$150 Oil Is Still A Distinct Possibility
The European Union seems to be warming to the idea of direct sanctions on Russia’s energy industry, slapping a ban on imports of coal for starters. The United States is releasing 180 million barrels of crude, and several IEA members are releasing another 60+ million barrels. And Saudi Arabia just hiked its prices for all buyers. Much higher oil prices may be around the corner. When a few months ago analysts were seemingly trying to out-forecast each other on crude oil prices, the most commonly cited bullish factors were OPEC+’s unwillingness to boost production by more than originally agreed while demand for oil continued strong. Now, all the news appears to be on the war in Ukraine, and the main bullish factor for oil is the expected continued decline in Russian oil exports. The country is the largest exporter of crude oil and oil products and a big supplier to the European Union, which explains the EU’s reluctance to directly target its energy industry. Yet pressure is growing on Brussels to do just that, and with coal already on the sanction list, it’s probably only a matter of time before oil becomes a target, too. When this happens, Brent may well top $120 and stay there. In the meantime, the United States has publicly stated it had banned all Russian oil and fuel imports, but in fact, the ban is only coming into effect on April 22, and in the meantime, the U.S. is stocking up on Russian oil and products. Per data from the Energy Information Administration, in the week to March 25, the U.S. imported an average of 100,000 barrels of Russian oil and fuels, up from 70,000 bpd in the previous week and zero barrels daily a month earlier. While all this was happening, oil prices dipped after the announcement of the U.S. SPR release, with West Texas Intermediate even falling below $100 per barrel. Yet the dip was only a brief one, and prices are once again above $100 as fundamentals reassert themselves after the initial market reaction to the Biden administration’s decision for the reserve release. Now, prices are likely to continue climbing, just like they did after the first Biden SPR release last year, again in an attempt to put a lid on retail fuel prices. At the time, prices reacted with a dip immediately after the news and then rebounded as emotions gave way to facts. These included the one that oil grades to be released from the reserve were not the ones refiners needed to boost their fuel production and the one that a reserve release can only provide temporary relief at the pump without actually fixing the supply problem. Now, the release is massive in comparison to the first one. It would amount to 1 million bpd over a period of six months. Theoretically, this would cover a third of the Russian oil export dip as predicted by the IEA. In practice, traders have probably already started to worry about how the administration will replenish the SPR after the release and what that would do to oil prices. Meanwhile, in Europe, coal prices jumped following the news of a coal import ban on Russia, with European Commission President Ursula von der Leyen saying, “We will impose an import ban on coal from Russia, worth 4 billion euros ($4.39 billion) per year. This will cut another important revenue source for Russia.” Sadly, it will also raise energy costs for European further, heating up the debate about who are anti-Russian sanctions actually hurting more: Russia or the EU. The European Union imports 45 percent of the coal it uses from Russia, according to European Commission data. That’s 45 percent of coal imports it will now need to replace because cutting coal use sharply is simply not an option. Incidentally, Indonesia, which is the world’s largest coal exporter, hiked its April delivery prices by as much as 42 percent. This sounds quite similar to what Saudi Arabia did with its oil prices and likely means the same thing: buyers have fewer options now; it’s a sellers’ market. But coal prices are set to rise further because Russia supplies as much as 70 percent of Europe’s thermal coal, the sort used for power generation and heating. And to make things more interesting, global stocks of thermal coal are tight, according to Rystad Energy. What does this mean for oil? Based on what we saw with gas and coal prices in Europe last year, the prices of all fossil fuels are linked. When one becomes prohibitively expensive, demand for the others rises. That’s why coal prices soared last year, in fact, as utilities turned from gas to coal in search of a more affordable source of energy. In this situation, the normal rule of the cure for higher oil prices being even higher oil prices does not really apply, at least not completely. Energy demand is hard to kill, regardless of costs, especially in places like the European Union, where people have lived in complete energy comfort and security for several generations. Oil prices will likely rise after the EU’s ban on Russian coal. And if the EU decides to go further and target oil itself, things could get really interesting on the price front and on the streets of European cities.
Petroleum dealers complain of short supply by HPCL
The Kerala State Petroleum Traders’ Association has alleged that around 200 retail fuel outlets had been affected in the State by a short supply of petrol and diesel by Hindustan Petroleum Company Limited (HPCL). Sabarinath, vice-president of the Federation of All India Petroleum Traders, said the fuel dealers had met the District Collector on Wednesday to impress upon him the seriousness of the situation and that the district authorities had agreed to intervene in the matter. While there had been an allegation that the oil company was trying to pile up stocks to take advantage of the daily rise in the price of petrol and diesel, sources in the oil company denied the allegation and said the company had stopped providing credit to the dealers and had now been demanding ready payments for supplies. This had resulted in some of the dealers not taking delivery of products. HPCL has about 25% share in the Kerala petrol and diesel market and has a total of 700 outlets across the State.
Does China’s Friendship With Russia Really Have ‘No Limits’?
For several years, China and Russia have been building an alternative world order to that offered by the U.S. and its allies, as analysed in full in my new book on the global oil markets. This was expedited by the unilateral withdrawal of the U.S. in May 2018 from the Joint Comprehensive Plan of Action (JCPOA) with Iran, its withdrawal from Afghanistan in August 2021, and its ‘end of combat mission’ in Iraq in December 2021, among other factors. China’s strategy to achieve this new world order is one based on incremental advances of power, based around money flowing from its ‘One Belt One Road’ (OBOR) program. However, Russian Foreign Minister, Sergei Lavrov’s comments before his meeting last week with Chinese counterpart, Wang Yi, that Moscow and Beijing are paving the way “towards a multi-polar, just, democratic world order” are too much too soon as far as China is concerned. The widely-publicised remarks have left Beijing needing to be even more careful in how its dealings with Russia are interpreted by the U.S., especially in the energy sector in which high oil prices pose direct economic and political threats to Washington. China stated two weeks before Russia invaded Ukraine that “there is ‘no limit’ to how far Russian and Chinese friendship may go” and signed a swathe of huge oil and gas deals shortly thereafter that provided an additional layer of insulation to both from any U.S. sanctions in the future. However, signalling perhaps that Beijing did not believe that Russia would necessarily launch a full-scale invasion of Ukraine before it did so, only a day after the military conflict spread to Ukraine’s major cities, Chinese President Xi Jinping held urgent talks with Russian President Vladimir Putin and advocated peaceful negotiations between Russia and Ukraine. “China was signifying its discomfort over Russia’s military actions, [and] has reiterated that it respects the ‘sovereignty and territorial integrity of all countries’,” Eugenia Fabon Victorino, head of Asia Strategy for SEB, in Singapore, told OilPrice.com last week. At the same time, though, she added, Beijing has refrained from calling Russia’s actions an ‘invasion’, and abstained to vote on a UN Security Council resolution that would have deplored Russia’s aggression against Ukraine. “In addition, so far, China has not indicated an intention to take direct action against Moscow, and has kept trading links with Russia open,” she said. A key reason for this, over and above any ideological aspirations of a new world order is that although Russia accounts for only 2.9 percent of China’s total imports, Moscow did resolutely step up to the plate in 2021 when China faced an energy crunch. “As a result, Russia now accounts for 20.1 percent of China’s total coal imports, and its share of China’s imported crude oil has steadily risen to 15.6 percent by end-2021 from 11 percent in 2014,” highlighted Victorino. Russia’s vital strategic importance to China was bolstered again with the 30-year contract for Russia to supply gas to China through its new Far Eastern pipeline – following the earlier installation of the Power of Siberia-1 pipeline which began pumping supplies in 2019 – as highlighted by OilPrice.com. “Despite stronger ties between Beijing and Moscow in recent years, there are limits to China’s friendship,” Victorino underlined. “While Russia is an increasingly important source of energy, its total trade with China pales in comparison with China’s trade links with the United States and the European Union [EU],” she said. According to the latest figures, among China’s top trading partners, the EU accounts for 15.3 percent of China’s total trade, followed by the U.S. with 12.5 percent. “As sanctions against Russia mount, there are reports that some of China’s largest state-owned banks are already limiting financing for transactions of Russian commodities,” she told OilPrice.com. “Although sanctions have so far stopped short of Russia’s energy trading, Chinese banks may have already stopped issuing US$-denominated letters of credit related to Russian commodities,” she added. Having said this, she underlined, Chinese yuan-denominated financing for Russian commodities may still be available, albeit with a higher level of scrutiny. “Large Chinese banks would be reluctant to lose access to dollar transactions, in our view, and in the past, China’s big four banks have complied with U.S. sanctions against Iran and North Korea in a bid to maintain access to the dollar clearing system,” she concluded. The precariousness of the position into which Russia has put China is further evidenced by the fact that increasing fears of U.S. retaliatory measures against Beijing added fuel to the sell-off in Chinese equities in the aftermath of the invasion on the 24th of February. “China will need to make a stronger gesture of neutrality if Beijing wishes to lower the risk of second order political and economic spillovers from the Russian invasion of Ukraine,” Rory Green, head of China and Asia research at TS Lombard, in London, told OilPrice.com last week. “Our view remains that China will comply with the existing sanctions regime and is prioritising three objectives in the current geopolitical turmoil: first, maintaining normal ties with Russia but avoiding aiding the war effort; second, non-alienation of the EU; and, third, avoiding secondary sanctions and economic damage.” The relative importance of the first objective is now much lower, he said, as Beijing has made efforts to moderate its stance and move closer to European and Western positions. “Following intelligence leaks and U.S. accusations, Chinese officials have sought to clarify Beijing’s stance, with the Chinese Ambassador to the U.S., Qin Gang, writing a Washington Post editorial that underscored Ukraine’s sovereignty and played up China’s neutral position,” he told OilPrice.com. “Also, in a bilateral call, President Xi called on [U.S.] President [Joe] Biden and their respective countries to ‘work for world peace and tranquillity’,” Green underlined, “Additionally, earlier in the week, Xi described the conflict as a ‘war’ for the first time, and Chinese state media have also begun to report less favourably on Russia including coverage of civilian deaths,” he said. “Overall, despite the shared
Gas Price Hike Boosts Upstream Companies’ Profits
The more than doubling of natural gas and oil prices will boost the profitability of oil and gas producers like ONGC and Reliance Industries Ltd, Fitch Ratings said on Tuesday. From April 1, the government has raised the price of gas for old fields of state-owned Oil and Natural Gas Corporation (ONGC) and Oil India Ltd (OIL) to $6.1 per million British thermal unit for April-September 2022 from $2.9. The rate for difficult fields of deepsea KG-D6 of Reliance has gone up to $9.9 per mmBtu from $6.1. The “increase in natural gas prices by the Indian government, along with a recent revision in our Brent crude oil price assumptions to $100 per barrel in 2022, from $70 earlier, and $80 in 2023, from $60 previously, will boost the profitability of rated Indian upstream companies and support their investment spending and shareholder distributions,” Fitch said. The rise in prices “should improve the upstream companies’ profitability from gas fields where domestic prices were below the cost of production,” it said. “We also expect prices to be revised higher in the next reset in October 2022 in light of the high gas prices to date,” it added
Petrol prices up by only 5% as against 50% in developed nations, says Union Minister Puri in LS
Petroleum Minister Hardeep Singh Puri on Tuesday said in the Lok Sabha that in the aftermath of the Russia-Ukraine war, petrol prices in India have gone up by merely 5% as against over 50% in some of the developed countries. Intervening in the short duration discussion in the Upper House on ‘Situation in Ukraine’, the Minister rejected the Opposition’s charge that Operation Ganga was ‘operation transport’ and not ‘operation evacuation’. Referring to rising petrol prices, the Minister said, “We are not the only country impacted by the war.” The Russia-Ukraine war has affected the entire world, he added. Citing figures, the Minister said the increase in prices of petrol was very low in India as compared to developed and other developing nations in the aftermath of the war. He said petrol prices have gone up by over 50% in countries like the U.S., the U.K., Canada, Germany, and Sri Lanka. In case of India the increase worked out to be only 5%, he added. Mr. Puri also pointed out that the price of natural gas has shot up several times in the international market after the outbreak of the war.
Average price of Indian crude oil increased by $19.33/barrel in Feb-Mar: Govt
The government on Monday informed the Parliament that the average price of Indian basket of crude oil has increased from $94.07 per barrel in February, 2022 to $113.40 per barrel in March, 2022. Replying to a question raised in the Rajya Sabha by Member of Parliament (MP) Subramanium Swamy, Minister of State (MoS) in Petroleum and Natural Gas Ministry Rameswar Teli stated that the prices of petrol and diesel have been market-determined from June 2010 and October 2014, respectively and the public sector oil marketing companies (OMCs) take appropriate decision on pricing of petrol and diesel. “The OMCs take appropriate decision on pricing of petrol and diesel in line with their international product prices, exchange rate, tax structure, inland freight and other cost elements,” he added. Meanwhile, the petrol and diesel rate today were increased for the 12th time in two weeks by oil marketing companies (OMC). In all, petrol prices have gone up by Rs 8.40 per litre in a span of two weeks. Petrol in the National Capital of Delhi currently retails at Rs 103.81 per litre up from Rs 103.41 per litre yesterday, an increase of 40 paise from yesterday while diesel in the city is priced at Rs 95.07 per litre up from Rs 94.67 per litre. In Mumbai, a litre of petrol and diesel cost Rs 118.83 and Rs 103.07, respectively.
India Sends 40,000 Metric Tonnes Of Diesel To Crisis-Hit Sri Lanka
A consignment of 40,000 metric tonnes of diesel from India reached Sri Lanka on Saturday, the fourth such assistance from New Delhi, to mitigate the spike in power cuts in the island nation, which is facing an unprecedented economic and energy crisis caused due to shortage of foreign exchange. Power cuts lasting over 13 hours were imposed on Thursday, the longest cut since 1996 when a strike by the state power entity employees caused a 72-hour black out. Officials of the state fuel entity, Ceylon Electricity Board (CEB), said the Indian diesel supplies would ease the ongoing power cuts. The power cuts effective Saturday are over 8.5 hours. “More fuel supplies delivered by #India to #SriLanka! A consignment of 40,000 MT of diesel under #Indian assistance through Line of Credit of $500 mn was handed over by (the) High Commissioner to Hon’ble Energy Minister Gamini Lokuge in #Colombo today,” the Indian High Commission here tweeted. India recently announced that it will extend a USD 1 billion line of credit to Sri Lanka as part of its financial assistance to the country to deal with the economic crisis following a previous USD 500 billion line of credit (LoC) in February to help it purchase petroleum products.
Indian gasoil, gasoline sales surge as dealers top up
Indian state refiners’ gasoil and gasoline sales surged to a three-month high in March on increased demand from dealers and consumers ahead of an expected sharp rise in retail prices after elections in key states. State refiners’ average daily sales of gasoline and gasoil were 86,850 tonnes and 227,650 tonnes respectively, 14.2% and 5% higher than the pre-pandemic levels of March 2019, preliminary sales data shows. India’s overall fuel sales during the month will be higher because some industrial clients bought from retail stations of private refiners. Reliance Industries, operator of the world’s biggest refining complex in India, last month said that bulk diesel buyers are snapping up fuel from retail stations because pump prices were cheaper than bulk contract prices. State-run Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp, which together own about 90% of the country’s retail fuel outlets, kept pump prices steady for more than four months despite a surge in global prices. However, they continued to raise diesel prices for industrial or bulk customers. The state fuel retailers began a gradual increase in pump prices from March 22 after elections concluded on March 10, leading to a continued stocking up by dealers. Sales of gasoil, which accounts for about two fifths of India’s overall refined fuel consumption, are also directly linked to industrial activity in Asia’s third-largest economy. India’s gasoline sales have been rising since the country eased its pandemic lockdown, with people preferring to use their own vehicles rather than public transport for safety reasons.
GAIL commences supplying CNG from Walayar to Coimbatore
The Gas Authority of India Ltd’s (GAIL) Kochi-Koottanad-Bengaluru-Mangaluru natural gas pipeline project (KKBMPL) commenced supplying CNG to Indian Oil Corporation’s City Gas Distribution (CGD) system from Walayar to Coimbatore. The project is part of the second phase of the KKBMPL project from Kochi to Koottanad, Bengaluru and Mangaluru, officials said. Gas supply at GAIL station in Pichanur village, Madukkarai taluk, Coimbatore district, was inaugurated by George Antony, DGM (constructions), along with P Saseendranath, DGM (operations), early this week. The first stretch of 96km from Kochi to Koottanad was commissioned in June 2019 and Prime Minister Narendra Modi inaugurated the 450-km natural gas pipeline between Kochi and Mangaluru in January 2021. Koottanad is the point from where the pipeline bifurcates to Mangaluru (via Malappuram, Kozhikode, Kannur and Kasaragod) and to Bengaluru (via Palakkad, Coimbatore, Erode, Salem, Dharmapuri and Krishnagiri). George Antony said the pipe will have 30-inch width from Kochi to Koottanad. The pipeline which bifurcates from Koottanad will have 24-inch width each to Bengaluru and to Mangaluru, he said.
How Biden’s Huge Strategic Oil Release Could Backfire
This week, the Biden administration revealed that it will release as much as 180 million barrels of crude oil in a bid to calm oil prices, which have remained above $100 per barrel for an extended period of time. The International Energy Agency, meanwhile, is coordinating a smaller but international reserve release of some 60 million barrels and has called an emergency meeting to discuss how exactly to go about it. It remains unclear whether part of the 180 SPR release in the United States will be a completely separate endeavor or if some of these barrels will be part of the IEA release. Earlier this year, the U.S. had agreed to release 30 million barrels as part of the IEA push. What is clear is that the success of these releases in calming down oil prices is quite unlikely. The United States last year announced the release of 50 million barrels in an effort to bring down prices t the pump, which were eroding Americans’ purchasing power and weighing on the President’s approval ratings. This pressured prices for a few days before they rebounded, driven by continued discipline among U.S. producers, equal discipline in OPEC+, and a relentless increase in demand for the commodity. Then Russia invaded Ukraine, and the U.S. banned imports of Russian crude and fuels. It also sanctioned the country’s financial system heavily, making paying for Russian crude and fuels too much of a headache for the dollar-based international industry. Prices soared again before retreating some, but remain firmly in three-digit territory. As of mid-March, the Department of Energy said, some 30 million barrels of crude from the strategic petroleum reserve had been sold or leased. That’s more than half of the 50 million barrels announced in November, and it appears to have had zero effect on price movements. But the new reserve release is a lot bigger, so it should make a difference, shouldn’t it? It amounts to some 1 million bpd over several months, per reports about White House plans in this respect. Unfortunately, but importantly, oil’s fundamentals have not changed much since November. U.S. shale oil producers, the companies that a few years ago prompted talk among analysts that OPEC was becoming increasingly irrelevant, have rearranged their priorities. They no longer strive for growth at all costs. Now they strive for happy shareholders. This has given more opportunities to smaller independent drillers with no shareholders to keep happy. Yet these have also run into challenges, mainly in the form of insufficient funding because the energy transition has had banks worrying about their reputations and their own shareholders. Pandemic-related supply disruptions have also affected the U.S. oil industry’s ability to expand output. Frac sand, cement, and equipment are among the things that have been reported to be in short supply in the shale patch. Now, there’s a shortage of steel tubing, too. Meanwhile, OPEC is doing business as usual, sticking to its commitment to add some 400,000 bpd to oil markets every month until its combined output recovers to pre-pandemic levels. Just this week, the cartel approved another monthly addition of 432,000 bpd to its combined output despite increasingly desperate calls from the U.S. and the IEA for more barrels. OPEC has been demonstrating increasingly bluntly that its interests and the interests of some of its biggest clients may not be in alignment right now. It has refused to openly condemn Russia for its actions in Ukraine and has not joined the Western sanction push. On the contrary, OPEC is gladly doing business with Russia. And Saudi Arabia and the UAE, the two OPEC members that actually have the capacity to boost production beyond their quotas, have deemed it unwise to undermine their partnership with Russia by acquiescing to the West’s request for more oil. In this environment, releasing whatever number of barrels from strategic reserves could only provide a very short relief at the pump. Then, it may make matters even worse. As one oil market commentator on Twitter said about the SPR release news, the White House will be selling these barrels at $100 and then may have to buy them at $150. Indeed, one thing that tends to get overlooked during turbulent times is that the strategic petroleum reserve of any country needs to be replenished. It’s not called strategic for laughs. And a 180-million-barrel reserve release will be quite a draw on the U.S. SPR, which currently stands at over 580 million barrels. If oil’s fundamentals remain the same, prices will not be lower when the time to replenish the SPR comes. This seems the most likely development. The EU, the UK, and the United States have stated sanctions against Russia will not be lifted even if Moscow strikes a peace deal with the Ukraine government. This means Russian oil will continue to be hard to come by for those dealing in dollars or euros. According to the IEA, the shortfall could be 3 million barrels daily, to be felt this quarter. OPEC+ is not straying from its course. In some good news, at least, U.S. oil production rose last week for the first time in more than two months, by a modest 100,000 bpd.