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How Saudi Arabia Caused The Worst Oil Price Crash In History
How Saudi Arabia Caused The Worst Oil Price Crash In History
- Saudi Arabia made good on its promise to flood the market with oil after the collapse of the previous OPEC+ deal in early March.
- The Kingdom’s oil exports jumped by 3.15 million bpd to 11.34 million bpd in April.
Saudi Arabia made good on its promise to flood the market with oil after the collapse of the previous OPEC+ deal in early March, exporting a record 10.237 million barrels per day (bpd) in April 2020, up from 7.391 million bpd in March, data from the Joint Organisations Data Initiative (JODI) showed.
Total oil exports from Saudi Arabia, including crude oil and total oil products, also soared in April – by 3.15 million bpd to 11.34 million bpd, mostly due to the surge in crude oil exports, according to the data released by the JODI database, which collects self-reported figures from 114 countries.
Production at the world’s top crude oil exporter also jumped in April—to over 12 million bpd, at 12.007 million bpd, the database showed.
After flooding the market with oil in April and contributing to the oil price crash, OPEC’s de facto leader and largest producer, Saudi Arabia, agreed that same month to a new round of OPEC+ cuts in response to the demand crash and plunging oil prices. Saudi Arabia had to reduce its oil production to 8.5 million bpd in May and June under the OPEC+ deal for removing 9.7 million bpd of collective oil production from the market.
According to OPEC’s secondary sources in the latest Monthly Oil Market Report (MOMR), Saudi Arabia slashed its crude oil production in May to the required level of 8.5 million bpd.
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The Unique Ways Oil Companies Are Looking To Avoid Bankruptcy
The Unique Ways Oil Companies Are Looking To Avoid Bankruptcy
Many U.S. shale firms have cruised through the past couple of years by borrowing money and drilling new wells, making the United States the world’s top crude oil producer. The strategy worked for a while, especially when oil prices were around $60 a barrel.
But this year’s oil price crash exposed the financial vulnerability of many U.S. shale companies who are now fighting for survival. All producers across the U.S. patch pulled back production volumes in April and May in response to the collapse in prices.
For some oil and gas firms, reduced capital budgets will not be enough to save them from defaulting on debt or seeking restructuring as cash flows are shrinking, while the window of access to capital markets and new debt remains, for the most part, closed.
Those firms who choose not to seek (or are not forced to seek) protection from creditors via Chapter 11 restructuring could look at other options to avoid bankruptcy, some of which may be a little unconventional.
Today, unconventional may be an understatement when it comes to describing the oil industry’s state of affairs. All options – regardless of how (un)common they are – are on the table for struggling oil producers.
Industry consolidation, private equity firms acquiring assets or distressed companies, banks ending up holding oil and gas assets, or power utilities buying their providers of energy could be some of the options that oil firms might consider, Suzy Taherian, who worked with Exxon and Chevron at the start of her career, writes in Forbes.
Mergers & Acquisitions Hit By Uncertainty
U.S. shale firms have fewer financing options now than they did in the 2015-2016 downturn. Thus could drive consolidation in the industry with some attractive M&A opportunities emerging, according to Robert Polk, principal analyst with Wood Mackenzie’s U.S. Corporate Research team, covering Lower 48 independents.
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Oil Market Heading For Months Of Deficit
Oil Market Heading For Months Of Deficit
The oil market is set for a deficit from August onwards, even after OPEC+ eases the current cuts that are up for a tentative extension through July, Rystad Energy analysts said on Friday.
Assuming that global demand recovery continues in the coming months, the oil market will still be in deficit even after the OPEC+ group relaxes the current cuts from 9.7 million bpd to 7.7 million bpd, as currently planned, Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, said, as carried by Oilfield Technology.
“That will ensure a fundamental support for prices, while also spurring a quicker reactivation of curtailed US oil production, and eventually frac crews ending their holidays early,” Tonhaugen said in a note.
“Indications show that a bit more than 300 000 bpd from shut US production is actually coming back online already from June as a result of the current price levels,” he said.
Some U.S. producers have already restarted some curtailed production as prices have rallied in recent weeks and as they need the cash from operations, regardless of how little.
The market deficit coming this summer, however, doesn’t mean that there will be a global oil supply crunch, because inventories and floating storage have yet to begin depleting.
“So, even if demand exceeds supply for a while, that does not mean that we really have a problem to source oil. Oil is there, lots of it, waiting to be drawn from storage facilities,” Rystad Energy’s Tonhaugen said.
Improving global oil demand and faster-than-expected production curtailments from outside the OPEC+ pact are set to push the oil market into deficit in June, according to Goldman Sachs. Yet, there is little room for an oil price rally in the near term because of the still sizeable oversupply of crude oil and refined products, Goldman Sachs said in a note in the middle of May.
Earlier this week, Russia’s Energy Minister Alexander Novak said he expected a shortage in the oil market in July.
The Shale Suffering Has Only Just Begun
The Shale Suffering Has Only Just Begun
A few weeks before the summer driving season begins, U.S. gasoline consumption has plummeted to levels last seen in the late 1960s, due to the lockdowns to contain the spreading of the coronavirus.
With demand for motor fuel plunging, refiners are cutting crude processing, and crude oil storage capacity in America is filling fast. The glut is set to worsen in the coming weeks, and storage capacity at Cushing, Oklahoma, could be full by the middle of May, analysts say.
The fast demand destruction in the pandemic threatens to fill up storage across America soon, forcing oil prices lower and forcing oil producers to idle more rigs and curtail more production than initially thought.
Total U.S. petroleum consumption stabilized in the latest reporting week to April 17 at 14.1 million barrels per day (bpd), up slightly from the 13.8 million bpd estimated consumption in the previous week, which was the lowest weekly consumption level in EIA’s statistics dating back to the early 1990s.
But crude oil and gasoline inventories continued to jump while crude refinery inputs continued to drop, according to EIA’s latest inventory report from this week.
U.S. crude oil refinery inputs averaged 12.5 million bpd during the week ending April 17, which was 209,000 bpd less than the previous week’s average. Refineries continued to cut run rates and operated at 67.6 percent of their capacity. To compare, refiners would typically operate at more than 90 percent capacity just ahead of the summer driving season. But this year, the summer driving season is postponed and is expected to be very weak.
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Unprecedented Demand Destruction Marks The Return Of The Super Contango
Unprecedented Demand Destruction Marks The Return Of The Super Contango
These days, every corner of the oil market is “unprecedented”—from the demand destruction to the supply surge and the resulting glut. The oil futures curve is no exception and is also in a state never seen before. This is the super contango, the market situation in which front-month prices are much lower than prices in future months, pointing to a crude oil oversupply and making storing oil for future sales profitable.
The last time a super contango appeared on the market was during the previous glut of 2015. During the peak of the 2008-2009 financial crisis, the super contango hit a record—the discount at which front-month futures traded compared to longer-dated futures was at its highest ever.
The double supply-demand shock of the past month threw the oil futures market into another super contango. And this super contango is already beating previous records.
The super contango is representative of the state of the oil market right now: the growing glut with shrinking storage capacity as oil demand craters, OPEC’s leader and the world’s top exporter, Saudi Arabia, intent on further cratering the market with a supply surge beginning this month. Storage costs are surging, and so are costs for chartering tankers to store oil at sea for future sales when traders expect demand to recover from the pandemic-hit plunge.
The market structure flipped into contango in early February, when the Chinese oil demand slump in the coronavirus outbreak led to lower estimates for oil consumption. A month and a half later, oil consumption is set to plunge by 20 million bpd, or 20 percent, this month. Add to this the Saudi supply surge, and here we have what analysts expect to be the largest glut the oil market has ever seen.
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The Race For Arctic Oil Is Heating Up
The Race For Arctic Oil Is Heating Up
Despite climate concerns and environmentalist backlash against exploration for oil and gas in pristine sensitive regions of the Arctic, companies continue to explore for hydrocarbon resources in the Arctic Circle, in Russia and Norway in particular.
The largest Russian energy companies are looking to explore more Arctic oil and gas resources on and offshore Russia, while Norwegian and other Western oil firms are digging exploration wells in Norway’s Barents Sea.
Those companies lead the development efforts to tap more Arctic oil and gas resources as legacy oil and gas fields both offshore Norway and onshore Russia mature.
Russia’s biggest energy firms Gazprom, Rosneft, Novatek, and Lukoil, and Norway’s oil and gas giant Equinor, as well as Aker BP and ConocoPhillips, are the top oil and gas producers in the Artic region, data and analytics company GlobalData said in a new report. Gazprom is the undisputed leader in Arctic oil and gas production, followed, at a long distance, by two other Russian firms, Rosneft and Novatek, GlobalData’s estimates show.
Russian firms are ramping up exploration in Russia’s Arctic, while Equinor and other Western companies drill exploration wells in Norway’s Barents Sea, hoping for a significant discovery that could add to the Johan Castberg oilfield—a massive discovery which was made in 2011, but which hasn’t been replicated in the Barents Sea so far.
Yet, both Russia and Norway face specific challenges in getting the most out of their respective Arctic oil and gas resources.
In Russia, the government has made Arctic oil and gas development a key priority and offers tax breaks for firms exploring in the area.
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UK’s Guardian Bans Ads From Oil, Gas Firms In World’s Media First
UK’s Guardian Bans Ads From Oil, Gas Firms In World’s Media First
UK newspaper Guardian will not accept advertising money from the fossil fuel industry, even if this means a financial hit for the media, making it the world’s first large news organization to ban oil and gas adds.
The Guardian has been active in recent years in covering climate change and reporting on the climate crisis. Last year, the Guardian changed its style guide to use stronger language to describe the climate emergency, using words such as ‘climate crisis’ and ‘climate emergency’ instead of ‘climate change.’
Now the Guardian is outright banning advertising money from oil and gas companies, with immediate effect, the newspaper said on Wednesday.
“Our decision is based on the decades-long efforts by many in that industry to prevent meaningful climate action by governments around the world,” the company’s acting chief executive, Anna Bateson, and the chief revenue officer, Hamish Nicklin, said in a joint statement.
The Guardian has also recently pledged to become a carbon neutral organization at a corporate level by 2030, and to almost entirely divest its Scott Trust endowment fund from fossil fuels.
Guardian Media Group (GMG) generates 40 percent of its revenue from advertising, so rejecting ads from oil and gas companies would be a financial hit to the organization, the managers said.
“The funding model for the Guardian – like most high-quality media companies – is going to remain precarious over the next few years. It’s true that rejecting some adverts might make our lives a tiny bit tougher in the very short term. Nonetheless, we believe building a more purposeful organisation and remaining financially sustainable have to go hand in hand,” Bateson and Nicklin said.
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Germany Aims To Close All Nuclear Plants By 2022
Germany Aims To Close All Nuclear Plants By 2022
Germany is going forward with its plan to phase out nuclear reactors by 2022 as another nuclear power plant is going offline on December 31.
Power company EnBW has said that it would take the Philippsburg 2 reactor off the grid at 7 p.m. local time on New Year’s Eve.
This leaves Germany with six nuclear power plants that will have to close by 2022.
In the wake of the Fukushima disaster in Japan in 2011, Germany ordered the immediate shutdown of eight of its 17 reactors, and plans to phase out nuclear power plants entirely by 2022.
The Philippsburg 2 reactor near the city of Karlsruhe in southwestern Germany has provided energy for 35 years. The Philippsburg 1 reactor—opened in 1979—was taken offline in 2011.
Over the past few years, nuclear power generation in Germany has been declining with the shutdown of its nuclear plants, while electricity production from renewable sources has been rising.
In January this year, Germany became the latest large European economy to lay out a plan to phase out coal-fired power generation, aimed at cutting carbon emissions—a metric in which Berlin has been lagging in recent years.
A government-appointed special commission at Europe’s largest economy announced the conclusions of its months-long review and proposed that Germany shut all its 84 coal-fired power plants by 2038.
Germany, where coal, hard coal, and lignite combined currently provide around 35 percent of power generation, has a longer timetable for phasing out coal than the UK and Italy, for example—who plan their coal exit by 2025—not only because of its vast coal industry, but also because Germany will shut down all its nuclear power plants within the next three years.
The closure of all nuclear reactors in Germany by 2022 means that Germany might need to retain half of its coal-fired power generation until 2030 to offset the nuclear phase-out, German Economy and Energy Minister Peter Altmaier said earlier this year.
Trump Follows Up On His Promise To Protect Syrian Oil
Trump Follows Up On His Promise To Protect Syrian Oil
The United States has moved more equipment from Iraq into Syria to boost the protection of the oil and gas fields in eastern Syria currently under the control of Kurdish militia, Turkish media reports.
A logistics convoy of pick-up trucks, minibusses, ambulances, and 100 rigs filled with fuel oil crossed the Iraqi-Syrian border at Al Waleed on Saturday, according to footage obtained by Turkey’s Anadolu Agency.
This weekend’s maneuver was the second deployment of the U.S. Army in Syria’s oil provinces this month after the army moved heavy construction equipment and armored vehicles into Syria on December 4 and 5.
The Kurdish SDF forces control most of Syria’s oil. Before the war, Syria was producing 387,000 barrels of oil per day, of which 140,000 bpd were exported.
In October, U.S. President Donald Trump claimed that the U.S. had taken control of the oil in the Middle East, tweeting that “The U.S. has secured the Oil, & the ISIS Fighters are double secured by Kurds & Turkey.”
The President did not elaborate on what he meant by “securing the oil,” but speculations about the President’s statement assume he was referring to the U.S. special forces that have been—and will continue to be—in control of oil and gas fields in Deir Ezzor. Related: Are Energy Stocks Hot Again?
President Trump has vowed to protect Syrian oil fields from ISIS, and the United States may leave 500 troops in northeastern Syria and send in battle tanks and other equipment with the purpose to help the Kurds in the area to protect oil fields that used to be controlled by Islamic State during its so-called caliphate in parts of Iraq and Syria.
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IEA: An Oil Glut Is Looming
IEA: An Oil Glut Is Looming
If global oil demand growth continues to languish with uncertainties around the global economy and Brexit, the oil market will likely have to cope with another oversupply next year, according to the International Energy Agency (IEA).
“Unless other things change, we will see a surplus probably, unless there is very strong demand growth recovery,” Keisuke Sadamori, the IEA’s Director for Energy Markets and Security, told CNBC on the sidelines of an energy event in Singapore on Tuesday.
“Overall, we will continue to see a well supplied market in 2020,” Sadamori said, echoing the IEA’s monthly oil report from earlier in October, which painted a rather gloomy pictureof oil demand growth in the short term.
In the report earlier this month, the IEA cut its demand growth forecast by 100,000 bpd for both 2019 and 2020, to 1 million bpd and 1.2 million bpd, respectively. For the second quarter of this year, the IEA expects oil demand growth to quicken to 1.6 million bpd, thanks to a lower base for comparison in the same period of 2018 and to oil prices that are currently some 30 percent lower compared to a year ago.
Other organizations, as well as analysts, have been also revising down their oil demand growth estimates for this year and next, citing increased uncertainties over the pace of the global economic growth amid the U.S.-China trade war, Brexit, and slowing growth in major economies including China, India, and Germany, for example.
Against this background, the market attention turns again on OPEC and its non-OPEC allies led by Russia, who need to decide in early December how to proceed with their production cut pact expiring in March 2020. There is a growing consensus among experts and observers that the OPEC+ coalition may need to cut even deeper if it wants to prevent a large oversupply building in 2020 and sending oil prices even more uncomfortably low for major oil-producing nations.
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Yergin: Expect Extreme Volatility In Oil Markets
Yergin: Expect Extreme Volatility In Oil Markets
Rising pipeline takeaway capacity in the Permian and global oil demand growth at its weakest in a decade are set to lead to more volatility in oil prices in the near term, a prominent energy expert said, joining a growing number of analysts who see prices further depressed by slowing economies and crude demand.
“The pipeline bottlenecks are in the process of being resolved, so a lot more oil is going to come onto the market by the end of the year. We expect the U.S. (crude oil output) to be up to 13 million barrels a day,” IHS Markit’s vice chairman Daniel Yergin told CNBC on Tuesday.
While U.S. production will continue to add more supply in an already oversupplied global market, on the demand side, expectations are getting increasingly pessimistic.
“We’re in one of the weakest periods since 2008 and we think demand growth this year is under a million barrels per day. So you have that factor at the same time as you have more oil coming to the market. So expect some volatility,” Yergin told CNBC in an interview on the sidelines of a conference in Abu Dhabi.
Despite expectations of volatility, IHS Markit’s vice chairman sees Brent Crude prices range-bound in the US$55-65 range.
Yergin is not alone in predicting substantially lower oil demand growth this year than originally anticipated.
The International Energy Agency (IEA) revised down its demand growth estimates for 2019 in its latest Oil Market Report, by 100,000 bpd to 1.1 million bpd, after seeing that between January and May demand growth was just 520,000 bpd, the lowest increase for the period since 2008.
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ExxonMobil Looks To Exit UK North Sea Oil & Gas
ExxonMobil Looks To Exit UK North Sea Oil & Gas
ExxonMobil has recently discussed with operators selling part or all of its assets in the UK North Sea in a move that could raise up to US$2 billion for Exxon and mark another major U.S. exit from the area, Reuters reported on Tuesday, quoting three industry sources familiar with the matter.
Exxon has been a major investor in the UK North Sea since 1964, when the first exploration drilling in the area began. The U.S. major holds interests in 40 producing oil and gas fields and produces around five percent of UK oil and gas production, with an average 80,000 barrels of oil and 441 million cubic feet of gas a day. Exxon’s investment in the North Sea is managed through a 50/50 joint operation with Shell.
If Exxon sells some or part of its assets in the UK North Sea, it will be yet another major U.S. oil and gas firm to divest interests in this mature area to focus on their current key growth areas, which for Exxon right now are the Permian in Texas and conventional oil production offshore Guyana.
While European supermajors Shell, BP, and Total continue to view the North Sea as one of their core assets, U.S. majors have been selling North Sea stakes as many of them are now focused on U.S. shale.
Marathon Oil said in February that it would be exiting the UK North Sea as it continues to focus on high-return U.S. shale oil operations.
In April, ConocoPhillips sold its UK oil and gas business to Chrysaor Holdings for US$2.675 billion in a deal which Wood Mackenzie described as “another story of the changing corporate landscape in the North Sea – for the first time, a non major is the number one producer in the UK.”
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OPEC’s Fight To End The Oil Glut Is Far From Over
OPEC’s Fight To End The Oil Glut Is Far From Over
OPEC and its Russia-led non-OPEC allies are in their third year of managing supply to the market, hoping to draw down high inventories and push up oil prices.
Early this month, the so-called OPEC+ coalition of partners rolled over their production cuts of a combined 1.8 million bpd into March 2020, as the resurging oil glut threatened to derail their continued efforts to manage the market.
OPEC is now considering using several metrics to assess where global oil (over)supply stands, including taking the five-year average of oil stocks in 2010-2014 instead of the most recent five-year average 2014-2018, which it currently reports in its monthly oil market reports and which the International Energy Agency (IEA) also takes as a benchmark to measure oil inventories.
Analysts warn that the 2010-2014 average metric will not give a correct comprehensive assessment of the oil market.
Fatih Birol, the IEA’s executive director, warns that moving the goalposts doesn’t change the situation in the oil market. The glut is there, regardless of how OPEC wants to measure inventories.
“The important thing is that you can change the methodology but you cannot change the realities of the market,” Birol told Reuters, noting that the 2010-2014 average is a new perspective OPEC proposes to use, while the IEA has its own perspective.
On the sidelines of the OPEC+ meeting in Vienna earlier this month, Khalid al-Falih, the Energy Minister of OPEC’s largest producer and de facto leader Saudi Arabia, told Al Arabiya:
“With demand rising over the next nine months and the commitments from all the countries, including the Kingdom of Saudi Arabia, we are approaching the normal levels of supplies of 2010-2014. It is one of the options in front of us as a goal.”
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‘’Biofuels Haven’t Cut Gasoline Prices Or Emissions’’
‘’Biofuels Haven’t Cut Gasoline Prices Or Emissions’’
Since its introduction more than a decade ago, the Renewable Fuel Standard (RFS) hasn’t cut gasoline prices outside the Midwest and has even led to a slight rise in pump prices in states far from ethanol production, while the standard has had a limited effect, if any, on greenhouse gas emissions.
These are the key findings of a new report from the United States Government Accountability Office (GAO) prepared at the request of Republican Senator for Oklahoma, James Lankford, who supports policies to lower the biofuel volumes to reflect market realities that gasoline demand turns out to be lower than what the legislators had predicted when enacting the RFS more than a decade ago.
Under the RFS, oil refiners are required to blend growing amounts of renewable fuels into gasoline and diesel. This policy has long pitted the agriculture lobby against the oil refining lobby. The Midwest farm belt benefits from the RFS policy because it increases demand for ethanol, but the oil refiners do not—they lose petroleum-based market share of fuels, and meeting the blending requirements costs them hundreds of millions of dollars.
In a recent blow to the ethanol industry in the farming vs. oil refining battle, a federal appeals court has denied a renewable fuel group’s attempt to block the Environmental Protection Agency (EPA) from issuing small refinery exemptions (SREs) to the Renewable Fuel Standard.
Now it looks like the RFS and its effects on prices and emissions are also pitting one government agency against another.
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Tainted Russian Oil Crisis May Drag On For Months
Tainted Russian Oil Crisis May Drag On For Months
It’s been a month since Russian oil flows through the Druzhba pipeline were suspended due to contamination, and despite Russia’s assurances that clean oil will resume flowing through the pipeline westward to Europe in the second half of May, analysts and traders say the progress is very slow while costs could be very high.
Last month, Russia halted supplies via the Druzhba oil pipeline to several European countries due to a contamination issue, which the Russians say was deliberate.
Refineries in Belarus, Poland, Hungary, Slovakia, the Czech Republic, and Germany have been impacted by the contamination issue as clean Russian oil is not flowing normally yet, while Western refiners and Russian companies are in a dispute over who’s paying for the clean-up and when.
Western oil traders tell Bloomberg’s Javier Blas that the contamination issue and the subsequent clean-up, blending of dirty oil, and restart of normal deliveries via the pipeline will be much costlier than initial estimates and could take much longer than anticipated.
The cost could be as high as US$1 billion, according to traders and executives at refiners in Moscow, Geneva, and London, who spoke to Bloomberg. Traders also believe that the contaminated oil volume could be as high as 40 million barrels, double the 20 million barrels that Russian officials are claiming
Earlier this week, Russia said that it is already sending clean within-standards crude oil via the Druzhba pipeline toward Hungary and Slovakia, with first clean oil expected to arrive at the metering stations in those countries within a week.
A spokeswoman for Czech pipeline operator Mero told Reuters on Friday that clean Russian oil via the pipeline is expected to reach the Czech Republic on Monday afternoon. Russian oil reached Slovakia on Wednesday evening.
The now month-long suspension of Russian oil supply to several European countries comes as global supply outages mount with Venezuela and Iran, and with increasing supply disruption risks in Libya and the Middle East.
