Fake News Or Fundamentals: What’s Driving Oil Prices?
Following the Saudi Energy Minister’s comments about the “disconnect” between oil fundamentals and oil prices, more OPEC officials have spoken out about what they suggest is fake news that is misleading the markets. In its latest report, Standard Chartered describes OPEC ministerial concerns about oil price volatility as “primarily straightforward appeals for higher prices”. At the same time, Standard Chartered’s bull-bear index for U.S. oil data has fallen week-on-week to -43.2 due to disappointing demand. On August 22nd, Saudi Energy Minister Prince Abdul Aziz bin Salman told Bloomberg that “extreme volatility” was “undermining the market’s essential function of efficient price discovery”. That, in turn, made it impossible for physical users to manage the costs of hedging or navigate the inherent risk. “This vicious circle is amplified by the flow of unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes, and sanctions,” he said. Several days later, on August 25th, Libyan Oil Minister Mohamed Oun stated that the recent heightened volatility in oil markets was “largely the result of misleading news and stories about global oil demand and supplies”. Fake news, Oun alleged, was sending the “wrong signals to all market participants”. OPEC members Iraq, Algeria, Bahrain, Kuwait, Equatorial Guinea, and Venezuela also followed suit with similar statements, Bloomberg reported. Standard Chartered notes that “when oil ministers talk of volatility sometimes they just mean falling prices”. However, the report also notes that the current 30-day realized Brent crude volatility is only at 44% – a figure that is “not particularly high”, and in fact, only 4 percentage points higher year-on-year. From Standard Chartered’s perspective, the case for weakening demand is not necessarily misleading, as OPEC ministers have claimed. A case in point is U.S. gasoline demand, which represents 9% of global oil demand. U.S. gasoline demand, according to Standard Chartered, has weakened for five consecutive months. Standard Chartered’s U.S. oil data bull-bear index has been bearish in 10 of the past 12 weeks, leading to the assessment that “fundamentals have clearly been far weaker in Q2 and Q3 than they were in Q1”, warranting the conclusion that fundamentals – not fake news – have been the key drivers of prices.
ONGC Videsh gets 2 year extension for Vietnamese oil block in South China Sea
India’s flagship overseas firm ONGC Videsh Ltd has got the seventh extension to explore for oil and gas in a Vietnamese block in the contested waters of the South China Sea, officials said. OVL, the overseas arm of state-owned Oil and Natural Gas Corporation (ONGC), has secured extension of the exploration phase upto June 15, 2023, they said. The company has not found any commercially recoverable oil and gas reserves in the block in the 16 years it has been exploring there but has continued presence there because of India’s strategic interest in the South China Sea. Vietnam too wants the Indian firm to counter China’s interventions in the contested waters. OVL had signed a production sharing contract (PSC) with Vietnam’s national oil firm PetroVietnam for deepwater exploratory Block- 128 having an area of 7,058 square kilometres in Offshore PhuKhanh Basin, Vietnam in May 2006. An investment licence was issued to it on June 16, 2006, thereby giving effect to the PSC. The firm has completed the licence requirement of shooting 3D seismic data and reprocessing of 2D seismic data as well as drilling of the committed one well. Officials said PetroVietnam has agreed to share some of the technical data pertaining to the nearby area of the block for petroleum system modelling and other related studies for better geological understanding. The firm has received the data and is now carrying out petroleum system modelling to mitigate the exploration risk and review the prospectivity of the block. OVL first took a two-year extension of the exploration period till June 2014 and then another for one year. A third extension was granted on May 28, 2015, and a fourth in 2016. It got the fifth extension for two years in 2017 and a sixth from June 16, 2019 to June 15, 2021.
India talks to Russia about restarting its LNG supplies
According to GAIL chairperson Manoj Jain, India is now in discussions with Russia to restore gas shipments under the long-term import agreement between Russian state energy behemoth Gazprom and India’s state-controlled GAIL. Since May, GAIL, the nation’s main gas distributor and pipeline operator, has been unable to receive the pre-arranged imports and has been obliged to reduce customer deliveries. He commented on Friday during an annual shareholder meeting, “there are some immediate issues which we are trying to tackle both at the company level and also at G2G [government to government] level.” Jain emphasized that the Russia and Ukraine war has had an impact on the volumes under the Gazprom arrangement, which make up nearly a fifth of GAIL’s total offshore gas portfolio of 14 million tons per year. The impact on local supply is decreased to roughly 7-8 percent by the injection of domestic gas, the senior management added, “so, overall it is not affecting us in a significant way. The only affect is to the extent of ten to 15 percent.”
Lagging Demand Won’t Keep Gas Prices From Soaring Again
After peaking in early-May at $5.02 per gallon, U.S. national average gas prices have declined for 70 straight days to trade at $3.88 per gallon on Wednesday, marking the second-longest losing streak in two decades. But experts are now warning that consumers should not be lulled into a false sense of confidence thinking the cuts will last. In an interview with Yahoo Finance Live, Rebecca Babin, senior energy trader at CIBC Private Wealth, has warned that two factors could put upward pressure on gas prices: reserves and sanctions. “Even if demand dips [for gasoline], supply will dip with it, and I don’t see a significant pullback. If anything, I think that gasoline prices on the national average will probably rise from here,” Babin has said. Babin notes the giant SPR release of oil reserves by the Biden administration is set to end in November while Europe is due to implement sanctions on Russia in December. She argues that both factors could cut oil supply, pushing prices higher and rippling through to gasoline. Compounding matters is the fact that this will coincide with the heating oil season in North America, meaning refiners will be more inclined to make crude into heating oil instead of gasoline. Since the beginning of the week, crude oil prices have been paring back earlier losses after Saudi Oil Minister Prince Abdulaziz bin Salman said the current bear market may require OPEC+ to tighten production because futures prices do not reflect underlying fundamentals of supply and demand. “Extreme volatility and lack of liquidity in the futures market are moving prices in ways that do not conform to normal supply and demand factors, which may spark OPEC+ to take action,’’ the Saudi oil chief warned. Bloomberg Opinion columnist Javier Blas says $100 oil just got a lot more likely following bin Salman’s comments: “Call it a price floor, the return of the OPEC+ put or, simply, a line in the sand. Whatever its name, Riyadh’s intervention indicates a preference to keep oil near $100.”
India Cuts U.S. Crude Imports By 50% As It Buys Discounted Russian Crude
New reports have emerged that during the second quarter, India slashed its crude imports from the United States by one million metric tonnes while sharply ramping up imports of discounted Russian oil. India’s energy mix now looks dramatically different from a year ago. Last year, Russian oil in India’s crude basket amounted to a paltry 2.2%, while the U.S. was 9.2%; right now, Russia accounts for nearly 12.9% of India’s crude imports, while the U.S. share has tumbled to just 5.4%. India has never been a big buyer of Russian crude despite having to import 80% of its needs. In a typical year, India imports just 2-5% of its crude from Russia, roughly the same proportion as the United States did before it announced a 100% ban on Russian energy commodities. Indeed, India imported only 12 million barrels of Russian crude in 2021, with the majority of its oil sourced from Iraq, Saudi Arabia, the United Arab Emirates and Nigeria. But back in May, reports emerged of a “significant uptick” in Russian oil deliveries bound for India. According to a Bloomberg report, India spent a good $5.1 billion on Russian oil, gas and coal in the first three months after the invasion, more than five times the value of a year ago. However, China remains the biggest buyer of Russian energy commodities, spending $18.9 billion in the three months to the end of May, almost double the amount a year earlier. And, it’s all about the money. According to the International Energy Agency (IEA), Urals crude from Russia have been offered at record discounts. Ellen Wald, president of Transversal Consulting, has told CNBC that a couple of commodity trading firms–such as Glencore and Vitol–were offering discounts of $30 and $25 per barrel, respectively, for the Urals blend. Urals is the main blend exported by Russia. Experts say simple economics are the biggest reason why White House pressure to curb purchases of crude oil from Russia have fallen on deaf ears in Delhi. Responding to a question on India-Russia ties, U.S. state department spokesperson Ned Price has acknowledged that India shares a historical relationship with Russia, and it would be a Herculean task to change that.
Indian firms await Russian nod on bid to acquire stakes
Russia hasn’t been amenable to overtures by Indian state-run firms in acquiring the stakes of Western energy majors in Russian oil and gas assets after their exit from the sanctions-hit nation, said a top Indian government official aware of ongoing deliberations. This comes against the backdrop of the Russian government looking at taking over the stakes of withdrawing Western firms such as ExxonMobil and BP, and then selling them at a premium. Indian state-owned firms such as ONGC Videsh Ltd (OVL), Bharat Petroresources Ltd, Indian Oil Corp (IOC) and Oil India Ltd (OIL) have invested $16 billion in Russia till date, including in the Far East and East Siberia, in oil and gas assets such as Sakhalin-1, Vankor and Taas-Yuryakh. OVL owns a 20% stake in the Sakhalin-1 hydrocarbon block in which ExxonMobil is the operator. While OVL, Oil India, IOC and Bharat Petroresources own 49.9% in Rosneft’s subsidiary JSC Vankorneft, another consortium of OIL, IOC and Bharat Petroresources owns 29.9% of Taas-Yuryakh Neftegazodobycha. OVL has also acquired the Siberian deposits of the UK’s Imperial Energy Corp. A spokesperson for Russia’s Rosneft in an emailed response said, “On 15 May, the operator of Sakhalin-1 made a decision to halt production. At present, technological process is being maintained and no oil shipment is taking place at the project. Rosneft looks forward to resolving the situation legally and restoring the Sakhalin-1 project’s production activities involving all existing shareholders.” A consortium of OVL, IOC and Oil India Ltd is looking to invest jointly in Rosneft’s massive Vostok project. India has also been looking to invest in Novatek’s Arctic LNG-2 project as part of its energy security playbook. India imports 85% of its oil and 54% of gas requirements. “One of the promising areas of cooperation between the company and its Indian partners may be the Vostok oil project, which is the largest greenfield oil and gas project in the world. Rosneft is open to see new partners entering the Vostok Oil project, including those coming from India who are now taking part in relevant negotiations,” the Rosneft spokesperson said. While an Oil India Ltd spokesperson declined comment, a Novatek spokesperson asked Mint to direct queries to Indian firms. Queries mailed to the spokespersons of India’s ministry of petroleum and natural gas, the Russian Embassy in New Delhi, GAIL (India) Ltd, Petronet LNG Ltd (PLL), IOC, Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL), OVL, BP and ExxonMobil on 18 August remained unanswered till press time. “India is one of Russia’s key strategic partners. Rosneft backs the efforts of both leaders of our countries, President Vladimir Putin and Prime Minister Narendra Modi, to significantly increase mutual investments ensuring the stable trade and economic cooperation between Russia and India,” the Rosneft spokesperson said.
No evidence of India diverting Russian oil to US, says Deputy Secretary of US Treasury
The US government has denied allegations of India diverting Russian crude oil to the US by circumventing the economic sanctions imposed after the Russian war on Ukraine. Visiting US Deputy Secretary of the Treasury Wally Adeyemo told media that he has not seen any evidence of Indian companies circumventing sanctions that have been placed on Russia. “Companies around the world, including those in India, the US and Europe, are taking the sanctions seriously and implementing them as well,” he said on his maiden visit to the Indian Institute of Technology Mumbai, on Wednesday. Economic sanctions The US had imposed economic sanctions on Moscow for its invasion on Ukraine and prohibited import of Russian-origin energy products including crude oil, refined fuels, distillates, coal and gas. Last month reports emerged that the US Treasury Department has told India that an Indian ship picked up oil from a Russian tanker on the high seas and brought it to a port in Gujarat on the west coast, where it was refined and shipped on, Reserve Bank of India Deputy Governor Michael Patra was quoted recently. The US-led coalition of the sanctions has broadened and the ultimate objective of the same is to reduce revenues Russia earns through oil exports while ensuring that there is a steady supply of energy, said Adeyemo. “We have to look at the Russian invasion beyond the immediate concern about the sovereignty of Ukraine getting compromised,” he said, pointing to the economic consequences of the war, especially inflation. “Indian consumers are paying a lot more for energy than they ought to,” he said and added that during his visit to New Delhi he will focus on discussing key shared priorities such as bolstering energy security, addressing food insecurity globally and combating illicit financial flows. India has 560 million internet subscribers and 1.2 billion mobile phone subscribers, a massive market that will fuel innovation for years to come. According to study by McKinsey & Company, India is digitising at a faster rate than any other country, he said. Both India and the US can reinforce the supply chains to protect against the sort of global shocks that have raised prices and idled factories in both the countries, he said. “What is clear to me is that both of our countries will play pivotal roles in the next wave of technological innovation – and how it is deployed responsibly to the benefit of all segments of society – especially when our people and companies work together,” he said.
Gas flares take a toll on finances and environment
At a time when India is forced to buy costly natural gas form from international markets after long-term liquefied natural gas imports from Russia is disrupted, some domestic producers are flaring at least 3 million standard cubic metres of gas per day — sufficient to produce about 750 MW of electricity — due to a skewed pricing policy for indigenously produced gas. The scale of flaring in local oil and gas fields is quite high, which is a waste of a scarce energy resource and also harmful for the environment. The government is aware of the matter and looking for ways to bring this gas into the supply system through incentives, as it would involve considerable investments and, at current pricing policy, does not make any commercial sense, two people aware of the development said, requesting anonymity. This matter has been frequently raised by the Comptroller and Auditor General of India (CAG), the first person working in an economic ministry said. High pressure gas valued at ₹8160.8 million was flared in Mumbai High field of state-run Oil and Natural Gas Corporation (ONGC) during 2012-20, according to a CAG report released in December 2021. The petroleum ministry did not respond to an email query on this matter. ONGC, however, accepted flaring is a technical necessity. “During the first quarter of the year 2022-23, gas flaring has been 2.32% of total gas production. ONGC makes continuous efforts to minimise gas flaring. This gas flaring is a technical necessity for processing of oil and gas at installations to maintain pilot flares for avoiding escape of unburned hydrocarbons into atmosphere… in order to ensure safety and environmental protection,” a company spokesperson said. The real reason lies somewhere between technical necessity and economic sense, experts said. “The cost of tapping this gas would be several times high and would not make any commercial sense due to the currently regulated pricing policy,” a second person mentioned above said. There are companies such as Reliance Industries that do not flare any gas. While Reliance did not respond to a query on this matter, another state-run firm Oil India Ltd, said that “flaring is required for safety reasons” as the company maintains “minor gas flaring” for safe operation of crude oil and natural gas production and processing installations as a technical and safety requirement. India regulates domestic gas pricing every six months. While gas price for April-September 2022 is $6.10 per unit, natural gas produced from deep and ultradeep water is capped at $9.92 per unit. Recently, after the Ukraine war, the supply of long-term cheaper Russian liquefied natural gas was abruptly stopped, forcing India to pay spot price of LNG, which is about 127% higher at around $50 per unit. HT reported it on August 10. “It is technically essential to flare some of the low-pressure gas,” said SC Sharma, an energy expert and former officer on special duty at the erstwhile Planning Commission. “However, there had been economic reasons as the gas flaring nations mandate low price of gas for domestic use rather than commercialise it at an opportunity cost.” India, which imports 55% of the natural gas it consumes, is not in a position to flare gas like other producing countries, he said. “It is assumed that the high volume gas flaring nations like Russia, Iran, Iraq, Venezuela and to some extent the US are flaring natural gas as the gas prices are very low in these gas producing and exporting countries for domestic consumers compared with the price of gas to exporting nations,” he said.
Freeport LNG Pushes Back Restart
Freeport LNG has pushed back the date of its expected restart that it provided earlier in the month. Freeport LNG has been shut since June, and shared earlier this month that it expected to complete the repairs in time to resume partial operations in early October. But now, Freeport LNG isn’t expecting to resume partial operations until early to mid-November, reaching 2 billion cubic feet of gas production per day by the end of November, the company said in a Tuesday press release. The 2 Bcf per day mark represents 85% of the facility’s export capacity. The remaining production is expected to be reinstated by March 2023, “although typical construction risks could impact the recovery plan,” the company said. Houston-based Freeport LNG suffered an explosion on June 8, which caused the plant to shut down to assess the damage and perform repairs. Freeport LNG accounts for 20 percent of the United States’ total LNG export capacity, capable of processing 2.1 billion cu ft of gas per day. According to Freeport LNG, it is the seventh-largest liquefaction facility in the world and the second-largest in the United States. The months-long outage in the United States has restricted exports at a critical time for the EU, as the block tries to wean itself off Russian gas. Freeport LNG declared force majeure back in June after the explosion, which was supposed to last until September. The company retracted the force majeure later in June, while the facilities remain shuttered. A force majeure declaration would provide cover for traders who default on their natural gas delivery commitments. Without it, those traders must find alternate supplies on the spot market—typically at much higher prices, resulting in significant losses. Henry Hub gas futures were trading down after the announcement.
Iran And Russia Move To Create A Global Natural Gas Cartel
The US$40 billion memorandum of understanding (MoU) signed last month between Gazprom and the National Iranian Oil Company (NIOC) is a stepping stone to enabling Russia and Iran to implement their long-held plan to be the core participants in a global cartel for gas suppliers in the same mold as the Organization of the Petroleum Exporting Countries (OPEC) for oil suppliers. With a foundation in the current Gulf Exporting Countries Forum (GECF), this ‘Gas OPEC’ would allow for the coordination of an extraordinary proportion of the world’s gas reserves and control over gas prices in the coming years. Occupying the number one and number two positions in the world’s largest gas reserves table, respectively – Russia with just under 48 trillion cubic meters (tcm) and Iran with nearly 34 tcm – the two countries are in an ideal position to do this. The Russia-Iran alliance, as evidenced in the most recent multi-faceted MoU between Gazprom and the NIOC, wants to control as much of the two key elements in the global supply matrix – gas supplied over land via pipelines and gas supplied via ships in liquefied natural gas (LNG) – as possible. According to a statement last week from Hamid Hosseini, chairman of Iran’s Oil, Gas, and Petrochemical Products Exporters’ Union, in Tehran, after the Gazprom-NIOC MoU had been signed: “Now the Russians have come to the conclusion that the consumption of gas in the world will increase and the tendency towards consumption of LNG has increased and they alone are not able to meet the world’s demand, so there is no room left for gas competition [between Russia and Iran].” He added: “The winner of the Russia-Ukraine war is the United States, and it will capture the European market, so if Iran and Russia can reduce the influence of the United States in the oil, gas and product markets by working together, it will benefit both countries.” The Gazprom-NIOC MoU, as initially analyzed by OilPrice.com, contains four key elements that are geared towards the build-out of a ‘Gas OPEC’. One element is that the Russian state-backed gas giant has pledged its full assistance to the NIOC in the US$10 billion development of the Kish and North Pars gas fields with a view to the two fields producing more than 10 million cubic meters of gas per day. A second element is that Gazprom will also fully assist with a US$15 billion project to increase pressure in the supergiant South Pars gas field on the maritime border between Iran and Qatar. A third element is that Gazprom will provide full assistance in the completion of various liquefied natural gas (LNG) projects and the construction of gas export pipelines. The fourth element is that Russia will examine all opportunities to encourage other major gas powers in the Middle East to join in the gradual roll-out of the ‘Gas OPEC’ cartel, according to a senior source who works closely with Iran’s Petroleum Ministry. “Gas is widely seen as the optimal product in the transition from fossil fuels to renewable energy, so controlling as much of the global flow of that will be the key to energy-based power over the next ten to twenty years, as has already been seen on a smaller scale in Russia’s hold over Europe through its gas supplies,” he added. From a top-down perspective, the Russia-Iran alliance is focused on drawing in the overt or covert support for the Gas OPEC construct from other major producers in the Middle East regarded as undecided in committing to the Russia-Iran-China axis or to the U.S.-Europe-Japan axis. Qatar (with the world’s third-largest gas reserves of just under 24 tcm, and the top LNG supplier) has long been seen by Russia and Iran as a prime candidate for such a gas cartel, given that it shares the principal source of its ongoing prosperity with Iran in the shape of the 9,700 square kilometres (sq.km) reservoir that holds at least a combined 51 tcm of gas and 50 billion barrels of natural condensates. Iran has exclusive rights over 3,700 sq.km of this reservoir in its celebrated South Pars field (containing around 14 tcm of gas), with Qatar’s North Field comprising the remaining 6,000 sq.km (and 37 tcm of gas). A new cooperation accord was reached between Tehran and Doha in 2017 on the shared reservoir and beyond, as analyzed in depth in my latest book on the global oil markets. Since then, Qatar has overtly tried to avoid alienating either of the major two geopolitical power blocs. At the beginning of this year of Qatar’s Emir, Sheikh Tamim bin Hamad Al Thani, visited the White House, and in March he met with German economy minister, Robert Habeck, the latter visit being to discuss how Qatar could help alleviate bans on Russian gas into Europe. Prior to these visits, though, Qatar concluded a slew of long-term LNG supply deals with China that caused considerable concern in Washington (hence the visit of Al Thani to the U.S. in January). Over and above the need for a good relationship between Qatar and Iran to ensure the optimal functioning of their huge joint gas reservoir, Russia and Iran see another area of particular vulnerability in Doha’s political makeup that can be exploited in the building out of a Gas OPEC, and that is its dislike for its other neighbor, Saudi Arabia. The blockade of Qatar from 2017 to 2021 was orchestrated by Saudi Arabia and actively endorsed by the UAE, Bahrain, and Egypt initially, with later support coming from Jordan, Libya, and other smaller states. It has never been forgotten by Qatar, and nor has the support that was given to Doha during the period by Iran, and by Russia, both independently and via Turkey. Together, Russia, Iran, and Qatar account for just under 60 percent of the world’s gas reserves, and they were the three countries instrumental in the founding of the GECF, whose 11 members control over 71 percent of global gas reserves,