Red Sea Crisis and OPEC+ Cuts Support Oil Prices
Brent Crude prices have held above $80 per barrel for most of February, with signs pointing to a tightening in the physical market as OPEC+ production cuts continue and the rerouting of cargoes away from the Red Sea and the Suez Canal drags on. European refiners are looking for Atlantic Basin cargoes as arrivals from the Middle East are being delayed by at least two weeks with the longer route via the Cape of Good Hope that tankers have to make to reach the Mediterranean and Norwest Europe. As a result, prices for North Sea and West African crude grades have increased this month, supporting Brent Crude prices above $80 a barrel and deepening the backwardation in the futures curve. Backwardation typically occurs at times of market deficit, and in it, prices for front-month contracts are higher than the ones further out in time. The deeper backwardation curve suggests the market is tightening, analysts say, noting that the supplies may be tighter than market sentiment and price action imply. Lower production and exports this quarter from the OPEC+ producers, led by the biggest exporters from the Middle East, are also supporting oil prices in the months when global oil consumption is typically lower. OPEC+ producers can’t feel bad about that—oil prices are holding above $80 a barrel this month, defying earlier analyst projections of weak prices and oversupply on the market at the start of 2024. The tighter market is not all OPEC’s work, though. Disruptions to Red Sea/Suez Canal traffic have played a major role in the run-up of prices of Atlantic Basin crudes and higher refining margins so far this year. The average margins for refining diesel and gasoline in Europe jumped to their highest levels in months in January, to $34.30 and $11.60 per barrel, respectively, according to estimates by Reuters. Moreover, longer voyages for crude oil from the Middle East have raised Europe’s demand for crude oil from closer destinations, resulting in higher prices for the Nigerian grades, with the top African OPEC producer now selling its crude cargoes faster, according to traders. “While global crude balances are getting longer (seasonally) in February and March, increased levels of Red Sea shipping diversions are keeping the market tight – as more oil is put on ships, leaving less available on land,” analysts at consultancy FGE wrote in a note on Friday. The rerouting of crude cargoes around the Cape of Good Hope has picked up so far this month, with the volume of diversions reaching a fresh peak of 1.6 million barrels per day (bpd) in the first week of February, according to FGE. “The bulk of the diversions remain focused on westbound flows of Middle Eastern crude destined for Europe. Indeed, out of eight cargoes of Iraqi crude bound for Europe loaded in the first 10 days of February, six have been diverted away from the Red Sea via the Cape of Good Hope,” said FGE analysts. Europe’s crude oil imports from Iraq slumped at the beginning of this year, “definitely aggravated by the Red Sea transit risks, which caused most tankers carrying Iraqi crude to Europe to sail via the Cape of Good Hope (COGH) as opposed to the Suez Canal,” Armen Azizian, Senior Oil Risk Analyst at Vortexa, wrote in an analysis last week. On the other hand, India’s imports of Iraqi crude hit an estimated 1.15 million bpd in January, the highest level observed since April 2022, according to Vortexa data. India is close to one of its top oil suppliers, Iraq, while the world’s third-largest crude importer is also looking to replace lost Russian oil due to payment issues with the stricter enforcement of the sanctions against Moscow. U.S. benchmark oil prices are also supported by higher demand for American crude in Europe due to the Red Sea disruption to flows. The arbitrage for U.S. crude to Europe improved in late January-early February, as the MEH/Brent differential remained wide while transatlantic freight was reduced, FGE said. But with the higher European buying of U.S. crude, the arbitrage has started to close up in recent days, suggesting that the current strength in WTI futures structure could be short-lived, FGE analysts reckon.
Russia bans gasoline exports for 6 months from March 1
Russia on Tuesday announced a six-month ban on gasoline exports from March 1 to compensate for rising demand from consumers and farmers and to allow for planned maintenance of refineries. The ban, first reported by RBC, was confirmed by a spokeswoman for Deputy Prime Minister Alexander Novak. Russia previously imposed a similar ban between September and November last year in order to tackle high domestic prices and shortages. Only four ex-Soviet states – Belarus, Kazakhstan, Armenia and Kyrgyzstan – were exempt. This time, the ban will not extend to member states of the Eurasian Economic Union, Mongolia, Uzbekistan and two Russian-backed breakaway regions of Georgia – South Ossetia and Abkhazia.
The Oil Market Is Tightening to 2016 Levels
Last week, the International Energy Agency reported that global oil demand growth is losing momentum, with demand growth clocking in at 1.4 mb/d in January, down from 2.8 mb/d in 3Q23 to 1.8 mb/d in 4Q23. According to the IEA, the expansive post-pandemic demand growth phase has largely run its course. Thankfully, falling supply is expected to counter slowing demand growth with non-OPEC supply by the U.S., Brazil, Guyana, and Canada expected to come in at 1.6 mb/d this year compared to 2.4 mb/d in 2023. The best part for oil bulls, however, is that oil markets are tightening, which could help sustain the ongoing oil price rally. The IEA has revealed that global observed oil stocks plummeted by about 60 mb in January, with on-land inventories falling to their lowest level since 2016. In contrast, December global stocks rose by 21.6 mb thanks to a surge in oil on water (+60.7 mb) more than offsetting draws in on-land inventories (-39 mb). Brent crude has rallied 7.9% so far in the month of February to trade at $83.42 per barrel while WTI crude has gained 9.9% to trade at $79.43 per barrel. Whether or not the markets will continue tightening will largely depend on whether OPEC+ can maintain discipline and unwind its production cuts gradually. Estimates by various energy agencies of changes in the call on OPEC; i.e. the level of OPEC crude oil output that would keep inventories constant given changes in non-OPEC supply, oil demand, and OPEC non-crude liquids supply are quite varied at this point. With the exception of the IEA, estimates of the call on OPEC have generally trended upwards, implying an improvement in overall market fundamentals. These figures represent how much OPEC could increase output from Q2 onwards without global inventories increasing The lowest estimates are those of the Energy Information Administration (EIA) at 0.6 million barrels per day (mb/d) and the IEA at 0.7 mb/d, while the highest estimates are by Standard Chartered at 1.8 mb/d and the OPEC Secretariat at 2.7 mb/d. Brent Could Approach $100 Previously, commodity analysts at Standard Chartered have argued that oil fundamentals are in better shape than oil prices suggest, adding that the market is heavily discounting geopolitical risks. StanChart has noted a sharp improvement in oil balances in the current year compared to 2022 According to StanChart, the small global oil surplus we are currently witnessing is due to seasonal weakness in the month of January, noting that the surplus is much smaller than the 20-year average. StanChart has revealed that there’s been a January inventory draw in only three years since 2004, with the first month of the year averaging a build of 1.2 million barrels per day (mb/d). Last year, the month of January recorded a mega-surplus to the tune of 3.4 mb/d; the third largest surplus in any month over the past two decades. StanChart puts this year’s January surplus at just 0.3 mb/d. StanChart says Brent price is supposed to hit at least $90 per barrel to truly reflect market fundamentals. StanChart has predicted that Brent will average $92 a barrel in the first quarter, good for a 19% jump from Dec. 31. The analysts have forecast that Brent will hit $98 per barrel in the third quarter; $109 in 2025 and $128 in 2026 before pulling back to $115 in 2027. ICE Brent futures gained $5/bbl during January, marking their first monthly gain since September. J.P. Morgan is another oil bull, and says the oil market outlook “continues to project a tightening market with prices rising from here by another $10 by May.” JPM’s forecast assumes that OPEC+ leaders will unwind 400K bbl/day of cuts from April but has not assigned a risk premium from the Middle East turmoil. JPM says crude shipments on a 30-day moving average basis are down 1.3M bbl/day from the October peak. The U.S. Energy Information Administration (EIA) is much less optimistic, and has projected Brent to average $82.42 in 2024 and $79.48 in 2025 while WTI will average $77.68 a barrel for 2024 and $74.98 in 2025.
Washington’s biggest sanction wave on Russian oil threatens to engulf India
Washington is slowly but steadily cutting the umbilical cord that links Russian oil to India—shipping. The US, on Friday, unleashed the largest sanctions package, partly directed at Sovcomflot, Russia’s state-owned shipping behemoth, and on 14 of its vessels, which are some of the biggest carriers of Russian oil to India on a regular basis. Since January 2023, these newly-sanctioned tankers have transported around 68 cargoes to India, equivalent to around 6 per cent of the total Russian crude imports last year. That’s approximately 48 million barrels of oil, more than what Nigeria, a key crude oil supplier to India prior to the Ukraine war, supplied in 2023, according to calculations .
Qatar to boost gas output with new mega field expansion: minister
Qatar on Sunday announced new plans to expand output from the world’s biggest natural gas field, saying it will boost capacity to 142 million tonnes per year before 2030. The new North Field expansion, named “North Field West”, will add a further 16 million tonnes of liquefied natural gas (LNG) per year to existing expansion plans, Qatari Energy Minister Saad al-Kaabi said at a press conference. “Recent studies have shown that the North Field contains huge additional gas quantities estimated at 240 trillion cubic feet, which raises the state of Qatar’s gas reserves from 1,760 (trillion) to more than 2,000 trillion cubic feet,” said Kaabi, who also heads the state-owned QatarEnergy firm. These results “will enable us to begin developing a new LNG project from the North Field’s western sector with a production capacity of about 16 million tonnes per annum,” he said. This will bring Qatar’s production capacity to 142 million tons once “the new expansion is completed before the end of this decade” — a nearly 85 percent rise from current production levels, Kaabi added. The QatarEnergy chief said the firm will “immediately commence” with engineering works to ensure the expansion is completed on time. Qatar is one of the world’s top LNG producers alongside the United States, Australia and Russia. Asian countries led by China, Japan and South Korea have been the main market for Qatari gas, but demand has also grown from European countries since Russia’s war on Ukraine threw supplies into doubt. The latest expansion plans follow a flurry of announcements for longterm Qatari gas supply deals. Earlier this month, Qatar said it would supply 7.5 million tonnes of LNG per year for 20 years to India’s Petronet, with the first deliveries expected from May 2028. And at the end of January, QatarEnergy announced a deal with US-based Excelerate Energy to supply Bangladesh with 1.5 million tonnes of LNG per year for 15 years. Last year, Qatar inked LNG deals with China’s Sinopec, France’s Total, Britain’s Shell and Italy’s Eni.
Mitsui O.S.K. Lines, soon to be a prized catch for GIFT City, in talks to build tanker at L&T yard
Mitsui O.S.K. Lines, Ltd (MOL), the Japanese transport giant and the world’s third largest ship owner by fleet size, will likely open a unit in the Gujarat International Finance Tec-City (GIFT City) for leasing and owning ships and has separately opened talks with Larsen & Toubro Ltd (L&T) to build an oil tanker at its Kattupalli yard near Chennai under the ‘Make in India’ program, multiple sources said. The GIFT City is India’s first International Financial Services Centre (IFSC) under the Special Economic Zone Act – a tax-free offshore enclave within India that seeks to onshore India focused business carried out in other parts of the globe. MOL’s plan is to open a new entity in GIFT City and use it to lease or build vessels in India under the ‘Make in India’ initiative.
FACT to set up green hydrogen plant jointly with OIL
Fertilisers and Chemicals Travancore Limited (FACT) plans to set up a small green hydrogen plant at its premises in Kochi, in collaboration with Oil India Limited. The two major Central PSUs signed a memorandum of understanding (MoU) in Noida on February 22 to explore opportunities in the domain of green hydrogen, including green ammonia/green methanol and other derivatives. It is learnt that FACT is already exploring possibilities of setting up a solar farm at its massive water reservoir on its Ambalamedu campus. The Initial explorations and study of potential is under way. The solar power generation facility will be carried out by FACT on its own, while the Green Hydrogen project will be a joint venture towards more environment-friendly operations and a sustainable future. Apart from State grid power, FACT now meets its energy requirement through use of liquefied natural gas (LNG), which is considered a clean fuel when compared to other fuels used earlier by the company. FACT consumes around 10 million mmBtu worth of LNG a year. FACT previously used a variety of fuels since its inception including firewood. In the late 1940s, firewood used to be brought in country boats from Malayattoor forests to be used to produce ammonia through wood gasification process.
IOC, GAIL, ONGC fined for third straight quarter for failure to appoint directors
State-owned oil and gas giants including IndianOil, ONGC and GAIL (India) have been slapped fines for the third straight quarter for failing to meet listing norm requirements of having the requisite number of directors on their board. Stock exchanges have fined oil refining and fuel marketing giant Indian Oil Corporation (IOC), explorers Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL), gas utility GAIL, and refiners Hindustan Petroleum Corporation Ltd (HPCL) and Mangalore Refinery and Petrochemicals Ltd (MRPL) a cumulative Rs 3.25 million, stock exchange filings showed. In separate filings, the companies detailed the fines imposed by the BSE and NSE for either not having the requisite number of independent directors or the mandated women director in the third quarter ended December 31, 2023, but were quick to point out that appointment of directors was done by the government and they had no role in it. The companies had faced fines for the same reason in the previous two quarters as well. The six PSUs in separate filings said they have been slapped with a fine of Rs 5,42,800 each for the third quarter. While ONGC and its subsidiaries HPCL and MRPL, GAIL and OIL faced fines for not having the required number of independent directors on their board, IOC for not having a woman independent director on its board.
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.