retail prices on a daily basis, thereby exposing gross marketing margins to the risk of higher Brent crude prices that fluctuate daily. Analysts also expect fuel rates of petrol and diesel in 2024 to be unchanged till elections. Indian OMCs do, however, have a possible hedge to higher prices by procuring crude at discounts—something the oil marketers have been doing from Russia since 2022. However, benefits enjoyed by the OMCs have narrowed by $5.5 per barrel in nine months of FY24, when compared with FY23, according to Kotak Securotors.
Govt again hikes windfall tax on petroleum crude to ₹9,600 per tonne
The Indian government has announced an increase in the windfall tax on petroleum crude, raising it from ₹6,800 to ₹9,600 per tonne. This adjustment will take effect from April 16 as part of the government’s biweekly tax revision. Notably, diesel and aviation turbine fuel will remain unaffected and maintain a zero windfall tax rate. Earlier on April 3, there was an increase in the windfall tax by the government on petroleum crude, up from ₹4,900 to ₹6,800 per metric tonne. This tax was initially introduced in July 2022 to regulate private refiners, who were exporting fuel overseas to capitalise on higher refining margins instead of selling domestically. The Special Additional Excise Duty (SAED) for exporting diesel, petrol, and Aviation turbine fuel continued to remain at zero. Oil prices maintained their upward trend as concerns about potential supply disruptions due to escalating geopolitical tensions persisted. However, some of these worries were alleviated by an unexpected rise in US crude oil inventories. Prior to this recent change, on March 15, 2024, the Finance Ministry raised the windfall tax on domestically produced crude oil sales to ₹4,900 per tonne, an increase from the preceding SAED of ₹4,600 per tonne that was effective in the prior two weeks. Prior to that, on February 16, the government increased the windfall tax on petroleum crude from ₹3,200 to ₹3,300 per metric tonne and raised the tax on diesel from zero to ₹1.5 per litre. A windfall tax is imposed on domestic crude oil when global benchmark rates exceed $75 per barrel. The export of diesel, ATF, and petrol incurs this tax if product cracks (or margins) surpass $20 per barrel. Product cracks or margins refer to the discrepancy between crude oil (the raw material) and the final petroleum products.