Rising Middle East Risk Sparks Fear of $100 Oil
Despite Iran’s attack on Israel over the weekend, oil prices dropped on Monday as an Iranian response to the Israeli hit on the Iranian diplomatic mission in Syria was largely expected and priced in. The well-telegraphed-in-advance Iranian drone attack against Israel may have been peak escalation, for now, analysts and investment banks say. However, uncertainty over a potential Israeli retaliation and whether restraint will prevail continue to keep the oil market on edge. Risk premiums and fear will continue to be priced in Brent Crude for the foreseeable future. Uncertainty and risks have grown in the Middle East – a key oil-producing region, which is also home to the world’s most crucial oil chokepoint, the Strait of Hormuz. About 21 million barrels per day (bpd), or a fifth of the world’s daily consumption, is being transported out of the top Middle Eastern exporters via the Strait of Hormuz. ‘Well Above $100’ In case of further escalation, $100 oil is possible, analysts say, especially if this involves direct threats to oil supply. “What is not priced into the current market, in our view, is a potential continuation of a direct conflict between Iran and Israel, which we estimate could see oil prices trade up to +$100/bbl, depending on the nature of the events,” Citigroup in a note, as carried by Bloomberg. The worst-case scenario for oil supply is Iran attempting to disrupt tanker traffic in the Strait of Hormuz, which could send oil prices spiking to $130 per barrel, according to Lipow Oil Associates. “Any attack on oil production or export facilities in Iran would drive the price of Brent crude oil to $100, and the closure of the Strait of Hormuz would lead to prices in the $120 to $130 range,” Andy Lipow, president of Lipow Oil Associates, told CNBC. An escalation involving the U.S. could send oil surging to $140 per barrel, according to Societe Generale, which has raised its Brent price forecast by $10 a barrel to reflect continued geopolitical risk premium. Escalation Not the Base-Case Scenario While warning that oil prices could spike well above $100 per barrel in case of a major escalation, investment banks do not consider such escalation the base-case scenario. While Israel is weighing its response to the Iranian attack, the G7 has called for restraint and the U.S. has signaled it wouldn’t be part of any Israel offensive against Iran. U.S. President Joe Biden has assured Israeli Prime Minister Benjamin Netanyahu that the U.S. commitment to defend Israel is “ironclad,” but the U.S. would not participate in an offensive against Iran, a senior administration official has told NBC News. As of early Tuesday, Israel was still weighing its options. Iran has signaled that with the drone barrage against Israel it considers the matter closed, the permanent mission of Iran to the United Nations said on Sunday, but added that “should the Israeli regime make another mistake, Iran’s response will be considerably more severe. It is a conflict between Iran and the rogue Israeli regime, from which the U.S. MUST STAY AWAY!” In view of calls on Israel for restraint, the “most likely path from here (to be) de-escalation rather than further escalation,” Richard Bronze, co-founder and analyst at Energy Aspects, told CNN. “While Israel’s allies are pushing for a diplomatic response, it appears for now that Israel is considering a more direct response. If this is the case, it unfortunately means that this uncertainty and tension will linger for quite some time, as markets will then focus on how Iran further retaliates,” ING strategists Warren Patterson and Ewa Manthey wrote in a Tuesday note. “Iranian oil output is most at risk and even a strong diplomatic response from Israel’s allies could hit Iranian oil exports significantly with stricter enforcement of oil sanctions,” say the strategists, who see up to 1 million barrels per day (bpd) of Iranian oil off the market in such case. ‘The Worst Has Passed’ Morningstar sees “more downside risks than upside at the moment,” Stephen Ellis, an energy and utilities strategist for Morningstar, wrote on Monday. “[T]he ample public and private forewarning from Iran amid rising regional tensions means the attack was already reflected in oil prices via a higher geopolitical risk premium.” Most of the recent rise to $91 oil before the Iranian attack has been the result of geopolitical risks rather than supply risks, according to Morningstar, which notes that the OPEC+ group has ample spare capacity of about 5 million bpd – and probably more – part of which it can return to the market if oil prices surge above $100. “We expect more downside risks than upside at the moment, and see a higher potential to touch $75 by the end of 2024 versus a sustained movement beyond $100 a barrel,” Morningstar’s Ellis said. Iran’s retaliation can now prompt profit taking and prices could be easing, but this is not the end of risk premiums, consultancy FGE said in a note on Monday. Despite pressure from allies on Israel to limit a possible response, further escalation is not entirely off the cards, but FGE says that “Our base case is that the worst has passed.” FGE’s base case is now for OPEC+ to decide to unwind some of the production cuts as of July. Even with another up to 1 million bpd from OPEC+ output back on the market, Brent is still expected to average $90-$95 a barrel in the third quarter with the ongoing political risk, the consultancy said.
Asian LNG Prices Soar on Fears of Wider Middle East Conflict
Spot LNG prices in Asia jumped to the highest level since the beginning of January amid concerns that the conflict in the Middle East could further escalate. After lingering at around multi-month lows for nearly the entire winter heating season in the northern hemisphere, spot LNG prices for delivery into north Asia have jumped in recent days amid fears that an Israeli response to the Iranian attack could escalate into a regional conflict that could obstruct LNG cargo flows around the Middle East, most notably via the Strait of Hormuz, where 20% of the world’s LNG trade passes. Analysts see a low probability that the Strait of Hormuz would be blocked. Yet, spot LNG prices for delivery into North Asia surged on Tuesday to above $11 per million British thermal units (MMBtu), traders told Bloomberg. That’s the highest spot LNG price in Asia since early January 2024 and a 40% surge since the end of February. European benchmark natural gas prices also jumped on Tuesday, closing 6.4% higher and recording a fourth consecutive daily increase, amid concerns about global LNG trade flows. Early on Wednesday, the front-month Dutch TTF futures, the benchmark for Europe’s gas trading, advanced by another 1.6% to the highest level so far this year. While a mild winter and full gas storage helped Europe through a second consecutive winter without most of the Russian pipeline gas it had previously received, the potential of a widening conflict that could obstruct LNG flows is keeping the European and Asian gas markets on edge. Europe has become more dependent on LNG imports for its gas supply after losing a large part of the Russian pipeline gas following Moscow’s halt of flows to several EU countries and the sabotage of the Nord Stream pipelines. European prices have also jumped in recent days amid lower pipeline flows from Norway – now Europe’s top gas supplier – due to unplanned outages. “The geopolitical environment will also support European gas prices, particularly given the EU’s larger dependence on LNG since the Russia-Ukraine war,” ING strategists Warren Patterson and Ewa Manthey wrote in a note on Wednesday. “However, fundamentals remain bearish with storage more than 62% full, well above the 5-year average of 43% full for this time of year,” they added.
GAIL plans to double capacity at its Dabhol LNG terminal
GAIL is planning to more than double the capacity of its LNG terminal at Dabhol, Maharashtra, and build new terminals in the country to tap opportunities expected to emerge from the future growth in gas imports. The nation’s largest natural gasmarketer and transporter plans to raise the capacity of its Dabhol terminal to 12 million tonnes per annum (mtpa) in a phased manner by 2030-31, GAILchairman Sandeep Kumar Gupta told ET. The Dabhol terminal has a nameplate capacity of 5 mtpa but operates at about 2.9 mtpa as it remains idle during the monsoon season. The company is building a breakwater infrastructure, which will help the terminal operate also during monsoon. GAIL is also drawing up plans for new LNG import terminals but those are in the preliminary stages, Gupta said
Brent Crude Prices Surge: Here’s How It Can Impact Indian Oil Companies
Brent crude prices continue their upward trajectory and have surged 19.5% on a year-to-date basis on the back of heightened geopolitical tensions, along with a tighter global supply-demand scenario maintained by OPEC+ allied countries. Brent crude futures had breached the $90 per barrel threshold on April 5, reaching the highest level since October. Prices now stand around $90.84 per barrel, compared to the $75.89 per barrel at the start of the year. While higher prices were in line with expectations of stronger summer crude prices, they crossed the $90 mark prematurely, according to Amrita Sen, research director at Energy Aspects. What Are The Factors Affecting Brent Prices? Increased Demand While growth is slowing, global oil demand is still on the rise, particularly in non-OECD countries. The International Energy Agency recently revised up its 2024 demand forecast, while reducing global supply estimates downwards. The first quarter of 2024 recorded a global oil demand growth of 1.6 million barrels per day. According to its latest report, non-OECD countries dominated its outlook, with forecast demand set to rise by 1.3 million barrels per day in 2024 and 1.2 million barrels per day in 2025. Tight Global Supply Production hasn’t been keeping pace with demand. This is on account of the OPEC+ keeping a tight grip on global supply via voluntary production cuts. As of January 2024, Iran’s crude oil production stood at around 31.6 million barrels per day, a slight from December 2023’s output of 31. 7 million barrels per day. This s is also notably lower than the 43.8 million barrels per day production in 2016. On March 3, OPEC+ countries like Saudi Arabia, Iraq, United Arab Emirates, Kazakhstan and Oman announced additional cuts of 2.2 million barrels per day, all the way till the second quarter of 2024. These production cuts removed around five million barrels a day, or around 5% of supply, away from the global market. Scepticism of whether OPEC will stick to cuts or slowly release supply into the market will potentially be cleared on the next committee review meeting on June 1. Geopolitical Tensions The year has been marked by a series of geopolitical tensions, especially in the Middle East, which contributes to over one-third of global crude supply. Prolonged matters of conflicts like the Russia-Ukraine and the Israel- Hamas wars, and the Red Sea crisis have sent Brent prices on a higher trajectory. The latest potential trigger for prices to continue to spike is the current Israel-Iran situation that potentially threatens a shutdown of the Strait of Hormuz, a key transport pathway for global crude supply. About 15 million barrels of crude oil flows through the Strait of Hormuz, which represents around 15% of global crude consumption. The market is currently factoring a risk premium of $3 per barrel on account of geopolitical tensions, according to energy markets expert Vandana Hari. How Higher Crude Prices Impact Indian Oil Companies? Upstream Companies: Oil Producers For upstream or oil production companies, like Oil and Natural Gas Corp. and Oil India Ltd., an uptick in global crude prices theoretically poses well. Higher crude or selling prices technically raise the revenue potential for oil production companies. However, the windfall tax on petroleum crude that the Indian government levies limits the upside potential the upstream companies could make. The Special Additional Excise Duty or windfall tax is applied when global crude oil prices are high. The government has set a threshold price at which the tax kicks in and, thereby, targets profits made by domestic crude oil producers due to high international prices. As of April 15, windfall tax on crude was raised 41% to Rs 9,600 per tonne from Rs 6,800 per tonne at the start of April. This marks an almost fourfold increase from the Rs 2,300-per-tonne tax levied at the start of January. Downstream Companies: OMCs Higher Brent crude prices potentially negatively impact the gross marketing margins for Indian oil marketing companies like Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp. While the pump fuel prices of petrol and diesel were cut by Rs 2 per litre on March 14, it had remained unchanged since May 2022. Oil marketing companies do not continuously change fuel retail prices on a daily basis, thereby exposing gross marketing margins to the risk of higher Brent crude prices that fluctuate daily. Analysts also expect fuel rates of petrol and diesel in 2024 to be unchanged till elections. Indian OMCs do, however, have a possible hedge to higher prices by procuring crude at discounts—something the oil marketers have been doing from Russia since 2022. However, benefits enjoyed by the OMCs have narrowed by $5.5 per barrel in nine months of FY24, when compared with FY23, according to Kotak Securotors.
Govt again hikes windfall tax on petroleum crude to ₹9,600 per tonne
The Indian government has announced an increase in the windfall tax on petroleum crude, raising it from ₹6,800 to ₹9,600 per tonne. This adjustment will take effect from April 16 as part of the government’s biweekly tax revision. Notably, diesel and aviation turbine fuel will remain unaffected and maintain a zero windfall tax rate. Earlier on April 3, there was an increase in the windfall tax by the government on petroleum crude, up from ₹4,900 to ₹6,800 per metric tonne. This tax was initially introduced in July 2022 to regulate private refiners, who were exporting fuel overseas to capitalise on higher refining margins instead of selling domestically. The Special Additional Excise Duty (SAED) for exporting diesel, petrol, and Aviation turbine fuel continued to remain at zero. Oil prices maintained their upward trend as concerns about potential supply disruptions due to escalating geopolitical tensions persisted. However, some of these worries were alleviated by an unexpected rise in US crude oil inventories. Prior to this recent change, on March 15, 2024, the Finance Ministry raised the windfall tax on domestically produced crude oil sales to ₹4,900 per tonne, an increase from the preceding SAED of ₹4,600 per tonne that was effective in the prior two weeks. Prior to that, on February 16, the government increased the windfall tax on petroleum crude from ₹3,200 to ₹3,300 per metric tonne and raised the tax on diesel from zero to ₹1.5 per litre. A windfall tax is imposed on domestic crude oil when global benchmark rates exceed $75 per barrel. The export of diesel, ATF, and petrol incurs this tax if product cracks (or margins) surpass $20 per barrel. Product cracks or margins refer to the discrepancy between crude oil (the raw material) and the final petroleum products.
Germany’s Oil and Gas Production Continues to Drop
German oil and gas production fell again in 2023 compared to 2022, industry association BVEG said on Tuesday, calling for increased domestic production to reduce dependence on more emissions-generating LNG imports. Last year, Germany’s oil production dropped by 5.9% year-over-year, while natural gas output slumped by 10.4%. The share of domestic gas supply of total German supply was 5.7%, while domestic oil production met about 2.2% of Germany’s oil consumption in 2023, figures by BVEG showed. Germany’s oil and gas production peaked in the 1960s and 1990s, respectively. Output has been falling in recent decades, increasing the share of imports to meet demand. Germany should maximize domestic oil and gas production, which would be extracted with 30% lower emissions compared to LNG imports, Ludwig Möhring, Managing Director at the BVEG association, said at a press conference. Higher domestic output would also boost the security of supplies and reduce dependence on imports, Möhring added. The BVEG association groups the companies operating in Germany, including the local affiliates and joint ventures of ExxonMobil, Shell, Neptune Energy, and Wintershall Dea, among others. Politicians must commit to decarbonization and at the same time to continuous domestic production, Möhring said. Germany has faced two difficult years scrambling to secure gas supply with energy prices spiking after the Russian invasion of Ukraine and the halt of Russian pipeline gas exports to Germany. Last year, Germany imported the equivalent of 968 terawatt hours (TWh) of natural gas in 2023, down by 32.6% from the 1.437 TWh imports in 2022, as consumption also dropped, according to the country’s energy regulator Bundesnetzagentur. Norway was Germany’s top natural gas supplier last year, delivering as much as 43% of the imported gas, followed by the Netherlands with 26% and Belgium with 22%. Germany’s industry is unlikely to fully recover from the energy price shock and return to the competitiveness from before the Russian invasion of Ukraine, the chief executive of Germany’s top utility, RWE, told the Financial Times last week.
India’s Chhara LNG terminal gets first cargo
India’s Hindustan Petroleum, a unit of state-owned ONGC, has received the first cargo of liquefied natural gas at its Chhara LNG import terminal in Gujarat, according to shipping data. The 2015-built 159,800-cbm, Maran Gas Mystras, arrived at the LNG terminal in the Chhara port on April 11, according to its AIS data provided by VesselsValue. Maran Gas Mystras previously picked up a cargo of LNG at Marathon Oil’s Punta Europa LNG terminal in Equatorial Guinea, the data shows. Local media reports suggest that Gujarat State Petroleum Corporation (GSPC) purchased this commissioning LNG cargo for the delayed facility from trader Vitol. LNG Prime could not verify this by the time this article was published. The reports also claim that Hindustan Petroleum (HPCL) has not yet completed the breakwater for the LNG facility to protect it during the monsoon season, but it should be completed next year. India’s eighth LNG import facility HPCL LNG (HPLNG), a unit of HPCL, built the 5 mtpa LNG terminal with all associated facilities for receipt, unloading, storage, regasification of LNG, and gas supply to the grid. The firm, formerly known as HPCL Shapoorji Energy Private Limited (HSEPL), was incorporated as a 50:50 joint venture between HPCL and SP Ports Private Limited (SPPPL) on October 15, 2013. However, HPCL purchased the 50 percent stake from SPPPL in March 2021, becoming the sole owner of the LNG import facility. The LNG terminal features a 1.2 km long jetty capable of receiving carriers with a capacity of 80,000 cbm to 266,000 ccbm, two LNG storage tanks each with a capacity of 200,000 cbm, while GSCP built the connecting pipeline, according to HPLNG. This is India’s eighth LNG import facility. At the moment, India imports LNGvia seven facilities with a combined capacity of about 47.7 million tonnes per year. These include Petronet LNG’s Dahej and Kochi terminals, Shell’s Hazira terminal, and the Dabhol LNG, Ennore LNG, Mundra LNG, and Dhamra LNG terminal.
Petrol sales up 7%, diesel declines 9.5% in April
India’s petrol consumption soared 7 per cent in the first half of April but diesel sales were down 9.5 per cent ahead of the onset of a harsh summer season that is set to crank up fuel demand, preliminary data of state-owned firms showed on Tuesday. Petrol sales of three state-owned firms, which control 90 per cent of the fuel market, rose to 1.22 million tonnes during April 1 to 15 when compared to 1.14 million tonnes of consumption in the same period last year. Diesel demand dropped 9.5 per cent to 3.14 million tonnes. While petrol sales were up mostly due to an increase in use of personal vehicles on the back of a price cut, crop harvesting season as well as the onset of summer which will increase the demand for air conditioning in cars is likely to reverse the trend in diesel demand. Petrol and diesel prices were last month reduced by Rs 2 per litre, ending a nearly two-year-long hiatus in rate revision. Month-on-month petrol sales dropped 3.6 per cent when compared to 1.27 million tonnes of consumption in March 1-15. Diesel demand too was down 2.7 per cent month-on-month when compared to 3.22 million tonnes in the first half of March. Diesel is India’s most consumed fuel, accounting for almost 40 per cent of all petroleum product consumption. Transport sector accounts for 70 per cent of all diesel sales in the country. It is also the predominant fuel used in agriculture sectors, including in harvesters and tractors. Petrol consumption has consistently shown a year-on-year rise, diesel consumption has been on a see-saw – rising in one month and falling in another. Consumption of petrol during the first half of April was 9.2 per cent more than in the COVID-marred April 1-15, 2022, and 56.5 per cent more than in the first half of April 2020. Diesel demand was up 4.7 per cent over April 1-15, 2022, and 27.9 per cent compared to the first half of April 2020. Jet fuel (ATF) sales rose 10.4 per cent year-on-year to 3,35,700 tonnes during April 1-15, 2024. But this was 1.2 per cent lower month-on-month. Like petrol and diesel, ATF demand too is now firmly above pre-Covid levels. ATF consumption was 34.3 per cent more than in April 1-15, 2022, and 18.4 per cent more than in the first half of April 2020. Cooking gas LPG sales were up 8.8 per cent year-on-year at 1.2 million tonnes in April 1-15, 2024. LPG consumption was 15.3 per cent higher than in April 1-15, 2022, and 28.3 per cent more than in the first half of April 2020. Month-on-month, LPG demand fell 11.6 per cent against 1.36 million tonnes of LPG consumption during March 1-15, the data showed.
What Could Rising Tensions in Middle East Mean for India & World Economy? Impact on Oil and Rupee Explained
As if the Hamas war was not enough that the escalation of tensions between Iran and Israel has added fuel to the fire in Middle East. The so-called retaliatory drone attack on Israel by Iran on Sunday is making the world anxious about this will pan out for the economies and geopolitics. Global leaders, including UN chief Antonio Guterres, have called for restraint to avoid any further escalation, as the “Middle East is on the brink”, and the world could not afford more wars. US President has already warned Israel that it would not take part in a counteroffensive against Iran after the weekend attack that involved 300 missiles and drones While Israel and allies including the US, UK and France managed to mostly foil the unprecedented attack by Iran, stock markets in Israel, Saudi Arabia and some other countries in the Middle East fell on Sunday, but only slightly. Will Oil Take a Hit? Bloomberg reported that oil prices rose in the wake of the Syria strike, with Brent climbing above $90 a barrel and analysts saying it could reach $100 on a direct conflict between Iran and Israel. The Israeli shekel weakened and neared its weakest level this year. India is also keeping a close eye on the tensions in Middle East, considering 80% of its crude oil requirements are imported, a surge in prices would impact the country’s growth, inflation, rupee and balance of trade. India has called for immediate de-escalation of hostilities between the two sides that threaten regional peace and security, and return to the path of diplomacy. Though the pressure on petrol and diesel prices is unlikely until mid-June due to the Lok Sabha Election, but oil retailers will feel the burden on profits, and could increase the subsidy bill for the government. Oil production in the Middle East amounted to roughly 30.7 million barrels per day in 2022, accounting for 31.3% of the global total, according to data from intelligence platform statista.com. Moreover, higher oil prices also mean higher food prices — not just in the Middle East but across the world. That would intensify food insecurity, already high in many developing countries.
Japanese Investors Partner With I Squared Capital on US$370 Million Strategic Investment in Natural Gas Infrastructure to Accelerate the Energy Transition in India
Squared Capital, a leading independent global infrastructure investor, today announced that a consortium of Japanese investors will become strategic minority shareholders in the Natural Gas Transition Platform (the Platform), a Singapore-based holding company with investments in Indian city gas distribution networks that develop and operate Compressed Natural Gas (CNG) stations for vehicles, pipe natural gas to homes, and distribute Piped Natural Gas (PNG) as well as Liquefied Natural Gas (LNG) to industrial and commercial customers. The Japanese investor consortium is made up of Osaka Gas, the second-largest city gas distributor in Japan, Sumitomo Corporation, one of Japan’s largest trading houses, and the Japan Overseas Infrastructure Investment Corporation (JOIN), a government-sponsored entity that promotes Japanese investment abroad. The transaction will diversify the Platform’s shareholder base and bring in additional long-term capital from the consortium members. Commenting on the transaction, Harsh Agrawal, Senior Partner, APAC, I Squared, said: “India aims to boost the share of natural gas from nearly 7% currently to 15% of the primary energy mix by 2030. I Squared Capital, through the Natural Gas Transition Platform, is committed to supporting a just and equitable transition of the country’s energy sector. Our new partners, Osaka Gas, Sumitomo Corporation and JOIN share this ambition and together we will be working to facilitate the shift from more carbon-intensive fossil fuels to natural gas in India.” He continued: “We are very pleased to attract these long-term and experienced partners to our growing energy Platform. The additional capital provided will be used to support the energy transition in India through the expansion of last-mile city gas distribution infrastructure. We regard natural gas as a transitional energy source that will play an important role in global decarbonization, substituting for more polluting fuels such as diesel and coal, while at the same time supporting India’s urbanization and industrialization with stable and affordable energy.”