India ups crude oil imports from the US as Russian shipments stagnate
Triggered by OPEC+ announcement on cutting crude oil output, India is looking to diversify its crude sources, says a study As per the PPAC, India’s cumulative crude oil imports during April and May this fiscal year stood at almost 40 mt, of which 6.9 per cent was from North America. Even as crude oil imports from Russia exhibit signs of stagnation, India has gradually increased its shipments of the critical commodity from the US, which seems to be trying to claw back its lost share.
Russia oil discount to India shrinks to $4, delivery charges remain opaque
The steep discounts on Russia crude oil that India gorged on since the Ukraine war, have plunged but the shipping rates charged by Russia-arranged entities continues to remain ‘opaque’ and higher than normal, sources said. Russia bills Indian refiners at a price shade less than the $60 per barrel price cap imposed by the West but charges anything between $11 to $19 per barrel, twice the normal rate, for delivery from the Baltic and Black Sea to the west coast, three sources with knowledge of the matter said. The $11-19 per barrel shipping costs from the Russian ports to India — some of it on the 100+ tankers reportedly acquired by Russian actors for a shadow fleet — are higher than rates for comparable distances, such as a voyage from the Persian Gulf to Rotterdam. Following Moscow’s invasion of Ukraine in February last year, Russian oil was sanctioned and shunned by European buyers and some in Asia, such as Japan. This led to Russian Urals crude being traded at a discount to Brent crude (the global benchmark). The discount on Russian Urals grade has however narrowed from levels of around $30 a barrel in the middle of last year to closer to $4 per barrel, sources said. Indian refiners, who convert crude oil extracted from below ground into finished products such as petrol and diesel, are now the biggest buyers of Russian oil as Chinese imports have maxed out due to a massive electrification of vehicles and demand issues in a shaky economy. Indian refiners ramped up purchases from less than 2% of their entire buys in pre-Ukraine war times to 44% to capture the discounted oil. But these discounts have been shrinking as companies such as government-controlled entities like Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd (BPCL), Mangalore Refinery and Petrochemicals Ltd and HPCL-Mittal Energy Ltd as well as private refiners Reliance Industries Ltd and Nayara Energy Ltd continue to negotiate deals with Russia separately. The discounts could have been higher if state controlled units, who account for roughly 60% of the 2 million barrels per day of Russian oil flowing into India, negotiated together, sources said. “Chinese demand has maxed out and Europe is not buying any seaborne crude from Russia. So India remains the only destination with increasing appetite. And if they (refiners) negotiated together, bigger discounts could have been extracted,” a source said. Consider this, IOC is the only company to have entered into a term or fixed volume deal. Other refiners continue to buy on a tender basis. Before Russia’s invasion of Ukraine in February last year, India was a minor importer of Russian crude, with purchases of about 44,500 barrels per day (bpd) in the 12 months to February 2022. India’s purchases of seaborne crude from Russia have surpassed those by China a couple of months back. Sources said Indian refiners buy crude oil from Russia on a delivered basis, putting the onus on Moscow to arrange for shipping and insurance. While the invoicing for oil is at or a shade less than $60 per barrel, the shipping and insurance rate billed is as per quotes Russia gets from three not-so-well-known agencies which cannot be independently evaluated and remain opaque, they said. The actual sale price of Urals crude is about $70-75 per barrel, channeling a large portion of Russian oil revenues to the three shadow agencies, they said. The G7 imposed a $60 per barrel price cap on Russian oil beginning December 2022 to try to limit Moscow’s ability to finance its war in Ukraine.
U.S. Shale Production Costs Are Finally Falling
After years of rising production costs amid post-pandemic inflation, the U.S. Shale Patch can finally breathe a sigh of relief after the cost trajectory hit a turning point. Production costs fell 1% year-on-year in the second quarter, marking the first time they have shrunk in three years. Drill pipe prices have halved this year, daily rig rates are down by more than 10% and the costs of steel and diesel are also trending lower. According to Goldman Sachs via Bloomberg, Drill pipe prices have fallen by 50% this year; daily rig rates are down by more than 10%, while the costs of diesel and steel have been gradually declining. Only labor has been defying this trend as wages continue rising. Whereas a decline of a single percentage point might not make much of a difference on the bottom line, Goldman says costs will be 10% lower in 2024, enough to boost profits and cash flows significantly. Easing price pressures are most welcome: after two years of bummer earnings and copious cash flows, the U.S. oil and gas sector is set to record a decline on both metrics in the current year. According to Moody’s research report, industry earnings will stabilize overall in 2023, but remain below levels reached by recent peaks. The analysts note that commodity prices have declined from very high levels earlier in 2022, but predicted that prices are likely to remain cyclically strong through 2023. This, combined with modest growth in volumes, will support strong cash flow generation for oil and gas producers. Moody’s estimates that the U.S. energy sector’s EBITDA for 2023 will fall to $585B in 2023 from $$623B in 2022. The analysts say that low capex, rising uncertainty about the expansion of future supplies and high geopolitical risk premium will, however, continue to support cyclically high oil prices. But the decline in earnings could come in worse than expected if current forecasts are any indication. U.S. oil and gas major ExxonMobil (NYSE:XOM) revealed in an SEC filing on Wednesday that it expects to book sharply lower Q2 2023 earnings mainly due to low natural gas prices and lower refining margins. Exxon booked record earnings to the tune of $11.4 billion in Q1 2023, double from the $5.48 billion for Q1 2022. Earnings per share clocked in at $2.79 for the first quarter, beating the Wall Street consensus of $2.60. Exxon has predicted Q2 2023 earnings will clock in at ~$7.8 billion, a sharp drop from $11.4 billion for Q1 2023, with the company blaming $2.2 billion lower earnings in the upstream division due to lower natural gas prices, as well as another $2.2 billion decline in the energy products division, due to lower industry margins. Mixed Oil Price Outlook For the second consecutive month, the leading OPEC producer, Saudi Arabia, has extended its voluntary 1M bbl/day oil production cut for another month, this time till August. The reduction will take the country’s production to ~9M bbl/day, the lowest level in several years. Saudi has been single-handedly sacrificing sales volume in a bid to goose weak oil prices, but has so far reaped little reward. The bears remain unconvinced, with Marwan Younes, chief investment officer of hedge fund Massar Capital Management, saying oil price gains are likely to be short-lived. “The problem is when you cut production in an already weak environment, the impact is limited. It looks like we could be here for a while,” Ole Hansen, head of commodity strategy at Saxo Bank, has told the Wall Street Journal. On Tuesday, Morgan Stanley lowered its oil price forecast and predicted an oil surplus during the first half of 2024 thanks to non-OPEC supply growing faster than demand. MS has lowered its Brent price outlook for Q3 2023 to $75 from $77.50 per barrel and cut Q4 2023 forecast to $70 from $75. The Wall Street bank has also cut its oil price forecast for 2024 by $5, and now sees prices at $70 in Q1 2024; $72.50 in Q2 2024, $75 in Q3 2024 and $80 for the final quarter. “Despite low investment, non-OPEC+ supply has been growing robustly and supply from Iran and Venezuela has been creeping higher. We still model stock draws in Q3, but expect oil price softness to continue as the market’s focus shifts to H1 2024 when balances look in surplus,” the bank said in a note. But the bulls are still holding the fort: on Tuesday, TD Securities said that oil prices can still rally over the next 6 months regardless of ongoing demand fears as well as growing supply from the likes of Venezuela, Iran, and even Russia. “We do expect crude to rebound in the second half of the year. We think approaching $90 is probably not unreasonable in the next six months or so as the worst of the fears about a recession moderate. When we look at demand growth for 2023, we’re still looking north of two million barrels per day, and we continue to expect OPEC plus to be fairly well-disciplined on the supply side,” Bart Melek, Global Head of Commodity Strategy at TD Securities stated in a recent investor note. Last month, Goldman Sachs’ oil ultrabull Jeff Currie once again cut his Brent forecast for December, this time to $86 a barrel from $95 and $100 before that. Currie cited increasing supply from Russia, Iran, and Venezuela; growing recession fears, and persistent headwinds to higher prices from higher interest rates for his growing bearishness. His forecast is still good for nearly 20% upside. Oil prices kicked off the second half of the year, trading around the $71 per barrel level and have steadily traded below their 100-day moving average since the end of April. Oil prices have declined nearly 12% in the year-to-date.
Oil Futures Market Finally Signals Supply Tightening
The oil futures market has strengthened this week, signaling that a market tightening could be on the way. Following the latest announcements of fresh supply cuts from OPEC+ leaders Saudi Arabia and Russia, key spreads in the oil derivatives markets have started to show strength, according to Bloomberg’s estimates. Prompt spreads in the futures market have returned to backwardation, from contango. Contango is the state of the market in which prices for delivery at later dates are higher than front-month prices—a market situation signaling oversupply. The opposite market situation—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. Last week, the six-month spread in Brent flipped to contango for the first time since December 2022, after being in backwardation for months. The U.S. benchmark, WTI Crude, also dropped into contango on June 27, for the first time since March. But in recent days, prompt spreads have strengthened, swaps contracts linked with physical supply have surged, and in options markets, the premium of bearish puts over bullish calls has narrowed. On Monday, Saudi Arabia and Russia announced nearly at the same time fresh cuts to global oil supply. Saudi Arabia said it would extend its unilateral oil production cut of 1 million bpd into August. Saudi Arabia will be producing around 9 million bpd in both July and August after extending the voluntary cut into next month. “This additional voluntary cut comes to reinforce the precautionary efforts made by OPEC Plus countries with the aim of supporting the stability and balance of oil market,” Saudi Arabia said. Minutes after the Saudi announcement, Russia’s Deputy Prime Minister Alexander Novak said that Russia would cut its crude oil exports by 500,000 bpd in August in a bid to ensure a balanced market.
Saudi Aramco exploring investment opportunities in India, CEO says
Saudi Aramco, the world’s largest oil-exporting company, is looking for investment opportunities in India amid a surge in crude demand in the South Asian country, its president and chief executive has said. In terms of crude imports, both China and India – two large oil-consuming countries – have surpassed pre-pandemic levels, Amin Nasser said during the Opec International Seminar in Vienna on Wednesday. China’s crude imports hit a record16 million barrels per day in March as its economy recovers following the lifting of Covid-19 restrictions earlier this year, the International Energy Agency said in its April oil market report. China was the largest importer of oil from Saudi Arabia last year, buying about 1.75 million barrels per day. In March, an Aramco unit acquired a 10 per cent stake in Shenzhen-listed Rongsheng Petrochemical in a deal valued at $3.6 billion to expand its refining operations in China. In December, Aramco and China Petroleum and Chemical Corporation signed an initial agreement to build a refinery and a petrochemicals plant in China. The 320,000-bpd refinery and 1.5 million tonnes-per-year petrochemical cracker complex will be operational by the end of 2025. Mr Nasser said that rising crude demand from China and India would lead to an “imbalance” in the oil market amid underinvestment in new oil and gas projects. “Their priority is raising the [living] standards for their people and sustainability comes next. In Asia alone, there are 150 million people with no electricity,” Mr Nasser said. While policies such as the Inflation Reduction Act in the US and similar initiatives in the EU will support energy transition in those countries, such incentives will not work for developing economies, Mr Nasser said. It is expected to spur about $3 trillion of investment in renewable energy technology, according to Goldman Sachs. The International Energy Agency and Opec expect the oil market to tighten in the second half of the year, supported by a rebound in crude demand in Asia and Opec+ production cuts. However, Brent, the benchmark for two thirds of the world’s oil, has lost nearly 11 per cent of its value since the beginning of the year on economic slowdown concerns and resilient Russian crude supply.
PNGRB proposes Jammu-Srinagar natural gas pipeline
The Petroleum and Natural Gas Regulatory Board (PNGRB) has proposed building a natural gas pipeline between Jammu and Srinagar to help meet the energy needs in the union territory of Jammu & Kashmir. The downstream regulator has begun a public consultation for the proposed pipeline and sought comments from all stakeholders within a month on the route as well as carrying capacity. The proposed pipeline will connect with Gurdaspur-Jammu natural gas pipeline and also receive gas through that.
India in talks to supply 10 million tonnes of green hydrogen to EU: Report
India has hosted talks on a possible deal to supply 10 million metric tonnes of green hydrogen to the European Union (EU), which in turn would invest in one such clean energy project in India, sources told news agency Reuters. According to an earlier report, India will consider bilateral agreements with countries to allow them to use carbon credits linked to the production green hydrogen, or hydrogen made using renewable energy, in India in exchange for investment and purchase deals. Under the plan, EU businesses could invest in the projects in India and claim carbon credits, according to one of the officials, who attended a meeting that took place on Wednesday in New Delhi. The meeting was attended by officials from EU governments and Indian renewable companies, including Avaada Group, Renew Power and ACME Group.
IGX traded gas volumes at over 1.62 mmBtu in June
Indian Gas Exchange (IGX) on Wednesday said its platform traded 16,22,100 million British thermal unit (mBtu), or around 41 million metric standard cubic meters (mmscm), of gas volumes in June. Volumes were up 91% sequentially due to increase in spot buying interest from buyers amid correction in global gas prices. At 6,66,500 mmBtu, IGX traded a record single-day domestic ceiling price gas at $10.6/mmBtu during the month, it added. According to the company, a total of 47 trades were executed during the month. The maximum number of trades executed in Monthly contracts was 15, followed by Daily & weekly contracts of 12 and 11 trades respectively. The most active delivery point for free market gas was Dahej and domestic ceiling price gas was traded at Gadimoga. Other trading delivery points were- Mhaskal, Hazira, Suvali, and Ankot. “GIXI (Gas Index of India) for June 2023 was ₹879 /$10.6 per MMBtu, lower by 7% last month. Different spot gas benchmark prices recorded were: HH at $2.4/MMBtu, TTF at $10 /MMBtu, whereas LNG benchmark indices were: WIM 11.5 $/MMBtu,“ reads a statement. “IGX traded a total of 666,500 MMBtu domestic ceiling price gas at below ceiling price at Rs. 860 (volume weighted average price) during the month, complying with MoPNG notification dated 13.01.2023. Priority sector allocation in Ceiling Price gas were, CGD (CNG + PNG) – 6% and others (CGD (I&C), Marketers) – 94%,“ it added.
The World’s Green Energy Transition Depends On Asia
The rapid green transition of the Asian region may be key to the rest of the world meeting its climate pledges, according to several experts. The speed at which some of Asia’s largest countries and biggest polluters, such as China and India, achieve net zero could determine the success of other regions around the globe in accomplishing a green transition. And while China is progressing with the acceleration of its shift to green, several other Asian countries may need greater support to achieve this goal. According to Petronas CEO Tengku Muhammad Taufik, Asia must hit its net-zero targets for the rest of the world to do so. Taufik explained, “The bulk of the emissions [that] are expected to emit will be produced in Asia going forward.” He added, “The world cannot achieve net zero without Asia achieving net zero.” As Asia will contribute around half of the world’s GDP by 2040 and 40 percent of global consumption, its transition to green will be key to the world meeting its climate targets. Taufik also highlighted the importance of world leaders working together to achieve their climate goals, as no one power can meet the goals outlined in the Paris Agreement by working in isolation. This includes the aim of limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C. At present, emissions from Asia’s developing economies and emerging markets are increasing at a faster rate than other regions, rising by 4.2 percent in 2022. This is largely due to the rapid rate of industrialisation across the region, as well as the growing energy demand of several huge populations. Many Asian countries, including China, India and Indonesia, continue to rely heavily on coal to meet their energy demand, which is much more polluting than green alternatives or even other forms of fossil fuel. While Asia is not likely to move away from fossil fuels any time soon, as it depends on coal, oil, and gas for both its industry and consumer energy needs, a lot can be done to develop its renewable energy capacity at a more rapid rate. Greater investment in green energy and related technologies across the region will support efforts to decarbonise, as well as support an eventual shift away from fossil fuels to renewable alternatives. Unlike many European countries, Asia is not yet in a position to drop fossil fuels, but this could allow it to do so within the coming decades. Taufik emphasised the idea that “We’ve always positioned natural gas as a transition fuel,” and this will be key to energy security in Asia for the mid to long term.
Europe And China Face Off Over U.S. LNG Supply Deals
Concerned about energy security, Europe and China are in an intensifying competition to sign long-term supply deals with U.S. LNG developers and exporters. The race for LNG supply indexed to Henry Hub prices and with flexibility clauses to resell the cargoes if not needed gives buyers certainty about long-term supply and the possibility to send cargoes elsewhere if the market is not as tight as expected. For sellers, the U.S. LNG developers and exporters, more long-term purchase deals with Europe and Asia mean more chances for projects to contract future volumes from planned export facilities and underpin financing and final investment decisions for a greater number of U.S. LNG export terminals. “More volumes are good for the market, and with the new deals we will see more LNG export projects being developed,” Sindre Knutsson, partner of gas and LNG research at Rystad Energy, told the Financial Times. Despite concerns about cost inflation, developers of LNG projects in the United States are set to approve a record-high volume of export capacity this year, driven by rising global LNG demand and increased long-term contracting from customers willing to boost energy security. Venture Global LNG has already approved one project this year—it announced in March the FID and successful closing of the $7.8 billion project financing for the second phase of the Plaquemines LNG facility. This, along with Sempra’s Port Arthur LNG Phase 1 project in Jefferson County, Texas, were the two projects approved so far in 2023. The third one, NextDecade’s Rio Grande LNG project, targets FID in early July, after signing framework agreements with Global Infrastructure Partners (GIP) and TotalEnergies, and selling 16.2 million tons per annum (MTPA) of LNG from Phase 1, or 92% of nameplate capacity, under long-term agreements, sufficient to support the binding debt commitments from these leading lenders and the near-term FID of the 17.61 MTPA Phase 1. Supermajor TotalEnergies will hold a 16.7% interest in the first phase of the project, and has agreed to purchase 5.4 million MTPA of LNG from Phase 1 for 20 years and has options to purchase LNG from Train 4 and Train 5. In another major long-term offtake agreement between an energy major and a U.S. LNG exporter, Equinor signed last month a 15-year purchase agreement of around 1.75 million tons of LNG per year from Cheniere, which will double the volumes of LNG that Equinor will export out of Cheniere’s LNG terminals on the U.S. Gulf Coast. Another deal saw Germany’s state-controlled firm Securing Energy for Europe (Sefe) sign last month a 20-year agreement with Venture Global LNG to import 2.25 million tons of LNG per year from Venture Global’s third project, CP2 LNG, as Europe’s biggest economy is looking to secure gas supply after Russia stopped deliveries. Long-term LNG contracting has seen a flurry of deals in recent months, including from buyers in Europe, where energy security has taken center stage at the expense of concerns about emissions from natural gas imports. China is also looking at the U.S., apart from Qatar, to secure long-term LNG supply after last year’s energy crisis put an additional emphasis on Chinese energy security. Just last week, Cheniere Energy signed a long-term deal with China’s ENN to deliver LNG to the Chinese buyer for more than 20 years—the second deal between Cheniere and ENN. U.S. LNG exporters are signing deals with other Asian buyers such as Japan, securing further offtake commitments and making the U.S. export projects easier to push through the FID milestone. Developers of U.S. LNG export facilities could launch $100 billion worth of new plants over the next five years as high prices and the need for energy security create strong momentum for long-term LNG demand and contracts, energy consultancy Wood Mackenzie said in a report earlier this year.