Why Oil Crashed Back Below $100
After a torrid three-week rally, energy markets have entered correction mode, with prices moving sharply lower. Over the past week, Brent has slipped 30% from the 7 March intra-day high while European gas prices have declined 65%. Brent for May delivery settled at USD 106.90 per barrel (bbl) on 14 March, a w/w fall of USD 16.31/bbl, and moved below USD 100/bbl in early trading on 15 March. WTI for April delivery fell USD 16.31/bbl w/w to USD 106.90/bbl at settlement on 14 March, while the value of the OPEC basket fell by USD 15.84/bbl to USD 110.67/bl and by EUR 15.40/bbl to EUR 101.16/bbl. You can blame speculative overshoot for the unfolding scenario though the overall outlook remains bullish. According to Standard Chartered commodity analysts, the correction tells us more about market positioning and the effect of extreme volatility than it does about changes in fundamentals over the past week. The increase in volatility across financial and commodity markets has led to a sharp rise in the level of risk held by traders, and an associated incentive to close out some positions to lower the risk. Oil traders have mostly been positioned with a highly bullish bias in terms of both outright positions and spreads in recent weeks, meaning optimization in a higher-risk environment has mostly involved closing out prompt longs. With speculative shorts being very thin on the ground currently, there have been few natural buyers, and the downside has quickly opened up. While the price ranges involved have been rather extreme, recent price dynamics bear all the hallmarks of a textbook speculative overshoot followed by the correction necessary to reset extreme positioning. The irony of the situation is that the dominance among oil traders of the belief that prices could only move higher has led to a position from which market dynamics dictated that in the short term, prices could only go lower. Replacing Russian Oil Despite the positioning-led price fall, StanChart says that the key fundamentals are largely unchanged and are also subject to an unusually high level of uncertainty. According to commodity analysts at Standard Chartered, Russian oil flows to Europe can be replaced in the short term, with the short-term price implications of that displacement potentially capable of being minimized by the extent to which OPEC members increase output beyond their current OPEC+ targets, and also by the possibility of a successful conclusion to talks in Vienna that results in higher volumes of Iranian exports. The analysts have projected that consumer reluctance to buy from Russia coupled with shortages of capital, equipment, and technology will continue to depress Russian output over at least the next three years. Russian output is expected to fall by 1.612 million barrels per day (mb/d) y/y in 2022, and by a further 0.217mb/d in 2023, with the y/y decline peaking at 2.306mb/d in Q2-2022. To avoid significant upside price pressure, StanChart reckons that the market would require around 2mb/d extra supply for the remainder of 2022, and an additional 2mb/d in Q2 to ease the dislocations caused by the displacement of Russian oil. The temporary 2mb/d Q2 boost could come from strategic reserves, but the 2mb/d additional flow for the remainder of 2022 would likely need to come from OPEC sources (including potentially Iran). Market tightness is, however, being helped by the fact that withdrawal from Russian markets has been less dramatic than anticipated. So far, there are indications that some of the larger EU countries are less keen than countries in the east of the EU to pursue the fastest possible reduction in Russian oil flows. Outside of the EU, the UK’s ban on the import of Russian oil has proved less dramatic than the headlines that accompanied the initial announcement, as it does not take effect until the end of 2022. In the private sector, while several companies have given assurances they will buy no more Russian oil on the spot market, there have been very few indications given about if, when, and how they will cut the volume of Russian oil purchased through their term contracts. Meanwhile, statements from some governments and some companies do appear to have become less hawkish over the past week, with an apparent lengthening of the timespan envisaged for the process of reducing dependence. StanChart says that Russian oil trade into Europe appears to be moving further into the shadows of term contracts and a greater reliance on third-party trading intermediaries. That does not make trading with Russia any less distasteful for European public opinion, but it does make the trade less visible and thus likely keeps oil flows from Russia higher than they would have been with more direct government targeting of those flows.
BPCL delays 25-day crude unit shutdown to May
India’s Bharat Petroleum Corp (BPCL.NS) has deferred a maintenance shutdown of a crude unit at a 240,000 barrels per day (bpd) Mumbai refinery to May as its seeks to gain from strong fuel cracks, two sources aware of the plan said.
EIA: Oil Prices Will Remain Above $100 For Months
Oil prices will remain higher than $100 per barrel in the coming months, reflecting the geopolitical risk from Russia’s war in Ukraine and the tight energy markets with the current and potential future sanctions against Russia, the Energy Information Administration (EIA) said on Wednesday. Brent Crude prices are expected to average $105.22 per barrel this year, the EIA said in its latest Short-Term Energy Outlook (STEO) last week, significantly raising its February forecast of $82.87. In its March STEO last week, the EIA said it expects Brent Crude prices to average $117 a barrel in March, $116 for the second quarter of this year, and $102 per barrel in the second half of 2022. WTI Crude, the U.S. benchmark, is set to average $113 a barrel this month and $112 per barrel for the second quarter of 2022. Early on Wednesday, before the EIA inventory report, WTI was up 2% at over $98, and Brent was rising by 1.6% to $101.46. EIA’s oil price forecast, however, “is subject to heightened levels of uncertainty due to various factors, including Russia’s further invasion of Ukraine, government-issued limitations on energy imports from Russia, Russian petroleum production, and global crude oil demand,” the administration said. The current forecast Brent price also increased the forecast for the U.S. retail gasoline price, which the EIA expects to average $4.00/gal this month and continue rising to a forecast high of $4.12/gal in May before gradually falling through the rest of the year. The U.S. regular retail gasoline price is now seen to average $3.79/gal this year and $3.33/gal in 2023. If realized, the average 2022 retail gasoline price would be the highest average price since 2014, after adjusting for inflation, the EIA said. As of March 16, the national average gasoline price was $4.305/gal, according to AAA data. “This war is roiling an already tight global oil market and making it hard to determine if we are near a peak for pump prices, or if they keep grinding higher. It all depends on the direction of oil prices,” Andrew Gross, AAA spokesperson, said on Monday.
No sanctions but think about where you stand: US on India buying Russian oil
The White House said India taking up Russia’s offer of discounted crude oil would not be a violation of US sanctions, but appealing to all countries amid the ongoing Russia-Ukraine war, White House Press Secretary Jen Psaki said ‘think about where you want to stand’. “But also think about where you want to stand when history books are written at this moment in time. Support for the Russian leadership is support for an invasion that obviously is having a devastating impact,” Psaki said after she was asked about a report on the possibility that India could take up the Russian offer of discounted crude oil. “Our message to any country would be abide by the sanctions,” she said. Think where you want to stand when history books are written in this moment in time. Support for Russian leadership is support for invasion having devastating impact: WH Press Secy on report about possibility that India could take up Russian offer of discounted crude oil. Russian Deputy Prime Minister Alexander Novak reportedly told Indian Petroleum minister Hardeep Puri in a phone call that the country is keen to increase its oil and petroleum product exports to India along with Indian investments in the Russian oil sector, according to a statement issued by Moscow. Reuters reported New Delhi was mulling the option of buying Russian oil on which Putin is offering a heavy discount. “The officials, who declined to be identified, did not say how much oil was on offer, or what the discount was,” the Reuters report said. India’s stance in the ongoing war between Russia and Ukraine is being internationally watched as India has abstained from voting at the United Nations condemning Russia’s aggressions but have urged for an immediate cessation of violence and also sent humanitarian aid to Ukraine. US officials have said in recent weeks they would like India to distance itself from Russia as much as possible. Commenting on the war situation, Jen Psaki said China’s actions are being watched and if they violate US sanctions, there will be consequences, if China violates those sanctions. “The decisions that China makes are going to be watched by the world. But in terms of any potential impacts or consequences, we will leave those to private diplomatic channels at this point,” Psaki said.
Russia-Ukraine war spells trouble for CGD, power companies in India
On March 7 and 8, Reliance Industries Ltd and Hindustan Oil Exploration Company (HOEC) sold natural gas to companies like Gujarat State Petroleum Corp (GSPC) and GAIL in two separate auctions. The price discovery in both these bids, around $22 per million British thermal unit (mBtu), is the highest ever in India for domestic natural gas supply, said two officials close to the development. “Had it not been for the war between Russia and Ukraine, these deals would have been capped at $15 per mBtu or even lesser. RIL will supply gas from its coal bed methane fields while HOEC gas will be sourced from HOEC B-80 field,” said one of the two officials who is involved in the deal. In a recent communication to city gas distribution (CGD) companies in the country, GAIL India said it will cut the gas supplies by 20% due to the prevailing scenario. A communication by GAIL to the CGD entities has been reviewed by Hindustan Times. Earlier this week, Gujarat Gas, the largest CGD company in terms of volumes, wrote to ceramic companies in Morbi to put constrain on their consumption else they will have to pay for 20% of their total consumption at spot prices, said an official close to the development. “Asian spot LNG prices jumped $3 per mmbtu (week on week) to $40.5 per mmbtu for Apr’22 delivery as they tracked the continued high European gas prices (to $50-60/mmbtu) as buyers move away from Russian gas/LNG in response to its invasion of Ukraine,” according to a JM Financial report dated March 7. European gas price continues to be volatile at ~$61.9/mmbtu amidst ongoing geopolitical tensions between Russia and Ukraine posing supply side concerns, it said. Morbi is the country’s largest industrial hub for consumption of natural gas, consuming about 6-7 million metric standard cubic per day (mmscmd). Presently there are about 900 ceramic units run on natural gas and the retail price in Morbi is around ₹60 per scm or about $21 per mBTu. The soaring natural gas prices in the wake of war between Russia and Ukraine has put constraints in the supply with industries that are dependent on imported gas coming under pressure. For companies like Gujarat Gas, high spot LNG prices could pose near term concerns given their dependency on spot LNG, according to the JM Financial report. It said that there could be an impact on Petronet LNG, the country’s largest natural gas importer, due to the high spot LNG prices. “The CGD companies are facing 25% of shortfall in natural gas supplies in the last few days following the sudden uptick in international prices. The LNG imports to India has dropped 35% in recent times. From about 22 per mBtu two weeks ago, the international spot prices went up to USD 89 per mBtu following the geopolitical situation,” said an executive working with a leading CGD company. He spoke on conditions of anonymity. Power Struggle India consumption about $160 mscmd of natural gas of which 90 mscmd is through imports that largely consists of spot purchase and the remaining 70 mscmd is from domestic supply. The country’s dependence on Russia for sourcing gas is about 10-15% of the total imports, said Harsh Dole, energy analyst, IIFL Securities. “The spot LNG prices had gone to $50 per mmbtu and cooled down to $22-24/mmbtu by mid/end February. The prices have climbed to $55 per mmbtu amid fears of supply disruptions. Back home, the administered price mechanism (APM) gas prices were revised to $2.9 per mBtu in October, up by 62%, reflecting the global LNG price trends. They are up for revision in April and given the current scenario it could go up to $6 per mBtu. This will further disrupt the country’s power sector and lead to a sharp price hike in CNG and domestic gas prices,” said Dole. The government, according to APM, fixes the price of natural gas produced by domestic exploration and production firms like Oil and Natural Gas Corporation (ONGC) every six months. The international spot gas prices which hit rock-bottom at about $2-2.5 per MBtu in the second half of 2020 amid coronavirus pandemic, leading to a revival of the country’s many idle gas-based power plants, are once again under pressure due to the rise in imported natural gas prices. Gujarat, which imports 85% of the country’s natural gas through the three operational LNG terminals, houses about 7,700 MW of the total 24,000 MW power generated from gas-fired units in the country. In October 21, the plant load factor of gas-based power plants in the country was 20.2% and this has come down to less than 12% presently, shows data on Central Electricity Authority website. “In September 2020, gas-based power plants in Gujarat, many of which were earlier lying idle and facing viability issues, had seen a revival, operating at 50% capacity due to the low prices of spot LNG then. From the past one and half year they have again been under pressure and the recent hike in international prices could lead to issues of load shedding,” said a government official aware of the matter.
Oil deal with Russia to go through soon, sources say
India’s old ally Russia may be all set to sell India 3.5 million barrels of its crude at deep discounts, people in the know have told TOI. As a part of the deal, Russia will also take care of shipping and insurance for delivering the crude to India. So far, India has abstained from taking any stand in the Russia-Ukraine war except that of resolution via dialogue. The White House earlier on Tuesday had said that if India were to take up the Russian offer of discounted oil, it would not violate sanctions deployed by Washington. Oil minister Hardeep Puri on Monday had told the Rajya Sabha that India was looking into a Russian offer of discounted oil. Though the amount being discussed presently with Russia for crude is not very large, a discount will also help lower the cost for India. TOI has further reported that the said oil will be delivered over a few months. The Centre is yet to work out the payment mechanism, however, a Rupee-Rouble arrangement has been reported. A final decision on the issue is expected over the next few days with other options also on the table. India depends on imports to meet 85% of its oil need. At 3.6 million tonne, Russian crude accounted for 2% of 176 million tonnes imported by India between April 2021 and January 2022. Officials of the Biden administration have shown an understanding of India’s position and have told lawmakers that New Delhi has a major dependence on Russian military supplies for its national security. However, Indian-American Congressman Dr Ami Bera expressed disappointment over reports that India is contemplating buying Russian oil at a steeply discounted rate. “If reports are accurate and India makes this decision to buy Russian oil at a discounted price, New Delhi would be choosing to side with Vladimir Putin at a pivotal moment in history when countries across the world are united in support of the Ukrainian people and against Russia’s deadly invasion,” he said. In what has turned out to be a volatile streak, oil has tumbled into a bear market after losing more than 20% since closing at the highest level since 2008 just over a week ago. Caught between Chinese lockdown, Russia-Ukraine war & Iran nuclear talks, oil futures in New York declined for a second session and closed below $97 a barrel while Brent settled below $100.
Russia Looks To Charm India With Cheap Oil Supplies
Shunned by the West, Russia is looking to the East for partners in its oil and gas sector and for willing buyers of its crude. The closest partner east of Moscow is China, the world’s top oil importer, which is reportedly already taking advantage of the exodus of western companies from oil, gas, and metals projects in Russia. Now Russia is setting its sights on forging closer energy ties with another major economy, India. India, the third-largest oil importer in the world, has abstained in several United Nations votes condemning Russia’s invasion of Ukraine—a sign that the Indian government is keeping its ties to Moscow intact, although it has also warmed up to the United States in recent years. India has been largely adhering to the U.S. sanctions on Iran’s oil exports, for example, regardless of the price discounts which Iran offers to those willing to risk buying it. But India has looked to Russia in recent years to diversify its oil imports, which make up 85 percent of India’s consumption, and most of them come from the Middle East. Both India and Russia have interest in continuing, and even strengthening, their energy and oil ties. India will get crude at discount prices—seaborne crude that is not selling very well (if at all) west of St Petersburg – while Russia will continue to have a large and expanding market for its oil in one of the fastest-growing demand markets. So, it’s no surprise then that Russia’s Deputy Prime Minister Alexander Novak and India’s Minister of Petroleum and Natural Gas, Hardeep Singh Puri, discussed last week strengthening bilateral cooperation in fuel and energy, as the Russian government said in a statement last Thursday. “What we have is a particularly privileged strategic partnership; the leaders of our countries maintain regular contact. Mutually beneficial cooperation is actively promoted, including the Arctic LNG 2 and Sakhalin 1 projects. Gazprom supplies LNG to India, and Rosneft continues its systematic work with its Indian partners. We are interested in further attracting Indian investment to the Russian oil and gas sector and expanding Russian companies’ sales networks in India,” Novak said. “Russia’s oil and petroleum product exports to India have approached $1 billion, and there are clear opportunities to increase this figure,” the Russian official said. There is apparent willingness from both India and Russia to deepen their energy ties, but they have to find ways how to continue oil trade without the SWIFT banking system and how to get bank guarantees and insurance for cargoes. “There was an open offer over the last two-three days that Russia was giving it (crude oil) at some sort of a discounted price but we don’t know how it can be of effect because a whole lot of factors will have to be weighed in and we will have to get it from some port to ship it and then whether it can come to India, and whether it is workable,” a senior Indian government official told The Times of India last week. “Do they get the insurance or not? The nitty-gritty, if at all it can be worked out, needs to be worked out,” the official added, referring to cargoes from Russia. India is also considering ways to keep trade with Russia, not only in crude oil, by setting up an alternative payments system with an account at a bank, an Indian official told Hindustan Times this weekend. This could prove tricky to do because neither the Russian ruble nor the Indian rupee are widely used in international trade, analysts say. India could offer some additional outlet for Russia’s oil unwanted in the West, but it will not be unable to offset all the volumes which Western importers are shunning. Russia will have to shut in some of its oil production as it will be unable to sell all the volumes displaced from European markets to other regions, with Russian crude production falling and staying depressed for at least the next three years, Standard Chartered said last week. Even before the U.S. ban on energy imports from Russia, trade in Russian commodities had become toxic for many global players.
Europe Could Plunge Into Recession If Russia Cuts Its Gas Supply
Last week, Moscow made good on its threat to weaponize its energy exports in retaliation against Western sanctions by imposing wide-ranging export bans. Alexander Novak, Russia’s deputy prime minister, said his government has the “full right” to “impose an embargo” on gas supplies by halting gas supplies through the Nord Stream 1 pipeline. Facing one of the harshest sanction campaigns against any nation in modern history, Russia is in for a world of hurt. StanChart says continuing consumer reluctance to buy from Russia and shortages of capital, equipment, and technology will continue to depress Russian output over, at least, the next three years. The commodity experts have predicted that Russia’s output will fall by 1.612 million barrels per day (mb/d) y/y in 2022 and a further 0.217mb/d in 2023, with the y/y decline peaking at 2.306mb/d in Q2-2022. Russia also risks getting booted from the World Trade Organization or the IMF. To save the Russian currency from total collapse and to combat inflation, Russia’s central bank has raised its key interest rate to a staggering 20%–an all-time high. But that won’t be enough to prevent Russia from descending into a calamitous recession. Yet, Russia can take some comfort in the knowledge that it’s in good company. The rise in oil and gas prices triggered by the Ukraine conflict has raised the threat of the worst stagflationary shock to hit Europe since the 1970s. Amid heavy reliance on fossil fuels, energy prices in Europe have spiraled out of control, with European natural gas trading at ~$62/mmbtu, translating to $360 per barrel oil on an energy equivalent basis. But it could get much worse. A cross-section of experts is now warning that Europe will be plunged into a deep recession if Russia follows through with its threat to halt gas supplies into Europe. The EU has laid out plans to lower its dependence on Russian gas by two-thirds before the end of this year and end imports completely by 2030. Moscow, however, says it will retaliate against energy sanctions by cutting off vital supplies more quickly. The euro area generates a quarter of its energy from natural gas, with Russia accounting for around one-third of the bloc’s imports. Goldman Sachs has warned that any further gas import disruptions could therefore have significant knock-on effects for eurozone economic output and inflation. Eurozone Recession In a research note, Goldman’s Chief European Economist Sven Jari Stehn and his team has laid out several scenarios and assessed how they might impact the European economy. “By mapping physical gas supply constraints and upwards price pressures into GVA (gross value added) effects in the Euro area and the U.K., we estimate that for 2022 as a whole high gas prices could weigh on Euro area GDP growth by 0.6pp (percentage points) and the U.K. by 0.1pp relative to our baseline forecast if we assume no further gas supply disruptions,” Stehn said. The impact in Germany is likely to be even greater (-0.9pp), Stehn added, due to its high reliance on Russian gas. In a worst-case scenario in which Russia stops all pipeline exports, Sven and team says Euro area GDP growth is likely to fall by 2.2pp in 2022, with sizable impacts in Germany (-3.4pp) and Italy (-2.6pp). On a brighter note, a complete stoppage is seen as being unlikely given Russia’s reliance on exports to Europe as well as its ever-shrinking sources of revenue elsewhere. “Although Moscow forged a new deal with Beijing last month to supply China’s CNPC with an additional 10 billion cubic meters of gas a year, the new planned pipeline to carry these supplies will take two to three years to complete. In the meantime, Russia will have to rely on its sales to Europe to fund its military incursion in Ukraine and ensure domestic stability,” Mathieu Savary, chief European strategist at BCA Research, has told CNBC. Savary suggested, however, that Novak’s threat still highlights the risk of disruption to European energy supplies, which will continue to exert upward pressure on natural gas prices in the near term. “Until the risk premium in oil and natgas prices dissipates, high energy costs will lead to a period of stagflation in the Eurozone,” Savary has added.
Work on ambitious Mysuru natural gas pipeline takes off
Work has started on a pipeline that will bring natural gas to Mysuru city. In phase one, over 3,75,000 houses will get piped gas in the city. Within the Mysuru city limits, a 500-km pipeline will be laid, connecting 13 residential areas, initially. Mysuru MP Pratap Simha said natural gas will be supplied to the city from Bidadi in Bengaluru through a 103-km pipeline. Between the Columbia Asia Hospital (Manipal Hospital) signal and the Hinkal signal, the pipeline will cover 28 km through Bogadi and Srirampura. From the Hinkal signal, the pipeline will be laid up till Yelwal, he said. Madikeri city and Nanjangud in Mysuru will also get piped natural gas soon, he said. “My aim is to reduce cooking fuel expenses for a family by Rs 300 to Rs 350 per month in my constituency. The Mysuru City Corporation (MCC) will give permission for the laying of the pipes in the next meeting. It will be part of the meeting agenda,” he said. The project ran into trouble when two BJP MLAs in the city — SA Ramadas and L Nagendra — objected to the project as it involves the digging of roads. They also questioned the amount set aside for repairing the damaged roads after the pipeline work is over. It had led to a war of words between the BJP MP and the MLAs. Later, Ramadas, who had written to the MCC asking it not to give permission, altered his stance, saying he will discuss the pipeline with Simha. Nagendra declined to comment. According to Bhamy V Shenoy, an energy expert from the city who has worked as an energy consultant for US companies, in comparison to LPG, natural gas is a preferred fuel for several reasons. Regarding safety and energy security, natural gas is preferred, Shenoy, who is associated with the Mysuru Grahakara Parishat, said. The supply chain of LPG is far more complex than the natural gas supply chain. Natural gas burns better and cleaner than LPG as it produces fewer greenhouse gases, he said.
Reliance on Imported Liquified Natural Gas as a Fertiliser Feedstock
The latest Tweet by IANS India states, ‘#India’s heavy reliance on imported Liquified Natural Gas as a fertiliser feedstock exposes the nation’s balance sheet to ongoing global gas price hikes, increasing the government’s fertiliser subsidy bill, a new report by the @ieefa_institute said.’ #India’s heavy reliance on imported Liquified Natural Gas (LNG) as a fertiliser feedstock exposes the nation’s balance sheet to ongoing global gas price hikes, increasing the government’s fertiliser subsidy bill, a new report by the @ieefa_institute said.