How Long Will the Oil Price Rally Last?
It’s been a wild week for oil prices. First soaring on news of the biggest U.S. inventory draw in years, benchmarks later slumped just as sharply when Fitch downgraded the United States’ credit rating from AAA to AA+. Barely a day later, prices rebounded again after Saudi Arabia did what pretty much everyone expected, extending its voluntary production cuts of 1 million barrels daily into September. Where prices go from here is anyone’s guess, but analysts are saying the rally won’t last. That appears to be the opinion of the majority of analysts polled recently by the Wall Street Journal. Per that poll, Brent crude should average $87 per barrel in the current quarter and remain around this level until the second quarter of 2024. For West Texas Intermediate, the analysts see a price of $83 per barrel this quarter and into the first half of 2024. Even with continuing cuts from OPEC+ and a rebounding Chinese economy. The reason they don’t see prices much higher is that China’s recovery from the pandemic is moving more slowly than expected and, interestingly, that Saudi Arabia’s voluntary cuts have increased its spare production capacity. China has indeed been recovering more unevenly than analysts seem to have pictured it, but it is recovering, and its oil demand is at a record high. It may, however, have peaked earlier in the year, which would suggest slower growth in the next five months and possibly beyond. As for spare production capacity, that was a substantial concern a couple of years ago when demand for oil began to recover after the first wave of lockdowns. The concern was that, because of underinvestment, the global oil industry had not enough spare capacity to respond to a potential surge in demand. For now, this warning has not had to be tested, but Saudi Arabia is working on expanding its spare capacity over the medium term. While it does that, however, it is also limiting production. By limiting production, it is limiting the amount of oil immediately available to buyers, which renders the argument for greater spare capacity a little irrelevant. Saudi Arabia may boost its total production capacity to 13 million barrels daily, as it plans to do, but if it is only producing 9 million barrels daily to keep prices above $80, the size of its spare capacity has very little importance for day-to-day and even longer-term price developments. There is one more factor that is acting as a cap on prices, however, and that is the rebound in offshore drilling. Wood Mackenzie reported last month that deepwater rig utilization is on the rise as companies step up exploration offshore. Goldman Sachs also noted this rebound in a recent note, cited by the WSJ. “The significant rise in OPEC spare capacity over the past year, the return to growth in international offshore projects, and declining U.S. oil production costs limit the upside to prices,” the bank said. It’s worth noting that along with falling oil production costs in the U.S., production growth is also slowing down, which should boost the upside to prices. The EIA recently projected that shale oil production is set to decline this month after hitting a peak in July. The August decline, to 9.4 million bpd, will be led by the Permian, the most productive shale basin right now. Meanwhile, Saudi Arabia has indicated it may extend the cuts further or deepen them. Saudi Arabia appears back into “Whatever it takes” mode to keep prices at levels that are closer to its government spending plans. And there is little any other producer can do to counter the effect of those cuts in short order. The main drag on prices remains the economic outlook for the biggest consumers. Until recently, the fear of a recession in the U.S. held sway over traders, but recently the outlook brightened, which contributed to higher prices. Then came the Fitch downgrade and although Treasury Secretary Janet Yellen said it was “entirely unwarranted” and JP Morgan’s Jamie Dimon called it “ridiculous”, the downgrade rattled markets. In fact, Dimon said that the U.S. economy is doing so well that even if a recession does emerge, it will not be that big of a deal. “It’s pretty good, even if we go into recession,” Dimon said, as quoted by CNBC, this week. “The storm cloud part is still there.” It is this storm cloud, along with economic trends in Europe and Asia that will continue to shape oil prices over the coming months. Grave recession warnings have yet to materialize, if ever, and that fact has served to moderate the rise of oil prices. But if Saudi Arabia decides to deepen the cuts and Russia plays along with its own curbs, the current factors that cap oil prices may weaken enough to allow a stronger rally.
India’s energy consumption growing at three times the global average, says Oil Minister
India’s energy consumption is growing at three times the global average, the Minister for Petroleum and Natural Gas, Hardeep Singh Puri, said. By keeping domestic fuel prices “affordable” for consumers and by making fuel “available” to everyone, India’s energy consumption is now growing at a healthy three percent annually, compared to the global average rise of one percent. Speaking to a cross-section of correspondents in New Delhi, Puri said Prime Minister Narendra Modi had monitored domestic fuel availability during volatility in the global energy market and ordered cuts in central excise duties and value added tax on petrol and diesel. These made prices affordable for consumers. India also increased its sources for crude oil imports from 27 to 39 countries. “The challenges in the global energy market were there already, before the February 2022 Russia-Ukraine conflict. But we have navigated our way through this global turbulence.” Puri said India imports five million barrels of crude oil in a day. “We bought from wherever we could when shortages were feared.” As a result of these steps, price rise of fuel for domestic consumers in India was only 2.36 percent in the last two years, while the comparative price rise in many developing and developed countries was around 30 percent. “Domestic prices were last changed in May 2022,” the Minister said. India’s oil marketing companies (OMCs) may cut petrol and diesel prices if global crude oil prices remain stable at current levels because the OMCs have posted robust earnings for the April-June 2023 quarter.
LNG project: China-Pakistan company out, India in
The Government of Sri Lanka has decided to cancel a tender awarded to a China-Pakistan consortium to supply Liquefied Natural Gas (LNG) and lay a pipeline network after being selected through an international open competitive bidding process and instead consider an offer by an Indian company. The China-Pakistan Engro Consortium was selected last year as part of a step towards reducing the cost of power production. However, last Monday, Power and Energy Minister Kanchana Wijesekera submitted a Cabinet paper titled “Revisiting the National Energy Policy Related to the Development of Natural Gas Infrastructure in the Country,” to suspend the ongoing LNG procurement process. Accordingly, the suspension covers the Development of a Floating Storage and Re-gasification Unit (FSRU) off Kerawalapitiya on a Build, Own, and Operate basis and a compatible mooring system on Build, Own, Operate and Transfer basis. It also covers the associated projects – the development of Offshore and Onshore Re-gasification Liquefied Natural Gas (RLNG) Transmission Pipeline Network with an Onshore Receiving Facility (ORF) and an associated System from the Floating Storage and Re-gasification Unit (FSRU) to existing and future Kerawalapitiya and Kelanitissa Power Plants on Build, Own, Operate and Transfer (BOOT) basis. After following the proper tender process, the Cabinet-Appointed Negotiating Committee (CANC) in August last year granted approval to award the tender to the Engro Consortium. Accordingly, although the Power and Energy Ministry had to submit a cabinet paper to enable the tender to be awarded thus, the ministry delayed the process, Ministry sources said. The Sunday Times learns that the process had been delayed as the Indian government strongly objected to awarding this tender to the China-Pakistani company. However, finally, the subject minister had requested cabinet approval to suspend this officially permitted tender, under these circumstances. The Ministry had instead attempted to award this tender to Petronet LNG Ltd. of India, as an unsolicited procurement, but since the company did not have any experience regarding FSRU, the ministry had rejected the request and said if the Indian government supported the company, they would be able to supply LNG in containers. “This will badly hamper the investor confidence and no genuine investor will come forward in future to this country,” the official said. A Ceylon Electricity Board (CEB) top official said, “It will be a costly solution as there would be no competition, with prices being determined by the Indian company”. He said it could have an impact on the electricity tariff which would be increased and all costs would be passed on to the consumers. The CEB’s Least Cost Long Term Generation and Expansion Plan (LCLTGEP) (2018-2037), which was approved by the Public Utilities Commission of Sri Lanka (PUCSL) in 2018, identifies the need for converting furnace oil and diesel power plants to LNG power plants to reduce power generation costs. Accordingly, the CEB called for international competitive open tenders from February 18, 2021 to June 25, 2021, and two bidders came forward. At that point, the US-based New Fortress Energy Company which gave rise to much controversy in 2021, had, without submitting an open bid for this tender, presented an unsolicited proposal to the government. The then Gotabhaya Rajapaksa government which supported this unsolicited proposal had even signed an agreement to sell 40% of the shares of the 300 MW Treasury-owned Kerawalapitiya Yugadhanavi Diesel Power Plant to the New Fortress Energy. However, due to strong objections to the deal, the agreement had not been implemented up to now. Against this backdrop, the CANC granted approval on August 4 last year to award the tender to the China-Pakistan Consortium, one of the two companies which had submitted proper bids for the tender.
India insulated itself from rising fuel prices; enhancing refining capability: Oil Minister Puri
India maintained “affordability” of petroleum products notwithstanding disruptions in the global energy markets and the hike in prices of petrol and diesel in the last two years has been marginal compared to several large economies and neighbouring nations, Oil Minister Hardeep Singh Puri said on Friday. In an interaction with a group of reporters, he also slammed the opposition for attacking the government on oil prices saying the states ruled by it are selling petrol and diesel at higher rates compared to those governed by the BJP which significantly cut the VAT on petroleum products to bring down the rates. The oil minister also said that India is in the process of expanding its oil refining capabilities. India is already the world’s fourth largest refining hub and we are going to end up as the second largest refining place, Puri said while highlighting the Modi government’s success in areas of trade and foreign policy. “PM Modi’s governance is transforming our foreign policy, trade policy, energy policy,” he said. Asked whether the government plans to slash the petroleum prices as it is procuring crude from Russia at a discounted rate for over one year, Puri did not give a direct reply and said the discount is not that much now. At the same time he highlighted how the government managed to keep the oil prices under affordable range besides enhancing the country’s refining capability. Even during the most volatile period in the energy markets, Prime Minister Modi ensured “availability, affordability and sustainability” of fuel by reducing central excise twice, he said. Puri said the increase in petrol prices in India between June 2021 and June 2023 was 2.36 per cent, while the hike in Pakistan, Bangladesh, Sri Lanka and Nepal during the period was 50.83 per cent, 30.11 per cent, 79.61 per cent and 42.39 per cent respectively. Citing data of large economies, Puri said the rise in petrol prices during the period in the US was 30.15 per cent while the hike in France, Germany, Italy, Spain, the UK and Canada was 22.67 per cent, 19.08 per cent, 14.68 per cent, 17 per cent, 10.93 per cent and 24.17 per cent respectively. In the case of diesel, he said the increase in India was 4.97 per cent while the increase in Pakistan was 40.81 per cent, Bangladesh 50.11 per cent, Sri Lanka 130.65 per cent and it was 130.65 per cent in Nepal. Puri said the hike in diesel prices in the US in that period was 29.31 per cent, while it was 19.47 per cent in France, 17.50 per cent in Germany, 14.57 per cent in Italy, 16.38 per cent in Spain and 21.20 per cent in Canada. “India has been able to insulate itself from the rising fuel prices by taking several steps, including reduction in the excise duty by the Centre,” he said. Questioning the opposition’s criticism of the government on oil prices, he said while the rate of per litre petrol in Guwahati in July was Rs 98.03 (BJP-ruled state), the cost in Kolkata was Rs 106.03 (TMC-ruled). Similarly, Puri said the price of petrol per litre in Lucknow in July was Rs 96.57 while it was Rs 101.94 in Bengaluru. On whether the government plans to pass on the benefits of procuring crude oil at discounted rates from Russia, Puri said there were good discounts initially but suggested that the rates have gone up now. “There were good discounts initially and then they started raising prices…Now the discount is not that much,” he said. Puri said India is significantly expanding its refining capabilities. He said the country now has a refining capacity of around 300 million metric tons per annum and the government was looking at increasing it to over 400 million metric tonnes and that the government was looking at a major transition in the sector. India has strategically diversified its import basket from only 27 countries to 39 countries, he said, adding the country has increased ethanol blending in petrol from 1.53 per cent in 2014 to 11.7 per cent in June 2023. On India’s overall growth trajectory, Puri said India is the fastest-growing major economy in the world and that according to the IMF, the country will contribute 15 percent of the global growth in 2023. It is estimated that India’s GDP will cross 3.75 trillion USD in 2023, he said and cited the World Bank data to note that the figure was 2.04 trillion USD in 2014. Highlighting the outcome of the Modi government’s policies, Puri citing a report by NITI Aayog, said 135 million people exited “multi-dimensional poverty” between 2015-16 and 2019-21.
ConocoPhillips Agrees To Long-Term LNG Deal With Mexico
ConocoPhillips has agreed to a long-term LNG deal from a $15 billion export terminal that is being built in Puerto Libertad, Sonora, Mexico, according to a press release. The free on-board basis deal with span 20 years, with Conoco committing to purchasing 2.2 million tons per year of LNG from Mexico Pacific Limited LLC. Mexico Pacific Limited LLC is building out the terminal and in Sonora, Mexico, which is expected to cost some $15 billion. It is also planning to build a 500-mile-long pipeline as part of the project. The annual capacity of the first three LNG trains part of the project is expected to be 15 MTPA. It is expected to open by 2027. Conoco will also supply the terminal with gas from the Permian Basin, providing it with an outlet for its gas. Conoco has said that the strategic location on the West Coast of Mexico will result in lower gas emissions because of the shorter transit to Asian Markets compared to other GoM and Pacific Basin producers. Conoco has other LNG projects lined up, including future expansions at Port Arthur and Sempra Energia Costa Azul LNG export project, the latter, which is also on Mexico’s West Coast. “Mexico Pacific’s exceptional North American West Coast project fundamentals leverage abundant, low-cost natural gas from the nearby Permian Basin and a significantly closer proximity to Asia, the engine room of global LNG demand, to reliably deliver the lowest landed priced LNG into Asia. We will position Mexico as the fourth largest LNG exporting country and a key contributor in meeting critical energy security needs,” Mexico Pacific says on its website. “While our sales volumes exceed our Train 1 and 2 FID requirements, we are excited to move into oversubscribed territory with one of the strongest Permian Basin and LNG market participants in the market – a validation of our project’s fundamentals and position. We look forward to continuing the collaborative relationship we have with ConocoPhillips as we focus on delivering a final investment decision (FID) on our first two trains with Train 3 to follow shortly thereafter,” the press release from Mexico Pacific reads. ConocoPhillips will also have the option to contract further expansion train volumes.
The U.S.’s Hopes In Iraq Have Ended With The Oil-For-Gas Deal With Iran
Ever since the U.S. officially ended its ‘combat mission’ in Iraq on 31 December 2021, it has been looking for a way back into the huge but still relatively untapped oil and gas regions of the country, as analysed in depth in my new book on the new global oil market order. Iraq knows this perfectly well and has sought since then to exploit this need for money from the U.S. whilst having no intention of allowing it to return in any meaningful way. Many analysts trace this reluctance back to the U.S.’s invasion of Iraq in 2003 or to its continued military presence there until 2011, but although neither of these factors helped the U.S.’s ambitions in Iraq, neither of them put the final nail in their coffin either. This came with its unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) – or colloquially, ‘the nuclear deal’ – with Iran in May 2018. Iran has wielded enormous power over Iraq for a very long time indeed through its various political, economic, and military proxies and the death knell of the deal with Iraq meant the same for any ambitions the U.S. had in Iraq. The game plays from Iraq and the U.S. around this starting position were seen again last week but, as in the end of Macbeth’s fleeting moment of glory, these threats and counter-threats are ‘full of sound and fury, signifying nothing’: the game is already over, and the U.S. lost. The last week or so has seen a series of statements from both the U.S. and Iraq surrounding Baghdad’s staggeringly omni-toxic idea that Iraq will pay with its own oil supplies for the gas and electricity that it has long been importing from Iran. This is less of a slap in the face for Washington than a baseball bat in the crotch, as the U.S. has for years been giving Iraq tens of billions of dollars to help with its finances on the specific condition that the country reduces its imports of gas and electricity from Iran eventually to zero. For the U.S., the ending of Iraq’s reliance on Iran for around 40 percent of its power grid needs (through gas and electricity imports) would have provided an excellent starting point for American companies to move back into Iraq to begin a new commercially-based chapter in the two countries’ history. To encourage Iraq towards this end, the U.S. has granted waivers to it to continue to import gas and electricity from Iran to manage this transition away from dependence on its neighbour. Accompanying these waivers have been massive injections of U.S. funding into Iraq, usually following a visit to Washington in August or September each year by whoever was Iraq prime minister at the time to ask for money to bail out the Iraq budget. The principal reason why the Iraq budget needs bailing out every year is because of the industrial-scale corruption that lies at the heart of its oil sector administration, as also analysed in depth in my new book on the new global oil market order. This offensive manoeuvre from the Iraqi playbook is such a regular annual feature in Washington that for a long time, a very senior U.S. legal source closely connected to such discussions exclusively told OilPrice.com some years ago, it has been known as ‘the Baghdad Ballet’. Up until now, the most shocking betrayal of the U.S.’s optimistic trust in Iraq in this context came from the ultra-smooth Mustafa al-Kadhimi. He had danced the usual dance with the U.S. so well that in May 2020 Washington gave him even more money than before and the longest waiver ever given – 120 days – to keep importing gas and electricity from Iran, on the standard condition that Iraq stopped doing it soon. However, once the money had been banked and al-Kadhimi was safely back on home territory, Iraq signed a two-year contract – the longest period ever – with Iran to keep importing gas and electricity from it. Washington let the formidable then-State Department spokeswoman, Morgan Ortagus, out of her room, and she let fly. Not only was the next waiver to Iraq the shortest ever – 30 days – but also at the press conference in which it was announced, Ortagus let it be known that the U.S. was hitting 20 Iran- and Iraq-based entities with swingeing new sanctions. She cited them as being instruments in the funnelling of money to Iran’s Islamic Revolutionary Guards Corps’ (IRGC) elite Quds Force, which was entirely true. She added that the 20 entities were continuing to exploit Iraq’s dependence on Iran as an electricity and gas source by smuggling Iranian petroleum through the Iraqi port of Umm Qasr and money laundering through Iraqi front companies, which was also true. She also said that Washington was extremely concerned that Iraq was continuing to act as a conduit for Iranian oil and gas supplies to make their way out into the world’s major export markets. This was true as well, as additionally analysed in my new book on the new global oil market order. Even against this backdrop of stunning betrayals, though, this new idea from Iraq is of an unprecedentedly omni-toxic variety. Given tangential comments from the current Iraqi Prime Minister, Mohammed al-Sudani, it may well be assumed that Baghdad knows this and, if this is the case, it might well be the latest ruse in this year’s effort to gain another waiver (including allowing Iraqi payments to be made through the regular Iranian banking system), and more multi-billion dollar funding from the U.S. Specifically, and apparently with no sense of the irony involved, al-Sudani said that Iraq has no choice but to start paying for Iranian gas and electricity imports with Iraqi oil because U.S. sanctions on Iran has made it difficult for Iraq to make payments through traditional banking routes. Al-Sudani also said that such supplies are vital because of the rolling power cuts that are occurring across
PetroChina, other global oil companies keen to build reserves in India
PetroChina and global commodity traders Vitol, Glencore and Trafigura are among the nearly two dozen companies that have expressed interest in building India’s new strategic petroleum reserves (SPR), junior oil minister Rameswar Teli told the Lok Sabha on Thursday. India plans to build two commercial-cum-strategic oil storage facilities with a combined capacity of 6.5 million tonnes in a public-private partnership mode. The country already has three facilities with a combined storage of 5.33 million tonnes capacity. The government has been holding roadshows to rope in private players for its proposed facilities.
Russia To Cut Oil Exports By 300,000 bpd In September
Russia will cut oil exports by 300,000 barrels per day in September, Deputy Prime Minister Alexander Novak has announced. Russia has already pledged to cut oil output by around 500,000 bpd from March until year-end. “Within the efforts to ensure the oil market remains balanced Russia will continue to voluntarily reduce its oil supply in the month of September, now by 300,000 barrels per day, by cutting its exports by that quantity to global markets,” Novak has said. The news comes shortly after Saudi Arabia said it would extend its unilateral voluntary cut of 1 million barrels per day into September, and that these output cuts could be extended and/or deepened. Oil prices rose 1% minutes after the Saudi announcement, though it was largely expected by the market. Since then, oil prices have continued to rally. As of Thursday at 11:38 a.m. ET, Brent crude was trading up 1.74% at $84.65, while WTI was trading up 1.91% at $81.01, breaching the $80 resistance mark. Earlier this week, Russian President Vladimir Putin signed into law tax code measures that will narrow the discount of Urals (Russia’s flagship crude) to Brent to $20 per barrel from the current $25 discount. That measure will go into effect in September. The price of Russia’s ESPO crude blend has also risen to an eight-month high. The discount for ESPO vs. Brent is now the narrowest since the embargo went into effect in December, buoyed by strong demand from China’s independent refiners as well as India’s refiners. The new production cuts come as India’s Russian oil imports for July recovered to near all-time highs of 1.93 million bpd in May.
After parliamentary panel flags limited CBG progress, state oil firms cancel 87 LoIs
State-run oil and gas companies have cancelled letters of Intent (LoIs) issued to 87 “non-serious candidates” for setting up of compressed biogas (CBG) plants after a parliamentary panel recommended the review of LoIs, citing limited progress in building CBG plants. Oil and gas companies issue LoIs to entrepreneurs to procure CBG from them. The entrepreneurs use the LoI to receive regulatory clearances and loans for their CBG projects. After the standing committee on petroleum and natural flagged the issue of LoIs, the oil ministry advised state-run oil and gas companies to review the selection criteria for LoI issuance “so that only serious applicants are selected and also to withdraw the LoIs issued to non-performing entrepreneurs,” the committee said in its latest report. As of June 1, 2022, a total of 3,263 LoIs had been issued by the state oil companies, the committee said in its previous report tabled in December. Of this, only 35 CBG plants had been commissioned and around 40 plants were expected to be commissioned by March 2023, it said.
India, Sri Lanka to begin talks on petroleum pipeline project
New Delhi and Colombo are set to begin technical discussions that could pave the way for a multi-product petroleum pipeline between the two South Asian nations, Mint has learnt. The project, which was announced during president Ranil Wickremesinghe’s visit to India in July, is expected to help Sri Lanka improve its energy security at an affordable cost.