Lack of Investments Behind Energy Future Volatility

The ongoing global energy crunch, at least as proponed by major media outlets, is continuing. European eyes are largely focused on Russian president Vladimir Putin’s statements, while globally Saudi Ministers and US president Biden are making headways too. The current perceived shortage in crude oil and natural gas on the markets however is not caused by only power plays of OPEC+, Putin or Saudi officials, but caused by a structural deficit in investments in upstream oil and gas.

US president Biden is blaming OPEC+ for increased higher prices at the pump. He indicated yesterday also that he is assessing the option of “go in the [Strategic] Petroleum Reserve and take out and probably reduce the price of gas maybe 18 cents or so per gallon”. He however needed to admit that that still doesn’t remove higher price settings from the US markets.

Biden reiterated that “gas prices relate to a foreign policy initiative that is about something that goes beyond the cost of gas … That’s because of the supply being withheld by OPEC”. At the same time, European leaders and even the EU Commission is looking at Russian president Putin to open up the valves of natural gas pipelines to increase the flow to the union. Confronted by lower natural gas storage volumes, and price levels still 6-8 times higher than in 2020, Europeans feel that Putin holds all the cards.

Both parties, Biden and EU, are only partly right. Market fundamentals have been largely changed with a big bang, as the OPEC+ export strategy has been successful, against the odds of some analysts, removing not only supply but also part of the oil storage glut. At the same time, OPEC+ has been supported by an unexpected level of global economic growth pushing demand back to before 2020 levels. For natural gas, and even LNG, the same picture can be painted, even that there is no OPEC version for natural gas in place. Demand has increased substantially, while Europe’s main supplier Russia is struggling or unwilling to deliver.

Geopolitical issues are playing a major role, as Putin clearly has indicated by pushing for a Nordstream2 decision by the EU. Some however forget that Europe has been confronted by the removal of the Dutch Groningen gas field production (the Saudi gas version in EU), while Norway is also hitting its own constrains. A combination of lower European supplies, combined with higher global demand (China, India) for natural gas and LNG has pushed prices to never seen levels.

As Saudi Arabia’s minister of finance Mohammed Al-Jadaan however stated on US TV channel CNBC, the Kingdom is not targeting very low oil prices or pushing for even higher oil prices. Al Jadaan made a very potent point, low oil prices destroy or paralyze energy investment in general, no party is looking for this situation. He reiterated that very low oil prices are undesirable as they negatively affect and paralyze oil investments, which leads to a real energy crisis, as what is happening currently with gas.

This aspect has not been analyzed by most media sources. The attractiveness of taking a geopolitical or geo-economic position in the current energy crisis is clear, but not the Holy Bible of truth. Both OPEC+ members (oil) but also Russia as gas exporter have warned again and again that underinvestment in upstream and downstream will lead to destabilization of markets and risks higher price settings in the end. As Putin rightly stated to the press, underinvestment could lead to undersupply similar to current gas market conditions.

The Russian leader stated also that several OPEC+ are not able to increase production quickly due to lack of investments. He indicated that between 2012-2016 investments in oil were around $400 billion per year, while at present only $260 billion is available. The latter situation at present is also clearly visible in natural gas worldwide.

Not only OPEC+ producers have stated the latter, mainstream oil and gas investment consultants have again and again said the same. The current situation is clearly now a man-made disaster, which we can’t remove quickly from the connotation.

The situation could even become worse very soon, if the ongoing activistic approach taken by investment funds, pension funds or shareholders continues. The hydrocarbon divestment tsunami is going to hit mostly listed-private companies, forcing them not only to divest oil and gas assets, but also to invest more in renewables. By the latter approach the strategy is acting as a two-edged sword, cutting from both sides in future oil and gas production. The upcoming COP26 is already expected to be a major anti-hydrocarbon stage, resulting in even more pressure, while global demand is expected to increase substantially still the next decade. According to the US Department of Energy’s EIA demand for oil and gas will increase even until 2050!.

For a look at all of today’s economic events, check out our economic calendar.

Bander-e Jask Oil Terminal Declares JCPOA Dead!

In a major ceremony, Iranian president Hassan Rouhani has inaugurated a new oil terminal in the Gulf of Oman. The latter is a very strategic move as it allows for the first time ever Iran to export crude oil and products to global markets without using the Strait of Hormuz shipping route. Rouhani stated that the first shipment of 100 tons of oil is loaded outside the Strait of Hormuz. The new oil terminal in the port of Bander-e Jask allows Iranian and other tankers to avoid entering the Arabian Sea via the Strait of Hormuz.

It also is a direct major strategic change by Iran to decrease US and other navy forces to be able to block Iranian oil and gas exports. The new oil terminal targets a total export potential of 1 million bpd, at a cost of $2 billion. As Iranian oil minister Zanganeh stated to the press, the total project is at 82% of completion, already with an investment of $1.2 billion.

Until now the main oil export outlet for Iranian oil and products was at Kharg inside the Persian Gulf, which is patrolled by US navy vessels. Iran’s export potential has been severely hampered, especially due to navy controls and blockades set up by US and other parties in the Persian Gulf. The last years an increased amount of military confrontations have occurred in the area between Iran’s Islamic Revolutionary Guards Corps (IRGC) and the U.S. military in the area.

At the same time Tehran always has threated in case of a major conflict to block the Strait of Hormuz, effectively blocking Iran and Arab oil and gas (LNG) transport to global markets. Iranian president Rouhani has already stated that the opening of the Bander-e Jask oil terminal option is a clear defeat of US sanctions. Iran and others see the current developments as a weakening of the US options and the threat of a harsher new JCPOA deal.

The latter still is being pushed by Western powers, such as the UK, France and Germany, as these expect the JCPOA to be the only option to keep Iran from developing a full-scale nuclear weapons capability. Since the election of Biden as US president, Western politicians and Iran have been optimistic about a new deal, including the USA, which not only would remove part of current sanctions but also give Iran access to oil and gas markets and open Iranian financial assets currently being blocked.

The negotiations are however in a stalemate, largely caused by Tehran’s unwillingness to cooperate on all levels, while at the same time suspended its obligations under the JCPOA, expanding its nuclear activities and installing new uranium-enriching equipment. In another statement, Rouhani reiterated that Iran is able to enrich uranium at present to 90%, which is weapons-grade.

The election of hardline candidate Raisi as the new Iranian president also has put a stop to the negotiations. Raisi already is facing international calls for legal inquiries in his role in the massacre of Iranian Opposition members in the 1980s.

The opening of Bander-e Jask is not only a normal economic project but a geopolitical strategy of major significance. Iran shows clearly its hardline approach not only to US sanctions or a possible break-down of the JCPOA negotiations but also to its willingness to increase its oil and gas exports the coming months. With or without a JCPOA deal or OPEC support, Iran’s hardliners are not willing to wait. A soft reaction from the West and OPEC should not be expected. Instability and further aggressive moves by Iran’s regime are to be expected.

Possible support for Iran’s oil export expansion is already clear and in the making. China Concord Petroleum Corporation (CCPC), a Hong-Kong based oil trader, could be one of the main new clients. Since the US administration has put sanctions on the company two years ago due to oil deals with Iran and Venezuela, the Chinese party has become a major player in the Iran-Venezuela-China oil trade market. It currently plays the middle man between Iran and Venezuelan oil deals, as both are partly blocked from the international market and financial systems. US government sources are following the black-listed oil deals of CCPC.

In the coming months, it is expected that CCPC will be even more active in the Iran-Venezuela-China triangle. With 14 tankers, holding a total capacity of 28 million barrels of oil, CCPC can be a major partner for Iran. The company is slated to have also links to another tanker, bringing the total to 30 million barrels. Iranian oil exports at present stand at around 600,000 BPD (June), in comparison to 2.8 million bpd in 2018. China and India are the main targets and clients for potential Iranian oil and gas exports the coming years. No other main market is willing to burn their fingers.

Norway’s Equinor Playing a Double Game, Oil and Gas to Support Renewables

Even that Norway’s pension-fund Government Pension Fund Global ( Statens pensjonsfond Utland, SPU), also known as the Oil Fund, and Norway’s state-owned oil and gas giant Equinor (former Statoil) are making headlines due to its energy-transition and renewables approach, the hidden truth of both is oil and gas needed to finance the transition. International media seem to have still a very subjective interpretation of the Norwegian dream, showing a multitude of articles on the country’s leading EVs position and the ‘shocking hydrocarbon divestments’ of its pension-fund. Reality is however starkly different, Europe’s largest oil and gas producer is still continuing major investments in upstream, licensing rounds continue and even Arctic oil and gas reserves are not out of reach.

Equinor has now reported that its latest plans to increase renewable energy will entail still a growth, not a decrease, of its oil and gas production in the mid-term. The hydrocarbon giant’s strategy update today gives detailed plans to accelerate its transition to a lower-carbon future, targeting a 50% investment in renewables and low-carbon technology by 2030, which is an exponential increase compared to its 4% in 2020.

The company also has brought forward its targets to reach 12-16GW of installed renewables capacity by 2030 from 2035. However, internal rates of return on its renewables projects have been brough down from 6-10 percent to 4-8 percent. To soften this blow Equinor indicated that offshore wind in the US and UK could hit a 12-16 percent level. The company also steps up its CCS capacity to 15-30 million tons per year of CO2 storage by 2035.

The latter will be represented in mainstream media again as the main story, but Equinor continues in full force its oil and gas operations too. Even that the company has set itself a Net Zero by 2050 target, it also stated in its guidance that oil and gas output will grow by 3 percent per year until 2026. At the same time, looking at ongoing investments and plans, there will be new projects coming on stream by 2030, with a break-even price of $35 per barrel, showing a pay-back time of less than 2.5 years.

In a media statement, Equinor’s CEO Anders Opedal made a diffuse statement. “In the longer term, Equinor expects to produce less oil and gas than today recognizing reducing demand”. The latter doesn’t mean lower oil and gas production in case of higher demand in reality. He reiterated that he expects lower demand due to growth of renewables and low-carbon solutions after 2030-2035. Taking this into account, major investments upstream are still to be expected at least for 5-10 years.

Equinor also has joined the “Shell-League” it seems, as Norwegian activists are taking the company to the European Court of Human Rights. Based on the Dutch court order for Shell, which was also based on international human rights, which will be contested for sure by Shell, Norwegian parties now want to block Arctic oil drilling too. The main argument of the environmental organizations is that allowing new oil drilling during a climate crisis breaches fundamental human rights.

They also are using the IEA report Net Zero by 2050 as backing. The latter however is not likely to be a legal ground for a case, as the former oil and gas agency is not a main party in all, while its reports legally can be disputed without any trouble. Green Peace Norway’s leader Frode Pleym however thinks different, as he stated that “the oil industry and the oil-friendly parties’ bible has been the IEA reports….The IEA has now been clear on what we need to do to achieve the goals from Paris: that is to stop exploring for more oil.” Since years Norway is fighting legal battles with environmentalists on drilling licenses in the Barents Sea. One field is at present producing, but several are under development, all by Equinor ASA, Aker BP ASA, Var Energi AS and Lundin Energy AB

At the same time that Equinor published his guidance, news also emerged about a new oil discovery by the company. The report states estimated recoverable resources of 1.3 to 3.6 million standard cubic meters of oil equivalent in production license 554 in North Sea. The discovery was made by Equinor, Vår Energi and Aker BP on the Garantiana West prospect near the Visund field in Norwegian North Sea. The discovery will be a tie-in to the planned Garantiana field development project. Proven in 2012 and delineated in 2014, Garantiana is a discovery in the northern part of the North Sea, 15km north of the Visund field.

The Norwegian approach towards oil and gas in energy transition is a clear cut Scandinavian approach. As Denmark also has pushed its oil and gas reserves production to the limit to pay for energy transition and renewables, Norway is keeping in line. Other oil and gas majors are having another strategy it seems, they are choosing for divestments of mainstream assets to lower their carbon-footprint. In the greater play of things, the Scandinavian option is more realistic, as the other (Shell, BP, Total ao) are only divesting plays, which are going to be picked up by competitors or private-equity. The impact of the latter on the environment or energy transition is negligible.

For a look at all of today’s economic events, check out our economic calendar.

Saudi Arabia Re-Enters Full Scale Financial Markets, Aramco $6 billion Sukuk and PIF Infrastructure Fund Stake

After a slight lull in the market, Saudi companies have again made headlines the last day. The world’s largest oil company Saudi Aramco’s dollar denominated Islamic bond sale (Sukuk) has raised $6 billion, while another Saudi sovereign wealth fund Public Investment Fund (PIF) took a major share in a new Gulf based infrastructure fund. The time that only oil prices made Saudi headlines is over since the Crown Prince Mohammed bin Salman took over.

Saudi Aramco’s financial attractiveness has not been dented lately, even that volatile oil markets and unilateral oil export cuts have put a dent in its profitability at present. With orders of between $33 -55 billion in place, the oil giant has been able to raise $6 billion with a new sukuk offering. The oil giant’s sukuk had a price guidance of under 70 basis points (bps) over US Treasuries (UST) for a 3-year tranche, 90 bps over UST for 5-year, and 125 bpd over UST for a ten-year tranche. On Monday June 7 Aramco’s first US dollar-denominated sukuk was launched. The total sukuk is launched in three tranches.

The sukuk is going to be used to pay for Aramco’s $75 billion in dividends per year, which was offered during the IPO to increase international interest. The oil company is already cutting on its overall spending, even in the upstream operations. To reap additional finances, Aramco has set up at the same time a major program to sell non-core assets. Even that the last months oil revenues have increased substantially, as price levels are again hovering around $70 per barrel, the company is still struggling with its free cash flow, which is short of the $18.75 billion it needs to pay each quarter.

Today Aramco also has appointed Morgan Stanley as lead adviser for the sale of a multi-billion dollar stake in its natural gas pipeline network. At present a deal is being made worth around $12.4 billion, in which investors will be able to hold a minority stake in a new Aramco subsidiary leasing the network. The network is the so-called Aramco’s Master Gas System, linking its production with processing sites throughout the kingdom, holding a total capacity of 9.6 billion cubic feet per day.

At the same time, Saudi SWF PIF has done a capital commitment to the $800 million ASIIP infrastructure fund. PIF will fund up to 20% of the total fund. ASIIP is a joint infrastructure fund between Bahrain based Investcorp and Aberdeen Standard Investments, focusing on infrastructure in the GCC region. The Asian Infrastructure Investment Bank (AIIB) also has committed around $90 million to the fund.

The infrastructure fund targets projects in line with the economic diversification plans of the GCC and MENA region, mainly by investing in sustainable core infrastructure projects. Taking into account ESG and UNSDG issues, ASIIP will focus on solutions in healthcare, education, water, mobility and digital infrastructure. A possible link between the PIF ASIIP option and other Saudi entities is clear, as the PIF is also owner of Aramco and other conglomerates in the region.

This week PIF also made clear that it will not anymore focus on US-EU-Asian markets but increasingly focus on regional opportunities. The coming months more PIF transactions are to be expected as it wants to increase a full-scale regional network to support economic diversification in the region, with Saudi Arabia as the pivotal center. Possible new fund transactions with Abu Dhabi are also in the offing, partly to strengthen the cooperation of both powers.

For a look at all of today’s economic events, check out our economic calendar.

Climate Activists and IEA’s LaLa-Land Approach to Push Oil Prices Significantly

After a Dutch court forced Royal Dutch Shell to commit to much more stringent climate change and energy transition strategy, US majors ExxonMobil and Chevron also were defeated in their general shareholders meetings.

The American giants were hit by landmark victories of activist shareholders, as the latter gained seats on the board of ExxonMobil and others. With calls on mainstream oil and gas companies, activists and NGOs are trying not only to speed up energy transition strategies worldwide but also force oil majors to cut their production and emissions. The Dutch court case could be a watershed verdict, as the judge ordered not only Shell to cut emissions more than was proposed by the company, but also stated that Shell is responsible for the emissions of all parties in its value chain, which includes suppliers, buyers and consumers.

This activist onslaught on Big Oil was supported by a bombshell report of the International Energy Agency (IEA), Net Zero by 2050. The former oil and gas focused energy agency of the OECD stated bluntly that the world should stop investing in new oil and gas immediately. As expected, mainstream and activist media took all of these developments as a major watershed issue, the end of oil and gas was proclaimed already by some.

Since this media-genic bloodshed scenario, in which the end of Big Oil was proclaimed, some realism has returned in the market. After a short period of silence, the hydrocarbon giants started to react. In addition to the so-called Seven Sisters (IOCs), OPEC member countries already declared the ongoing IEA strategies as flawed, not relevant and having no impact on their own operations. In a reaction to the press, Saudi energy minister Prince Abdulaziz bin Salman stated “”I would have to express my view that I believe it is a sequel of the La La Land movie”.

He also asked the media “why should I take it seriously?” The Saudi official reacted to the statement by the IEA that to reach Net Zero by 2050 that oil supplies have to shrink by 8% per year, reaching 24 million bpd by 2050, in comparison to around 100 million bpd before COVID-19 hit. The Saudi reaction, supported by other OPEC members and Russia, already is proving to be right. Just shortly after its own report, the IEA needed to come out with a statement that global oil demand is showing high growth potential, hitting soon pre-crisis levels.

It seems that activist shareholders and NGOs still don’t understand the pivotal role of oil and gas in the economy. Without any other options, demand is set to grow, hitting soon 100 million bpd levels again, while no peak yet to be expected. Some could even argue that to force IOCs and other listed oil and gas operators to change their strategies and divest major parts of their business to reach Paris Agreements or the EU 55% emission reduction targets is setting up the hydrocarbon sector for a major shakedown and revamp of national oils. In the end, the next decades oil and gas will be needed, especially to stabilize the immense energy transition being implemented.

Without natural gas especially, formerly supported by the IEA as fuel of choice for the energy transition, the global energy system collapses. A major inherent flaw of activists and NGOs worldwide is that they want companies like Shell, Exxon or BP to commit suicide. By forcing them to sell assets, their specific emissions will be going down, but overall the vacuum created in the market will be filled by others. The “Others” are either private equity companies, which are not listed so no 3rd party influence, or national oils.

The latter, even acknowledged by the IEA, are looking at a very bright future. Removing production of IOCs will be not lost forever, but change into the hands of others. Supply however could be partly hampered, or politically influenced in future. Stability of hydrocarbon markets is needed, not only to commit to a sustainable economic future, but also to have the financial powers to put energy transition powers in place. The Seven Sisters will not be able to implement the major new green investments without having access to capital. Without high revenue levels from oil and gas, no options will be available to commit to lower risky projects such as offshore wind, solar or hydrogen.

In the short to mid-term, instability will be increasing substantially. Major new oil and gas projects, needed to even keep current demand-supply in check, are being threatened. If IOCs are leaving the market even more, consumers and industry will be at the mercy of private equity production parties or geopolitically instigated national oil companies. The latter two’s main strategy will be to maximize revenues, not to maximize production. Further price increases will be the result, which ever new party is owner of the fields and reserves.

For energy transition goals, higher oil prices are not the solution, as margins will attract investments, especially in a financial system looking at a glut of options. Renewables should be opting for higher production while removing demand, the latter would result in lower prices and less market interest. The current move is a Pyrus victory in Lala-land. Demand is growing, prices are still not high enough to constrain economic growth.

With oil prices at $70-80 per barrels, supply will be available but now regulated by out-of-reach parties for activists. Setting up IOCs to fall is reaping higher oil prices and continuing investments, whatever Western financials are stating. Current Green Washing accusations will now be based on upward pressure on US Dollar (Greenback) levels. Activists are clearly unknowingly pushing the world to higher prices, with geopolitically constrained supply options.

The IEA’s Net Zero to Hit Non-OECD Countries Energy Future

The International Energy Agency, which has stepped up its efforts to become a major green energy supporter, appears to have forgotten the reason it was set up as an agency in the first place. In its new report “Net Zero in 2050”, the energy agency calls for no new investments in oil- and gas-related projects.

As stated by Fatih Birol, the IEA’s executive director, “new energy security challenges will emerge on the way to net zero by 2050 while longstanding ones will remain, even as the role of oil and gas diminishes”. The IEA also stated that the contraction of oil and natural gas production will have far-reaching implications for all the countries and companies that produce these fuels.

In a remarkable statement, Birol said that “no new oil and natural gas fields are needed in the net zero pathway”. While he admits that, within that pathway, oil and gas supplies (aka production) will become increasingly concentrated in a small number of low-cost producers. Based on its own assessments, the IEA predicts that OPEC’s share of a much-reduced global oil supply will increase from 37% at present to 52% in 2050, a level higher than at any point in the history of oil markets.

While the IEA’s new report focuses on the need to drastically reduce our use of fossil fuels in order to reduce CO2 and methane emission, there are some major underlying issues it fails to address. In its determination to reach Net Zero emissions by 2050, the IEA appears to have engaged in wishful thinking, ignoring the existing constraints and immense investments needed to achieve such a goal. In its report, the agency does admit that there are severe risks on the way to Net Zero, including geopolitical and economic risks related to an overdependency on critical minerals.

In doing its recommendations elevate the privileged thinking of the rich world to the detriment of the developing world. This is especially the case across the continent of Africa, where the scope of opportunity for renewable investment is without parallel, but which first needs to develop the infrastructure to enable such investments to scale.

Renewable energy will of course form a key component of Africa’s future. But for a continent that is still presently power-starved, coal, oil, natural gas and nuclear must and will continue to represent a large proportion of energy investment in the short to medium-term.

Investment needs to come within Africa more than it does from abroad. Many Western firms are still wary of major investment in light of unstable political conditions, pointing to politicized jurisdictions and a range of leading multi-national companies that have got stuck in legal quagmires lasting decades, including Shell, ENI, and Lundin, to name just a few.

In the case of Shell and ENI, their acquittal of a decade old corruption case in Nigeria this March seems to have helped consign their concerns to the past, given they have signed a new deal with the country’s National Petroleum Corporation just this week – in tandem with with Exxon and Total – to develop an offshore oil block that includes the deepwater Bonga field.

The Lundin case by contrast remains outstanding, or rather resurrected. Two decades after an investigation concluded allegations of complicity in alleged war crimes in Sudan were unfounded, the case was reopened in Sweden in 2010 but seemingly remained dormant ever since.

For decades Western firms have found themselves reluctant to engage for fear of having their involvements politicised on the ground. However this vacuum has created an opportunity which African firms have successfully capitalized on – and their continued success should be encouraged by the IEA, not overlooked.

Innovation in oil and gas across the African continent has done well in recent decades, but needs to do better. African gas production is expected to double in the next two decades, and the continent, according to the International Energy Agency itself, needs $400 billion in that time to provide power to the full half of the population that is without it.

As such anyone who says this must be done with no coal, no nuclear, or no hydro, are simply not being serious. Technologies such as small nuclear reactors and other innovations in ‘non-renewable’ energy sources will be highly desirable to develop and scale across the continent.

It is also clear that LNG projects in Africa, such as in Mozambique, represent a huge opportunity for the continent to establish itself as a global powerhouse. A project like the East African Crude Oil Pipeline (EACOP) promises residents of Uganda and Tanzania more local jobs, new infrastructure, and enhancements in the central corridor between the two regions and more. Already EACOP has seen $3.5 billion USD in investment and a 60% increase in foreign direct investment in Uganda and Tanzania.

A fully renewable, sustainable, and stable world before 2050 is not something that can be achieved without oil and gas for both petrochemicals and energy, let alone in Africa. The IEA’s member countries may be able to cough up the cost of this aggressive green strategy without imploding their own economic wealth, but non-OECD countries will not be able or willing to.

Oil and gas represent an opportunity for Africa’s own companies to become world beaters. The IEA should be the first acknowledge and indeed encourage that.

For a look at all of today’s economic events, check out our economic calendar.

IPO Fever Heating up Arab Gulf National Oil Companies

After the world’s largest IPO ever by Saudi national oil company Aramco, others have been putting up part of their assets also up for sale. Saudi Arabia and the UAE have been leading the flock. Now a new star could emerge, Bahrain’s national oil company NOGA is considering options to access private-equity funding for some infrastructure assets.

Bahrain’s minister of oil Mohammed bin Khalifa Al Khalifa stated to Bloomberg Television that they are considering selling energy assets. The minister indicated that “we have got a lot of infrastructure assets that can easily be” structured for private-equity funding. First target could be to open up Bahrain’s pipeline to Saudi Arabia for a private equity deal. Other options could be an LNG import vessel and several upstream assets. Manama seems to be jumping on the train set in motion by Saudi Arabia, UAE, Qatar and others, to sell energy assets or issue bonds based on these assets.

No specific details yet have come forward, but a potential offering of a stake in the Saudi-Bahraini crude oil pipeline, which is supplied by Aramco, as an another outlet for Saudi oil, but also is used to supply Bahraini petrochemical and refinery projects, could be a major source of income. The so-called AB-4 pipeline was inaugurated, to replace an older one, in 2018. The new 112-km long AB-4 oil pipeline has a capacity of over 350,000 barrels of crude oil per day, which will replace the existing 73-year-old pipeline system. The new oil pipeline starts from Saudi Aramco’s Abqaiq Plants and finish at the Bahrain Petroleum Company (Bapco) Refinery in Bahrain.

The remarks that potentially upstream assets could also be in the offering is opening up a new discussion. Even that Bahrain is a very small oil producer, slated to produce around 50,000 bpd from its own fields, and shares production of a Saudi-Bahraini field of 150,000 bpd, the potential could however be much bigger. As indicated last month, NOGA, the National Oil and Gas Authority or national oil, is discussing at present a major tender round for its offshore shale Al Khaleej field.

The potential of that field is still unclear, but inside information links it to a major production expansion potential of the tiny island state. The Gulf Arab state in 2018 announced the discovery of the Khaleej al-Bahrain field, its largest oil and gas find since 1932, situated off Bahrain’s west coast and estimated to contain at least 80 billion barrels of tight (shale) oil and the country has been looking for foreign investment to help to develop it. Bringing in additional financial backup to start up production in 2022 is possibly a main driver for the current private-equity discussion. Bahrain is also rumored to be talking to major oil and gas companies, such as ENI, but also Gazprom and others, to start up the world’s first shale oil and gas field very soon.

Production comes from just one field – the onshore Bahrain Field (also known as Awali) – which was discovered and brought onstream in 1932. Bahrain also receives a 50% share of production from the Abu Sa’fah field in Saudi Arabia.

At the same time, IPO fever is growing. Abu Dhabi’s national oil company ADNOC is slated to be close to hire First Abu Dhabi Bank and JPMorgan as primary arranger for the drilling unit IPO. The Abu Dhabi giant is expected to sell a minority stake in the drilling unit, valued at around $10 billion. ADNOC Drilling already has a minority shareholder, as BakerHughes acquired in 2018 a 5% stake, in a deal putting up the value to $11 billion.

ADNOC is considering an IPO for its drilling unit but also for a fertilizer joint venture called Fertiglobe, The deals could raise more than $1 billion each. If the deal goes ahead, it would be the oil company’s second listing of a unit on the Abu Dhabi stock exchange after it listed ADNOC Distribution in late 2017, raising 3.1 billion dirhams ($844 million).

ADNOC Drilling owns and operates a large fleet of rigs, including 75 onshore rigs, 20 offshore jackup rigs, and 11 well water rigs, according to its website. Emirati sources have indicated that no formal mandates yet have been awarded, but JPMorgan and FAB are front runners. The ADNOC Drilling IPO will be listed on the Abu Dhabi Securities Exchange. The Emirate is trying to revamp its dormant stock market.

OPEC+ Production Cut Decision too Optimistic?

As indicated already before the start of the Joint Ministerial Monitoring Committee (JMCC), the OPEC+ members, led by Saudi Arabia, UAE and Russia, have decided to keep to the former early April decision of a gradual export cut relaxation. Today’s decision to cancel even the normal full ministerial meeting, which normally follows the JMCC, it shows its current willingness to take the risk of not adjusting export volumes to market indicators.

At the last meeting, OPEC+ decided to gradually raise its collective output ceiling in May-July. At the same time it stated that it will keep vigilant in assessing the global market developments. During yesterday’s OPEC+’s Joint Technical Committee (JTC), which monitors market conditions, clearly stated that there are concerns about oil demand following a severe surge in Covid-19 cases in India and new lockdowns in Europe.

Still, all OPEC+ parties feel that there is enough room in the market available to absorb new barrels. OPEC’s secretary-general Mohammed Barkindo stated already yesterday that there are a lot of positive signals. As the group now has decided to keep to its existing strategy, a combined 350,000 bpd will enter extra into the market in May, while another 350,000 bpd are expected in June, and 441,000 bpd in July.

Not clear at present is Saudi Arabia’s overall position, as the Kingdom plans to unwind its voluntary 1 million bpd cut, so putting an additional 250,000 bpd in May, 350,000 in June and 400,000 bpd in July. Global demand is up for oil, but at present it really is unclear if demand growth will be at levels expected. A total of 1 million bpd or more is still a large move, looking at markets globally.

Current statements about a possible supply-demand deficit in 2021 seem to be based on a normal market situation. Optimism is clear, demand growth is set to increase to 6 million bpd in 2021, compared to 5.9 million bpd last month. Total demand should be hitting 95.6 million bpd, OPEC stated. The oil group reiterated that even in a dark scenario (COVID lockdowns up), demand is expected to increase by 4.6 million bpd.

The next months the market will not be looking at a possible 2020 scenario, in which global storage volumes hit record levels, while crude oil even showed negative price settings. Still, current optimism, especially shown by oil producers seems to be built on a weak fundament. Potential disasters are clearly on the horizon, COVID-19 is not over, a clear picture of economic growth in OECD countries is not available, while potential market disruptors such as Iran, Iraq or Libya are willing to fight for additional market share too.

The Indian COVID situation is dire, to say the least. If the country is going into a major shutdown or hard lockdown approach, a potential 350,000 bpd could be at risk. Germany’s new lockdowns, which will be until June, also will have a major effect. In all of Europe, demand will not be at levels of 2019, as during the current May holiday season, normally a major demand splash due to international travel, current situation only allows local holiday arrangements.

OPEC+ will most probably be even more vigilant the coming weeks, not only to counter hidden COVID-risks but also to keep their own horses in the stable. Russia’s growing unrest over US-EU sanctions, the Iran-JCPOA discussions or a possible confrontation in the South China Sea, are black swans not being fully assessed it seems. At the same time, several others producers are already waiting to get a foot between the door to monetize their own production increases (Abu Dhabi) or available production capacity (Saudi Arabia).

To rely on a continuing OPEC+ bromance is positive, but could be misplaced. Prices are too high at present to keep compliance in place, as most players fear the Net-Zero Stranded Asset Scenario more than the wrath of Riyadh or Moscow.

While not discussed at all, but major producers, especially US shale, are just waiting on the sidelines. Price levels are already high enough to make an interesting profit. We all know that profit for US companies is like a pot of honey for Winnie the Pooh. Maybe the market should take one of Winnie’s main quotes in mind “”Always watch where you are going. Otherwise, you may step on a piece of the forest that was left out by mistake.”

Tamar Offshore Gas Deal Abu Dhabi SWF Mubadala Israel’s Delek

The move is a major step forward in the already growing Israeli-Emirati cooperation after that leading GCC countries and Israel signed the Abraham’s Agreement. The deal is still a major surprise, as if agreed and put into action will deliver a major stake in Israel’s energy resources to the Emiratis, a move not imaginable a year ago. Since last year, a wide-range of military-security and energy related contracts and agreements have been signed between Abu Dhabi parties and Israeli companies.

As stated in an official press release, Delek and Mubadala have agreed to an US$1 billion deal, that will bring the 22% stake of Delek into the hands of the SWF. Delek Drilling, in a notification to the Tel Aviv Stock Exchange and the Israel Securities Authority, indicated that the deal also entails an additional $100 million conditioned on certain terms and goals being met. The expected deal should be finalized by May 31.

Yossi Abu, Delek Drilling’s CEO, stated that “this transaction has the potential to be another major development in our ongoing vision for Natural Gas commercial strategic alignment in the Middle East, whereby Natural Gas becomes a source of collaboration in the region”. The move is already seen as a major support for new upcoming deals in the East Med region. The Delek stake sale was expected, as the company which is owned by Israeli tycoon Yitzhak Tshuva, is forced by the Israeli government’s 2015 gas framework terms to sell its non-operating stake in Tamar before the end of 2021, to open up Israel’s gas market for other parties.

The Tamar offshore gas field was discovered in 2009, currently operated and owned by Noble Energy Mediterranean Ltd. (25%), Isramco Negev-2 Limited Partnership (28.75%), Tamar Petroleum Ltd. (16.75%), Dor Gas Exploration Limited Partnership (4%), and Everest Infrastructures Limited Partnership (3.5%). The field holds an estimated 369 bcm of recoverable reserves. At present, the field’s six wells are producing 11 billion bcm per year. Some of the gas is already being exported to Jordan and Egypt.

Since October 2020 a possible UAE deal with Israeli energy partners was already in the offing. At a meeting between the UAE and Israel after the Abraham Agreement, discussions already included energy and gas cooperation. As stated by both leaders at that time, major multibillion deals would be expected to follow soon, not only in energy but also security, high tech and other sectors.

In the next months it will be very interesting to watch the region even better, as the UAE, as already Qatar did before, is having an eye on the vast East Med gas reserve potential. Possible renewed investment deals could also include potential tripartite deals, including Egypt’s LNG or a further investment in Israel (Leviathan) or Cypriot developments.

Some discussions seem also to be focusing on the revamp of the existing Israeli oil pipeline, which connects Eilat to the Mediterranean Coast. The former Israeli-Iranian pipeline has been idle for decades, but could be a very functional alternative to a Suez Canal blockade or other regional turmoil. The UAE, or maybe even Saudi Arabia, would be potential interested in revamping the second oil transport option.

Renewed GCC-Arab interest in the East Med is very important to make future developments possible. Looking at the immense costs still expected to set up a regional pipeline and LNG infrastructure, Arab investments could be making decisions easier. It also could increase the already strong Egyptian-Israeli gas connection, as the UAE and others will support a regional energy based stability. Potential others deals should not be blocked, even if there is still some potential historical fear in Israel or nationalism in Egypt to be wary of GCC involvements.

For a look at all of today’s economic events, check out our economic calendar.

Oil Markets in Flux, Banks Expect Doomsday Scenarios?

International bank Goldman Sachs seems to have joined the peak oil demand proponents, as the bank has brought forward its forecast for peak oil demand in the transportation sector by one year to 2026. GS analysts even reiterate that automotive demand could even peak before 2026, if accelerating adoption of electric vehicles (EVs) increases. The bank predicts an overall “anemic” pace of global oil demand after 2025. Some optimism is still there, as they see continuing growth in jet fuel and petrochemicals.

Goldman Sachs assessments, next to BP’s market shock statements, will have a detrimental effect on long-term prices, as they belong to a strong market movers groups, which also includes the IEA and EIA. The statements of GS however stand contrary to others, such as OPEC, the latter expects still strong growth. The hydrocarbon sector is expected to face severe risks from the energy transition onslaught, activist investors and government strategies.

However, oil and gas markets insiders still are not in majority believing the overall negative picture, as strong demand growth for oil is expected from emerging giant India, while other upcoming markets in Africa or Latin America are not yet even booming. To rely on the impact of EVs, first of all to take over the hundreds of millions of conventional cars, or trucks, taking into account the ongoing shift from small vehicles to SUVs or even bigger, demand is still strong for a very long time.

Without an adequate EV power infrastructure in place, high costs and needed government subsidies, expectations should be tempered much more than EV reports are showing. The expected worldwide government drive, as stated in EU Green Deal or Biden’s Energy Strategy, are until now mainly paper reports, where analysts are looking at as facts, but reality is much more stubborn than forecasting. At the same time, worldwide economic growth is even expected to accelerate faster, as stated by the IMF, than a couple of months ago. Reality shows that at present renewables are still only taking a thin slice of overall oil and gas demand, which will continue even longer. A rule of the thumb is a clear indicator, it takes 5 million EVs to replace 1 million bpd of oil demand.

Goldman’s sometimes market moving approach, not always resulting in a desired outcome for banks, investors or 3rd parties, is not being followed by others. A growing amount of banks is concerned about the current and future markets based on two other issues. The first is that positivism in the market is still not based on facts on the ground. Morgan Stanley already has stated that it has changed its oil price range for 2021 from $70 per barrel to between $65-70 per barrel.

The latter not due to lack or growth of demand, but based on higher US shale production in future and possible return of additional Iranian barrels. Morgan Stanley reiterates that at present, overall storage volumes are going down, while US mobility is still up. The bank did not look yet at outside issues, such as 3rd wave of COVID in EU, Latin America or India. Remarkably, GS is very bullish, forecasting Brent to hit $80 per barrel in summer.

The GS long-term demand predictions are also not supported by short-midterm assessments made by Rystad Energy. The latter foresees a strong year-on-year oil demand growth of 6% in 2021. Total global oil demand is expected to increase from 89.6 million bpd in 2020 to 95.4 million bpd in 2021. For 2022 Rystad expects a demand of 99.4 million bpd. Road fuel demand in 2021 is expected to increase by 9% to 45.1 million bpd in 2021, in comparison to 41.3 million bpd in 2020. 2022 could even add another 2.4 million bpd. Other fuels are also looking good. Jet fuel will increase by 21% to 3.9 million bpd in 2021, and 5.4 million bpd in 2022, almost at normal levels.

A more worrying picture, not for oil prices or demand, but supply is the ongoing financial onslaught on US oil and gas producers. According to the “Oil Patch Bankruptcy Monitor” by Haynes and Boone, since 2015, there have been 262 producer bankruptcies. In the same period, 298 oilfield services and midstream companies have filed for bankruptcy, bringing the combined North American industry total to 560.

For 2021 the picture already is very bleak, as during Q1 2021 eight producers filed, the highest level since 2106, when 17 were filed. The aggregate debt for producers that filed in Q1 2021 is just over $1.8 billion, which is the second lowest Q1 total, after $1.6 billion in Q1 2019. Main territory for filings in Q1 2021 is Texas, showing 50% of the total. Still, some light is there when you want to keep optimistic. Haynes and Boone report that there were no producers with billion-dollar bankruptcies this quarter, which has not happened since Q3 2018.

The US picture can be put on other regions too. Financials are constraining recovery of hydrocarbon sector companies for longer. If no change in cash flows, or investment inflows, supply is more an issue before 2025/26 than demand. Demand is there, now we need to have upstream companies produce the barrels.

On another front, the market is watching with anticipation the ongoing JCPOA Iran discussion. A possible re-joining of Washington of the international Iranian nuclear agreement is still in doubt, but the options that the Biden Administration will take this step is still there. The market expects that, if the JCPOA again is a success, if the USA joins, Iran will reenter in full the market, putting additional barrels on the market. Analysts are worried about the possible negative repercussions for global oil supply volumes and oil prices.

At the present market, the stability is still weak, as it is still a storm-wracked ship trying to find a safe harbor. The vessel is being repaired at sea, however, lingering storms on the horizon are still on the mind of OPEC+ leaders and traders. Part of the stability at present is the fact that Iranian, Venezuelan, and Libyan oil is still out of the market. Arab producers, US shale and Russia, are however fearful of a re-emergence of Iran’s export potential at a time of a very weak market equilibrium.

This concern could however also be a idee-fix, as Iranian oil is already in the market. The IEA reported that “China never completely stopped its purchases (of Iranian oil)”. The OECD energy watchdog also said that Iran’s estimated oil sales to China in the fourth quarter of 2020 were at 360,000 barrels a day, up from an average of 150,000 barrels per day shipped in the first nine months of last year. Just before the JCPOA discussions again started, Iran increased exports to China to around 600,000 bpd. Major Asian clients in China, India and elsewhere, are happy to take Iranian or (Iranian origin) volumes based on their very low price settings and attractiveness.

The question to be answered here however is will Iran be able to sell much more oil than at present if sanctions are retracted. Iran’s main position for several clients is linked to low prices or large discounts. When there is no need for a discount, expectations are that Iranian oil prices will be market conform again.

The latter could be a major constraint for exponential export growth in future, as clients will look more at cost/barrel than origin. The competition will be harsher, putting a damper on overall potential for sure as long as demand is constraint, and OPEC+ spare production capacity is relatively high. To expect higher supply volumes while markets are weak is too optimistic. Iran is not going to decide oil markets in 2021, at least via oil volumes. Fundamentals are not promising, the only price increase at present is geopolitical! Ukraine-Russia, Turkey-East Med, China-Taiwan or Biden’s Middle East policy is price drivers, the rest is just marginal.

For a look at all of today’s economic events, check out our economic calendar.

Saudi Arabia’s Dark Horse Position to Put OPEC+ Under Pressure?

The successful implementation of major COVID-19 vaccination programs is not only ruling national politics and elections in major markets, but also seems to have blindsided oil traders and consumers about the risks still clearly present in the market on the mid-term.

An economic and financial crisis is still looming in major OECD markets, especially EU-member states and USA are heading to a major financial showdown which could optimism on ice for a long period of time. Still, it seems that most analysts and hedgefunds are influenced by the spring sun shining in their eyes, as bullish sentiments prevail.

This week’s new OPEC meeting to discuss the possible roll-over of existing export cuts or a slow return of additional volumes to markets could become a watershed if analysts look at the real figures. The unexpected decision by Riyadh to cut unilaterally 1 million bpd of exports has been behind the current optimism. As most other OPEC members, supported by non-OPEC giants such as Russia, were more inclined to keep cuts in place as agreed before or even soften up their own commitments, Riyadh took again its historical swing-producer position and surprised the market.

The latter decision has put a fundament under the market no-one foresaw. The Hosanna stories in the media keep on being produced, even if market fundamentals are weakening due to COVID-variants, 3rd waves and a possible economic crisis of unknown order. All depends on the stability however of the OPEC(+) agreement and the internal cohesion of OPEC member countries at the same time.

On the outside, OPEC seems to be speaking with one voice, officially led by the group’s Kingpin Saudi Arabia with Abu Dhabi in tow. This symbiotic cooperation is the main cornerstone for the current position of the oil cartel, but major cracks are emerging. As has been discussed before, the Abu Dhabi National Oil Company (ADNOC) is targeting not only increased production capacity but also exports. The latter is a growing concern to others, especially if demand will be fledgling or not recovering as quick as expected.

At the same time, Saudi Arabia’s own oil production and export strategies seem to be not as clear as in the media is mentioned. The Kingdom’s swing-producer decision to cut 1 million bpd last month is still not hitting the market.

Even that optimism is there, when looking at real figures, as presented by Kayrros and Kpler indicate that Saudi’s exports in the first 21 days of February only declined by 176,000 bpd, while it also shows a stock draw of 150,000 bpd in the first 21 days of February. The latter would mean that, only 326,000 bpd has been cut, resulting in a situation of around 12 million barrels in total short. If this situation has continued the last weeks, another 4-4,5 million bpd until the rest of the month.

Total figures mean that the Kingdom, even when in media stating that its cuts are in place, is approximately 16 million barrels of crude oil behind schedule by the end of February. Until now, no real figures have shown if the Kingdom has put in place another cut of 600K bpd needed.

These figures stand in stark contrast to the current statements in the press that OPEC has pumped 24.89 million barrels per day (bpd) in February, down 870,000 bpd from January. The latter is the first monthly decline since June 2020. If the figures of Kpler and Kayrros are however right, we are looking at a different situation in place. Optimism about ongoing cooperation inside of OPEC could be tempered or dealt a blow. For the upcoming OPEC meeting on the 4th of March the pressure already is building up, if internal discrepancies or strategies are not aligned.

A possible discussion about OPEC’s Kingpin oil cut strategies could become a major discussion point, if its compatriots, such as Abu Dhabi or Iraq, are going to question to real Saudi support. The Saudi market premium currently pushing oil prices up could not only diminish quickly, but also could result in a more critical position of others. Abu Dhabi, Kuwait or Iraq, could be not anymore willing to comply with the Riyadh position taken, and partly strong-armed during the last meeting. Saudi Arabia’s power position will be questioned for sure, as most other OPEC members will want to monetize some additional volumes in light of current high oil prices.

If it is clear that Saudi cuts are much lower than currently mentioned in the market, not only internal fraction is on the horizon but the relationship with Russia and others could also become icy. As the figures provided by Kpler/Kayrros show some Saudi market opportunism is showing. Stabilizing the market by introducing an export cut, while failing to implement it fully could be a major bone of contention just before the OPEC meeting. To monetize revenues is normal, to take advantage of misperceptions in the market is not going to be taken lightly by others for a long time.

Compliance is still stated as a major bulwark for success, even that market knows interpretation of figures is still diffuse. With official compliance of 121% as reported the market should expect higher volumes soon. By however questioning them already, looking at Saudi export figures, some surprises still are in a market in flux. Even that global oil market have shown an appetite for another 1.5 million bpd, the assessments are largely based on misperceptions and misplaced optimism. Saudi’s pivotal role the last decade could again become the Dark Horse nobody looks at in a still foggy and black market.

Oil Market Relief OPEC+ Decision Only Temporary, Volatility to Increase Soon?

Analysts are still reeling from the cliffhanger statements made by Saudi Energy Minister Prince Abdulaziz bin Salman Al Saud, not only positively shocking the market by a unilateral Saudi export cut, but also reiterating the position that the Kingdom has been holding for decades, it is again pushing for the leading swing producer position in the market. Statements however that this is strong position the Kingdom holds, and that it is its historical or strategic right, should however be taken with a grain of salt.

The main message the market should now get in their mind is that OPEC+ is weakened, not by failure but by its own success. After struggling to get regain market stability, fighting historical levels of crude oil and petroleum products storage volumes, while facing an oil market glut in time of the COVID-19 crisis, some green leaves are showing themselves on the branches of OPEC+ and other producing trees.

Optimism is in the market, even unexpectedly high, as shown by the enormous influx of investors in the future markets, where oil and non-oil commodities are showing almost all green figures the last months. The news of COVID-19 vaccines, and the expected Biden Administration in a couple of days in Washington, seems to be ruling markets. Crude oil demand and price settings seem to be heading to pre-COVID levels, but rational indicators are still contrary.

Global markets are still extremely volatile, riding with a quantitative easing and government support programs, but heading for a rocky future when these support programs in the USA, EU and other places are ended. At the same time, increased lockdowns in Europe, and even now in Japan and China, don’t bode well for a major economic upturn very soon. OPEC+ decision making has been only partly taking these developments into account.

The growing split between OPEC leader Saudi Arabia and Russia is showing increasingly. Moscow’s push to increase oil production, by adjusting the existing production cut agreement to allow 500,000 bpd extra the coming month on the market, was met by a strong Riyadh answer, Putin’s wishes were met with Riyadh’s refusal.

A difficult internal discussion forced the parties to find a Salomon’s decision, in which some OPEC+ members could official state an export increase, and Saudi Arabia taking the brunt. First reactions were positive, but Riyadh’s oil gurus understood that OPEC+ already was overproducing, so more needed to be done. The Kingdom’s decision to cut its own exports by 1 million bpd, bringing its own exports to the lowest levels in years, was needed to keep the market stable. OPEC+’s overproduction still can not be taken by the market in full. The threat of additional volumes in the next weeks by Iraq, Libya and potentially Iran, could destabilize markets very soon.

The Kingdom is playing a tricky game, not only looking at oil markets but also linking its decision to geopolitical developments in the first couple of months of 2021. By removing 1 million bpd of Saudi crude on paper, Riyadh is keeping its bromance with Russia in place. Saudi Crown Mohammed bin Salman and his older brother are increasingly capable of playing geopolitical cards to their own advantage.

By keeping Putin’s link with MBS in place, Riyadh will be able to counter some of the expected outfall of the inauguration of the Biden Administration. At the same time, by being flexible to its own OPEC brothers, especially Abu Dhabi’s Crown Prince Mohammed bin Zayed and Iraq, flexibility is in place to strengthen its own position. Still, to take on again the financial brunt of being swing producer, Riyadh’s ministers not all will be smiling. The Kingdom is hit by lower oil prices and revenues, as the latter are needed to put in place the economic diversification plans of MBS. Without successes there, the Crown Prince’s strategy for 2021, including taking over the office of his father, will be under severe pressure.

It is to be expected that the current flexibility of the Kingdom should not be taken for granted. The one-time surprise is not a long-term strategy, as higher revenues and economic stability are needed very soon. To count on higher oil prices for 2021 is still wishful thinking if global economic drivers are hit or Riyadh’s current position will be changed.

Surprises are the game of MBS, even that he is maturing in geopolitics and power games scenarios, MBS’s main focus is the survival of Saudi Arabia. If necessary, based on Riyadh assessments or unilateral production increases of others, Saudi Arabia is also still willing and able to take no prisoners. A possible reversal of the export cut can be done as quick as the surprise of the Saudi Energy Minister.

If Saudi fears about Biden or regional power conflicts are waning, a more pro-active role inside of OPEC is going to be taken. Expect not a pro-OPEC position to be leading, but a pro-Saudi position.

For OPEC’s future Saudi strategies are leading, for Riyadh OPEC’s future is not decisive anymore. Internal dissent will not always in 2021 be solved by Saudi Arabia shouldering the costs. A production cut change by Riyadh will for sure lead to dramatic price changes if COVID-19 has not left the building. Cheating will not be tolerated anymore, even not by Russia and its cohorts.

Optimism Oil Market not Based on Fundamentals? IEA Cautious about Demand Recovery 2021

At present, most power brokers seem to be fed by optimism about the perceived effects of starting COVID-19 vaccines programs, and a possible resurge of economic activity. Looking at main markets in Europe and the USA, fundamentals are however very weak, especially if taking into account the resurge of national lockdown programs, such as in the Netherlands, Germany and UK. On the sidelines, COVID-has also removed almost all negative news from a possible NO-Deal Brexit on January 1 2021.

It is almost incomprehensible to see the total lack of rationality in certain parts of the market, European lockdowns are a precursor for more economic downturn, while Asian demand is in a globalized world for a large part depending on demand for products in Europe. The American lost battle against COVID is still ongoing, even that US based news is full of largescale vaccine programs, the latter will not have a direct and immediate effect on economic recovery.

Since the last OPEC+ meeting and the partial roll-over and easing of the production cut agreement, optimism even got stronger, as the oil cartel and main participants supported a positive vibe. Still, some critical assessments are currently hitting the market, as worries are growing over the 2021 market situation. The Paris-based OECD-energy watchdog International Energy Agency (IEA) already has cut its oil demand forecast today for 2020 and 2021.

The latter contradicts the optimism in the market, as the IEA calls for much more caution in the assessments of COVID vaccines effects and already underlying looming economic crisis outcome. The Paris based watchdog reiterates that it “will be several months before we reach a critical mass of vaccinated, economically active people and thus see an impact on oil demand.” At the same time, the IEA Monthly Oil Report (OMR) keeps some optimism, showing it is struggling with the current situation, as it reports that stronger Asian demand and persistent and effective OPEC+ supply management had aided the recent recovery in oil prices and on the physical oil markets.

The energy agency is partly optimistic because it sees a real shift in the oil storage situation, now showing 1.7 million bpd build for 2020 but changing to a 1.8 million bpd draw in 2021. The latter should however be taken very cautiously, as prices could push production up higher, compliance of OPEC+ s already under severe pressure, while an economic recovery in 2021 globally is still looking very fragile, based on national lockdowns in wide parts of the EU, UK and possibly other places.

When looking at oil demand, the IEA sees an 8.8 million bpd decrease for 2020, which is 50,000 bpd cut from its previous forecast. Overall IEA reports a strong oil demand growth of 5.7 million bpd in 2021, bringing global demand to 97.1 million bpd, an increase of 170,000 bpd compared with the November OMR. The latter is still not very strong, if you take into account that several OPEC+ members have indicated to be opening up their production higher, and prices around $50 per barrel would also support some additional shale revamp.

Demand, even if taking the IEA statements, will only recover by 66% in 2021 in comparison to 2020. The current lockdown scenarios, and loss of high travel related fuel consumption, looking at winter holidays Europe or shopping/family gatherings, which all are blocked, will have their own impact still.

By putting all 2021 demand increase on COVID-19 vaccines programs it is very tricky one. The effects are still not clear, logistics and country-wide coverage is still a major challenge. At the same time, a prolonged economic and social restriction in major markets is also increasing the total negative fallout on the economy long-turn. Financials are already looking very black, while unemployment is kept low due to EU subsidy programs.

There is also a major Trojan Horse some don’t yet see or are ignoring. OPEC+ is struggling to keep its pace. With already severe cracks showing in the battle walls of Troy, a strong opposition current is building up inside of OPEC itself.

Led by the UAE, but also supported by other members such as Iraq, Libya, Iran and Nigeria, the cartel needs to find a solution to its own Catch 22 situation. By keeping the market in check, prices are able to recover slightly. However, the costs are on the shoulders of OPEC members, which are all struggling to finance not only their own government programs but also need to prepare for a more non-hydrocarbon based future.

The costs are high, for some already unbearable. Without getting higher revenues, some of them could be facing instability. Others are also looking at the looming Peak Oil – Peak Demand scenarios in the media. Stranded assets and continued low income are a nightmare scenario for most. To prevent, oil producers could easily jump from a rational market stability approach to an all-out unilateral power game.

Perceived stability and demand – supply scenarios used presently are too rigid to be taken face-value. Instability is hiding in the Trojan Horses standing in plain sight on the streets in front of OPEC Vienna HQ, NYMEX buildings or the CME in Chicago.

For a look at all of today’s economic events, check out our economic calendar.

Lack of Effective Market Strategy OPEC+ Increases Dissent. Price Pressure Building.

As already has been indicated the last days in the media, internal dissent inside of OPEC is building up, while the oil cartel also needs to get to grips with the fundamental distress in the market. Still, the optimism in the market, shown by a steep increase of oil prices the last weeks, is based on a very fragile fundamentals, while OPEC needs to decide on its production cut strategy. The success story of the OPEC+ production cut agreement, driven by Saudi Arabia, Russia and the UAE, is at present only a one-sided story.

Without any doubt has the current OPEC strategy been supporting the stability in the market, removing 7.7 million bpd from the market, but the effects on prices and revenues of oil producing countries has been minimal.

The two-sided sword approach of OPEC, being the market stabilizer and swing producer, has not been very positive for the government revenues of its respective member countries. Removing not only a vast volume of OPEC crude from the market, while hit by lower price settings, has become a real strain on internal financing and stability. While media has been looking at increased oil prices, the levels shown at present are not enough to even scratch the surface of price levels needed in the majority of OPEC+ countries to bring government budgets in the green again.

At the same time, OPEC+ strategies already from the start were a lopsided approach. By taking on the burden of vast production cuts, OPEC+ members such as Saudi Arabia, UAE or even Russia, were hit very hard, while other member countries were either non-compliant to the agreed production volumes or given exemptions, such as Libya and Iraq. OPEC member Venezuela and Iran have the whole time playing a different game, as they claim exemption status due to US sanctions, but addressing the market fully via third parties.

The internal burden-sharing discussion and need for higher oil prices to counter government budget deficits is now showing its ugly face. The delay, media sources and analysts are currently ‘blaming’ the UAE for the crisis situation, as the latter was vocal in its criticism about the strategy and internal compliance, but it should not be forgotten that a continuously growing amount of OPEC+ members is looking for success, but all are like frogs jumping in different directions. The extremely negative impact of COVID-19, global lockdowns, economic crisis and a lack of real short-term vaccines successes, is confronting OPEC+ with a non-manageable market situation.

Not used to a real global oil and gas market situation that is out of control, leaving OPEC+ members only to support reactive measures and strategies, is now forcing hard-needed discussions. OPEC leaders and Russia need partly to look in their own mirrors and admit that they have been not willing to acknowledge their own ostrich policies. By not admitting that the demand destruction and global economic crisis is not in their control, the market is still looking at them as the savior. Without very harsh production cut strategies, removing much more from the market than currently is being done no real change is possible.

At the same time, OPEC and Russia is facing a situation that there is a party in waiting, US shale and no-OPEC+ production, that will constrain any unilateral move of OPEC+. If production cuts are prolonged or even increased, global oil prices will go up. In the short run, hydrocarbon based revenues of governments and companies will increase, knowing however that every US dollar price increase will awaken some shale oil party in the US and entice all oil producing countries, including the majority of OPEC+ members, to open up their taps to reap some short-term and short sighted rewards.

The fatal attraction of the current more than 27% oil price increase, and the fata morgana of higher income and return to “normal” for most rentier states, seems too enticing to find comprises. Eagerness to cash in, get back to ‘normal’ and open up the taps, is more on the minds of producing countries than the willingness to stabilize.

The current perceived UAE lone-wolf strategy should be seen in this modus, Abu Dhabi doesn’t want to break up or leave the oil cartel. The fatigue of already over 2 years of crisis mode, exponentially increased due to the COVID-19 Black Swan event, is now showing. OPEC+ leaders are tired of taking on the burden, being hit by financial crisis scenarios and instability, while others are currently taking advantage. Hard choices will have to be made, not again just a roll-over of the current strategy. If nothing is going to change dramatically, the only victim will be the oil price.

Without change and real market control, prices are set to be much lower than currently is expected. Optimism is based on a possible Father Christmas Holy Season approach, but oil and price developments are not a fairy tale. COVID vaccines will not be changing markets before H2 2022, demand destruction is still ongoing with no real relief on the horizon. The only real fact is oil producers are not willing anymore to take the burden, taps are being oiled and ready to be open.

Climate Iceberg Threatening International Shipping Lines

International media has been obsessed with the possible negative impact on the environment of hydrocarbon producers, but has forgotten to take on one of the world’s most vital but also polluting sectors, international shipping.

The International Maritime Organization (IMO), based in London and responsible for setting global environmental standards for shipping, has put in place a possible iceberg decision that could easily sink some of the international shipping “Titanics”. The IMO has last week approved rules designed to curb the industry’s carbon emissions, even that environmental agencies and NGOs criticized the organization by stating that its measures won’t do enough to help tackle climate change.

International shipping is one of the world’s most undervalued sectors, as it is transporting 90% of total global physical trade. At the same time, mainly due to the use of rather unclean sources of fuel, the sector is also spewing out as much CO2 as France and Germany combined each year. With its new regulations the IMO steps up its efforts to improve the shipping vessels’ carbon efficiency and footprint.

With a strong message, the IMO has now put in place a 50% emissions reduction target by 2050. The targets are green, but as some international shipping organizations, such as the Danske Rederier, already warned the measures will not be applicable and reach the set targets. As Maria Skipper Schwenn of Danske Rederier said, “the regulations are a stumbling block for a real transition to carbon neutrality because they don’t reward ships for performing well”.

The IMO measures are meant to hit not only its 40% reduction target for 2030, but increase the total level for 2050. Where main criticism of the sector is that vessels already have achieved most of the set savings, as since 2008, which is the goal’s baseline year, ships have gotten bigger, better designed and slowed down, meaning much of the required savings have already been achieved. Taking this into account, most of the former targets were in reach for 2030.

The real risk or target at present is the fact that now overall shipping emissions need to be cut. Having more efficient ships, as is increasingly the case, will not reach these targets anymore, not due to the vessel emission, but mainly due to evergrowing and booming international trade and transport. If the IMO would like to comply with the the Intergovernmental Panel on Climate Change (ICPP)’s 1.5 degrees Celsius scenario, man-made CO2 output needs to almost halve, versus 2010, by 2030. This will include an outright cut of vessel emissions.

Analysts agree that if the IMO wants to reach 50% cut in greenhouse gas emissions by 2050, almost the total fleet need to switch to zero-emission fuels. The latter is a fairy-tale as they don’t exist at present on commercial scale. In a statement made by the Global Maritime Forum, it is assessed that this would cost around US$1 trillion in investments.

Regulatory demands will be supporting this, as the EU already is expected in 2021 to propose rules to put a price on emissions from shipping, likely by bringing maritime transport into its emissions trading scheme. . Several large players, such as Maersk Tankers and commodities trading giant Trafigura, are supporting the latter approach already. It however is not expected that the IMO will soon put in place the same legislation. Some new legislation is expected from the IMO in June 2021.

NGOs, activist investors and governments however are now threatening a new kind of approach, based on the “Divest Hydrocarbon Fuels” approach. Warnings have already been given that inn light of the success reached with oil and gas companies, activists are planning to target international shipping lines and owners.

This will not reach the same impact as with oil and gas, but the threat of divestment from banks and finance companies supporting global shipping, could be a real crisis scenario. International maritime trade and shipping both are heavily dependent on large banks and ship insurers that provide low cost financing to shipping companies.

If now parties are able to force them to include environmental conditions to the requirements or costs, survival of several giants is at stake. Scenarios are already discussed between shareholders, NGOs and activists, that a list of potential targets, such as Berkshire Hathaway, Blackrock, Bridgewater Associates, Goldman Sachs, Nordea, Bank of America Merrill Lynch, are targeted. These financial giants all have positions in shipping and shipping finance.

The world now has the highest concentration of carbon dioxide in over 800,000 years, which has triggered major shifts in ices ages and life on the planet in the past

One of the largest divestment activist groups, Carbon Disclosure Project, said that already the threat of disclosure works. Companies, investors and especially institutionals, are likely to take action. Via disclosure, companies or organizations, such as the IMO, will act as they are confronted by failure. Until now, international maritime operators have been able to get away with it. If now the focus of groups like Carbon Disclosure Project, 350.org and others, is going to be on shipping, there will be a shock to the system.

CDP already has been producing damning reports, showing that with only 60,000 major ocean-going ships, global shipping makes up 33% of global freight emissions (1 billion tons compared to 3 billion tons of global carbon emissions from transportation). In its global report, CDP targeted 2604 companies to disclose carbon emissions in 2019. Only 110, or less than 5%, that disclosed were transport operator or logistic providers.

The lack in transparancy and levels of disclosure is maybe seen by companies as their own business, but could now backfire and become costly if investors and insurers become reluctant to finance any longer. It becomes even more a threat to maritime providers when realizing that 40% of global shipping is used to transport fossil fuels, while all are using fossil fuels. To be hit from both sides would have sunk Titanic much quicker even.

The lack of urgency in the global maritime sector is amazing. With the current approach, based on the current assessment, less than 10-15 companies will be able to get through the discussion without scars.

Sea Freight accounts for one third of all carbon dioxide emissions, despite only having 60,000 large vessels

40% of global shipping is used to transport fossil fuels

A prioritization matrix by CDP highlighting risks from lack of disclosure and movement toward low carbon shipping

CDP has a detailed methodology for looking at the disclosure risks posed by each shipping company

For a look at all of today’s economic events, check out our economic calendar.

Mixed Picture Oil Price H1, Increase Expected H2 2021

The current optimism shown in the media and increased oil prices due to the unexpected positive results of Pfizer’s vaccine and the Joe Biden victory in the US presidential elections was not available at all. Mainstream market players such as ADNOC, OMV, VITOL or market analysts, such as Energy Intelligence, Platts and Argus, are rather reluctant in a more optimistic view of the market yet. Most are even indicating that the risks currently seen hovering in the market are too large to expect even a minor price increase very soon.

At the ADNOC Trading Forum, part of ADIPEC, the impact of COVID-19, global oil and gas demand destruction and the US election results were leading the discussion on the market situation. In several discussions fear was shown about the possibility of an OPEC+ strategy change to allow in January 2021 more oil to flow to the market. At the same time, traders and analysts agree that the current oil stock draw is too fragile to be a basis for optimism. They all also referred to already clear dangers in the market on the short term, as Libya’s unexpected production surge, now recorded at around 1 million bpd, and a possible US decision in January 2021 to rejoin the JCPOA agreement with Iran, is not to be taken lightly.

Additional oil volumes are not able to be consumed in the current market situation, putting additional pressure on price settings and possibly result in filling up available storage space again. The impact of the re-emergence of COVID related lockdowns in the EU, and other places, combined with some scepticism about the Pfizer vaccine or others’ impact on the short term, is not providing a boost to optimism.

As the market fundamentals are still very fragile, and OPEC+ members are reassessing their overall production strategies or even not committed at all, lower economic growth overall or new production volumes could hit the market hard. Demand is still fledgling everywhere, so no room for mistakes.

The latter skepticism became clear when the Forum asked the participants to give their views on oil prices the next 12 months. According to Energy Intelligence, Platts and Argus, overall expectations for oil prices in 2021 are at high $30s – mid $40s per barrel.

The latter means overall optimism is not being supported at all in prices. In a panel with Martin Fraenkel , Global Platts, Euan Craik, Global Head Crude, Argus Media and Alex Schindelar, President, Energy Intelligence, all three however agreed on a more optimistic situation in 2022. Still, the oil analysts indicated that room for improvement will depend on COVID constraints and the resilience of the market to counter possible set-backs.

When asked about resilience and the state of the market, Russel Hardy, CEO Vitol, said that 2020 has shown how resilient the hydrocarbon sector still is. The major breakdown of demand, due to the Black Swan event, has been confronting the sector with an unexpected roller-coaster ride in H1 2020. The current H2 is seen as a preparation phase for 2021. He reiterated also that the market has become more stable, but we are far from getting back to normal.

Kajo Fujiwara, Executive Officer Crude Trading and Shipping of Japanese company ENEOS, stated “work continued even in Covid time”. Fujiwara reiterated that margins are very low. The ENEOS official sees improvement in H2 2020, as demand came a bit back and refinery runs were increased accordingly.

The main backer of ADIPEC and ADNOC Trading Forum, Abu Dhabi’s national oil company ADNOC also was taking part. When asked about ADNOC Trading, Khaled Salmeen, Executive Director, stated that the company “has not stopped doing what we wanted to do….we wanted to go strong on trading and we are as ADNOC Global Trading is going to go live in next weeks”. During H1 2020 the company had to deal with the demand and supply challenges, “all hands on deck”. ADNOC Trading however still focusses on sales growth, and also to increase storage. ADNOC Trading’s crude book has become life in September, while its products book via Global Trading is going life in the next weeks. In March 2021 it also is pushing ICE Murban Crude futures via the ADGM.

The trading arm of ADNOC, which is another example of GCC based NOCs entering the commodity sectors in full, also is interested in further expansion. Part of this will be a representation in the USA. Expansion plans are targeting Singapore, Europe and USA. At the same time, Salmeen stated that ADNOC Trading is also looking at shipping. ADNOC has been always been an FOB seller. Shipping is going to be a main part of all. Prices of second hand and new builds of vessels at present is very attractive. Investments are still planned. Key products to target for shipping is for products but for sure in crude. International storage is also being targeted.

With a full bird’s eye view of the market, most participants have been giving a mixed or foggy message. VITOL’s Hardy stated that current messages in the market, including the potential impact of Joe Biden as US president, is being digested right now. The full impact of all at present again is unknown, so volatility has increased. Hardy still sees some difficult couple of months are ahead. Real optimism, according to Hardy, could be in the market during H1 2021. Hardy also doesn’t expect significant demand increase for the winter 2020-21. If there is a COVID vaccine, the real impact is not measurable in the market before end H2 2021.

VITOL, ENEOS, OMV and even market analysts such as Argus, EI and Platts, all stuck to the story that the OPEC+ strategy is one of the major fundamentals to be watched. With already some draws of stocks in the market, OPEC+ postponing of its strategy will be also a support.

For a look at all of today’s economic events, check out our economic calendar.

World’s Largest Oil Company Aramco Shows Dire State of Sector

The latter results stand in stark contrast to the ongoing OPEC+ optimism that markets are recovering slightly. The Saudi giant, still valued at around $2 trillion, is fighting an uphill battle due to an ongoing market crash and slump in demand due to the pandemic. For Q4 and the H1 2021 it can be even expected to show even lower results, as oil prices are in flux, showing increased negative sentiment in the market and the still unclear negative repercussions of the re-introduction of lockdowns in major markets in the OECD. A possible US presidential election victory of Democrat contestant Joe Biden could even worsen the market situation as some expect a re-emergence of Iranian oil and gas to the market.

Aramco indicated also that the company’s figures have been slightly improved due to changes in royalties to the government. Some losses have been partly offset by a decrease in crude oil production royalties resulting from lower prices and volumes sold. At the same time, Aramco has benefitted from a decrease in in the royalty rate to 15% from 20%, lower income taxes and zakat. The oil giant also shows an increase in revenues due to higher gas product sales. Overall hydrocarbon production for Q3 is set at 12.4 million barrels of oil equivalent per day, of which crude oil made up 9.2 million bpd.

The overall financials also improved due to lower capital expenditures, now reported to be $6.4 billion. For the whole year, Aramco indicated that total capex for 2020 is expected to be at the lower end of the $25 billion to $30 billion range for 2020. The latter is still above the average in the sector, but shows that even the Saudi low cost producer is having a hard time to keep up its overall capex, possible resulting a further delays of new projects or some even being put totally on ice. It will be very interesting to keep an eye on Aramco’s investments and operations in the Red Sea region, and its flagship Ras Al Khair Shipyard project.

Aramco CEO Amin Nasser keeps up a positive mood, as he stated that “we saw early signs of a recovery in the third quarter due to improved economic activity, despite the headwinds facing global energy markets.” Aramco also seems to take an aggressive position in contrast to its IOC competitors, as it keeps total dividend payments at the historical levels.

Nasser stated “we maintained our commitment to shareholder value by declaring a dividend of $18.75 billion for the third quarter.” The latter however needs to be reassessed, as it seems that the Aramco dividend position is becoming critical, as the company’s free cash flow is $12.4 billion in the third quarter, falling short of its dividend commitment. The current dividend position is however based on Aramco’s IPO statement that it will issue $75 billion in dividend annually for five years.

With a global oil and gas market being shattered by COVID, growing economic instability and a possible widespread recession knocking on the doors in OPEC+’s main markets, optimism is at present too high. No fundamentals are showing that growth predictions of the global economy are even going to be as expected, while demand is again being battered in OECD and other markets. The green shoots that emerged during the Summer and Q3 are now being cut by force.

Low prices and possible new oil glut scenarios should be assessed but it seems this strategy is officially not on the table of OPEC+ main producers. Weaker refining margins seems to be continuing, as air traffic and even road traffic will be hit again very soon. First signs are already in the market, as VLCCs and other maritime offshore storage options are again heating up as demand is growing.

Aramco’s internal messages are also partly diffuse. Optimism being shown by Aramco’s CEO Nasser and Saudi officials at OPEC stand in contrast to warnings being given by Aramco Trading’s VP Ibrahim Al Buainain, who stated the last days that OPEC+ will have to contend with a “lot of demand issues” before raising supply in January 2021.

A possible implementation of a new more flexible OPEC+ production volumes strategy could bring the market straight away into a glut situation. If OPEC+ decides to lower its production cuts by 2 million in January, more oil is going to be on the market, without clients. January 2021 could also be more critical if Libya’s production is increasing further, Iran is becoming more active and other smaller OPEC producers are opening up their taps. Al Buainain warned already for continuing lower margins, as demand for products is lower.

Q4 could be a watershed, if Aramco and its counterparts are not looking more at real facts on the grounds. Chinese demand is going to show most probably no real changes, as Beijing is keeping a low cost oil buying spree in play. The latter however is not able to be kept for a long-time in place, while demand in OECD will be down again, also resulting in lower demand for Chinese products.

NOCs like Aramco will have to cope with pressure of their own governments, which need higher revenues to counter deficits, but at same time have to be able to stabilize the market. At present, the two issues are constraining each other. OPEC+ is a major market force, but it is not able to reform or shape the buyers=market situation at present. It is also worrying to see low-cost producers such as Aramco feeling the heat at present. IOCs, not known for their cheap oil production are being squeezed like hell the coming months. In the long-run IOCs, such as Shell, BP, Total or Chevron, will suffer from all sides.

Tanker Sector Rollercoaster Looking at Scrapping to Bring Long-Term Profits

Fledgling demand will have a major impact on total volumes needed, while global oil and petrochemical production is expected to increase slightly.

The current roller-coaster situation in oil, gas and commodities in general, is putting pressure on the maritime sectors overall. Shipbroker Gibson stated last week that based on IEA’s long-term energy outlook and OPEC’s Oil Market reports “the analysis shows that in absence of large changes in current policies, it is still too early to expect a rapid decline in oil demand”.

In the IEA STEPS scenario, global oil demand grows by around 5 million bpd in 2021, reaching pre-pandemic levels by 2023. Consumption is also expected to increase steadily, even at a more subdued rate, 0.7 million bpd per year until 2030, reaching 0.1 million bpd by 2040. As reported by the IEA, in STEPS, US tight oil is expected to return to 2019 levels by 2022.

At the same time, demand for oil products (petrochemicals, fuels), more than 6 million bpd is coming online until 2025, while demand for products is expected to increase only by around 2 million bpd. The latter will put increased pressure on OECD refineries, as margins will be low, but MENA refineries are going to be hitting higher returns.

Looking at the above picture, tanker demand is looking at a brighter future. Continuing global demand is clear, production will follow but distances between consumers and producers will increase. Most commodity transport at present and in future will be maritime based. If the markets are hitting contango again, as some expect looking at COVID 2.0 and global economic crisis scenarios, short-term demand for tankers will increase even faster due to need for additional storage, not only crude but also products.

Some analysts are worried about the current situation, as tanker rates are very low. The latter partly is caused by the situation that the immense floating storage volumes that accumulated between 2019 and now, are only slowly being unloaded. After a short price hike in April-June when Saudi Arabia pushed additional volumes in the market, contrary to the fledgling demand, rates hit around $250,000 per day.

Analysts have hoped the last months that global demand would return to pre-COVID levels soon, emptying tankers fast and putting them back on the spot-market. The latter would lead to a more normal market situation.

However, COVID 2.0, increasing lockdowns in major markets, such as OECD and India, are pushing back unloading volumes, keeping tankers full and prices very low. For the coming months this situation seems to be continuing, or even up to H2 2021, barring a major geopolitical confrontation or a solution to Corona.

The current situation is very painful for tankers, as intelligence company Kpler stated to the press. Clarksons Platou Securities stated in the media that cratering crude-tanker rates are now well below both breakeven levels. The latter reported that rates for very large crude carriers (VLCCs, tankers that carry 2 million barrels of crude oil) averaged $17,000 per day, in stark contrast to levels of $100,000 per day at this time 2019. Looking beyond last year’s anomaly, current VLCC rates are less than a third of their 2015-19 average.

Kpler, collecting data on laden crude- and condensate-tanker capacity for ships stationary for 12 or more days, stated that global crude floating storage peaked at 190 million barrels on July 1 and had fallen 31% (or 29.5 VLCC-equivalents) to 131 million barrels as of last weeks. Even that there is a draw, reality is that storage volumes have been hovering around the 130-million-barrel level since late August. Chinese storage has fallen. But non-Chinese storage has risen from around 60 million barrels in late August to 80 million barrels currently.

The most important development here is that Chinese floating storage accounted for around half of global floating storage in the beginning of September. It’s now down to around a third. More worrying at present is also the percentage of unladen (empty) crude/condensate tankers versus the total fleet, based on deadweight tonnage, regardless of size category.

According to Kpler the situation is very ugly. There are too many empty ships chasing too few cargoes. And it’s getting worse. As reported by Kpler the laden/unladen mix was roughly evenly split at the beginning of the year, until the Saudi production decision. That caused a surge in crude-tanker rates in March and April. That rate spike, and ships being chartered for floating storage, brought the unladen percentage down to 40%-42% in May.

Since that time, the unloaded percentage has however increased to 52.5%, a year high. The latter also gives a very bearish signal to oil markets, as demand is not positive until at least end 2021. Still, there are also positive signs in the market. Not only could OPEC+ decide again to push volumes in the market, tipping the latter again to full contango.

At the same time, the tanker market is not static at all. Analysts should be looking at the underlying structure of the crude tanker market. The current orderbook for tankers is almost empty, enticing owners to consider scrapping older ones. In a normal market around 5% of tankers is being scrapped every year. Scrapping is expected to come back with a bang, as COVID had temporarily restricted scrapping operations also. The latter, combined with low rates as present will be a major force to revamp the sector. A possible additional jump in scrapping is to be expected when the older VLCCs, currently all used for floating storage, are being unloaded.

The latter was also supported by Hisham Alnughaimish, VP Operations Bahri Oil, Saudi Arabia’s main shipping company and a panel at the Saudi Maritime Congress webinar. The panel members said that the lack of tanker newbuilding orders, coupled with reduced freight and asset values over the past few months, will lead to a more positive market in 2021.

Current orderbooks for new builds are lagging behind as financing by traditional shipping banks have disappeared or was reduced. Alnughaimish reiterated that the current negative market fundamentals will result in lack of newbuilds and a bullish market for tankers in the coming years. The Bahri VP reiterated that around 25% of the world’s approximately 800 VLCCs are over 15 years old, and they can only command low rates. Alnughaimish expects that “if tanker rates remain depressed, all the aging ships will need to exit the market. Only then will we see a slow recovery but much better tanker demand-supply market by 2023”.

For investors and financial institutions oil tanker operations are a very cyclical sector. At present the market has reached its lowest level, without any doubt rates and orders will increase again. A post-COVID situation will not only entail a re-emergence of economic growth, higher demand for oil and gas products and commodities. At the same time, a re-emerging global economic growth also will show a different energy trade flow, as some hydrocarbon producing regions will become less prominent.

A re-emerging OPEC+ oil production will not only change tanker routes and storage demand but also effect tanker rates and margins. New IMO, Green Deal and other environmental requirements also will block a vast part of existing tanker fleet, pushing for refurbishments or new builds. For investors it is now very necessary to re-assess their portfolio and future investment partners based on changing trade volumes, routes and regulations. Investing in an old-cheap fleet could become not profitable but a liability. New builds and oil tanker companies or projects linked to producers (NOCs) could also become a major focal point for new investments.

Arab SWFs Struggling with Rentier State Strategies

The last days Abu Dhabi Pension Fund and state-holding company ADQ announced that they will be investing $2.1 billion in ADNOC’s gas pipeline assets, acquiring a 20% stake in the ADNOC subsidiary with lease rights to 38 gas pipelines covering 982 kilometers.

The Abu Dhabi fund will partner in deal announced in June by a consortium of Global Infrastructure Partners (GIP), Brookfield Asset Management, Singapore’s sovereign wealth fund GIC, the Ontario Teachers’ Pension Plan Board, NH Investment & Securities and Italy’s Snam. The latter groups stated they will invest $10.1 billion in ADNOC gas pipeline assets for a 49% collective stake. ADQ, set up in 2018, is the owner of Abu Dhabi Ports, Abu Dhabi Airport and bourse operator ADX.

At the same time another Abu Dhabi SWF Mubadala announced that it has taken a 3.1% stake in the Spain-based gas system operator Enagas. The new stake falls in line with Mubadala’s investments in other Spanish assets in the oil and technology industries. Enagas owns stakes in firms in the Mediterranean region, Latin America and the United States.

Mubadala also announced that it invests 200 million euros ($235 million) in German pharmaceutical company Evotec SE as part of the Abu Dhabi wealth fund’s plans to expand its portfolio. The Abu Dhabi-based fund, managing around $232 billion, has engaged on a diversification strategy plowing mainly its cash in technology to prepare for a less-crude dependent future. Mubadala Investment stated that it will subscribe to 9.2 million Evotec shares, taking about a 5.6% stake in a private placement. In September, Mubadala acquired a 5% stake in private equity firm Silver Lake.

The Abu Dhabi moves stand contrary to its main rival Qatar’s Qatar Investment Authority (QIA). The latter, holding the main revenues of the former OPEC-member, officially has already assessed its own hydrocarbon sector companies investments. Mansour Al Mahmoud, QIA’s CEO, stated at an International Institute of Finance event that QIA has more than half of its assets invested in private equity and listed shares as it chases higher returns.

He indicated that QIA’s “approach is always to be a long-term investor, this gives us an advantage”. With around $295 billion in assets, the fund is now active mainly in stocks, private equity and venture capital. Mahmoud added that QIA had stopped investing in fossil fuel companies.

Still, roaming through last weeks’ media reports, the picture is diffuse. Arab SWFs also are reported to have invested in the Russian Sovcomflot IPO last week. The Russian entity has listed 17.2% of the company on the Moscow Stock Exchange, raising US$550M.

The Russian government still holds 82.8% of the shares in the company. The Sovcomflot IPO was supported by global bookrunners and coordinators, VTB Capital, Citi, Sberbank, JP Morgan and Bank of America. Russian sources stated that the shares were purchased by retail investors with the state Russian Direct Investment Fund (RDIF), Russia’s sovereign wealth fund.

Russian Direct Investment Fund CEO Kirill Dmitriev stated that main partners have come from leading sovereign wealth funds in the Middle East and Asia. Saudi Public Investment Fund, ADIA, QIA and others all are working with RDIF. Sovcomflot wants to expand in the key areas of sea energy transportation and seismic exploration. It will also help serve existing Russian and international energy projects more efficiently and participate in the development of new routes, including through the Northern Sea Route and the Arctic zone of the Russian Federation.

The above painted picture however is more opaque than shown in media. Arab SWFs are increasingly being tasked to fill in the financial gaps in their domestic markets, as oil and gas revenues of most Arab petrostates are dwindling. With COVID-19 continuing, global oil and gas demand destruction still high, and future prices still under extreme pressure, government revenues are not sufficient to cover budget deficits.

As has been shown in Saudi Arabia, the call on Aramco to provide additional cash, is growing, which is not different from the UAE, Bahrain, Kuwait and Qatar. The latter is even hit twice, as its major LNG projects and possible liquefaction expansion plans are facing a major global gas glut forcing prices to historically low levels. Dwindling Petrodollars are a fact of life for the coming years. The latter situation already is showing its ugly face in the Arab financial sectors too. Instability in the banking and financial markets in the region are increasing, as was reported also by ratings major S&P, in a recent report.

The latter stated that risks in the banking sector including reduced profitability as “the pandemic and drop in oil prices could mark the start of a new era” are continuing. The report indicated that “rated banks in the GCC face an uphill struggle in the next 18 months due to the protracted nature of the economic recovery and the expected gradual withdrawal of regulatory forbearance measures”. The Samba-NCB merger in Saudi Arabia is one of the outcomes already.

The latter ripples will for sure put a damper on the attractivity of Arab SWFs too. If the financials of these sovereign wealth giants are depressed further, oil-gas and construction or infrastructure projects in the region will feel the impact. Lower financial liquidity could impact possible future projects of Aramco, ADNOC, NOGA, QP or KOC, leading to a possible scenario as now is being shown by IOCs such as Shell, BP and Equinor. Less financial strength of Arab oil companies will not have a ripple effect on oil production and prices, but will be a Tsunami of unknown order.

Middle East Sovereign Wealth Fund Direct Transactions Comprise Larger Portion of Investments

Data: SWFI.com (SWFI Asset Owner Terminal)

Filter: Sovereign Wealth Funds. Amount Min: US$ 10,000,000. Type: Deal, New Security Issue, Open Market. No fund commitments.

Direct Sovereign Wealth Fund Transactions – Middle East and Asian SWFs Transaction Amount as a Percent of All SWF Transaction Amount

Year Gulf SWF Transactions / All SWF Transactions Asian SWF Transactions / All SWF Transactions
2020* 42.32% 22.09%
2019 26.98% 38.65%
2018 22.59% 49.12%
2017 15.64% 38.40%
2016 19.27% 36.34%
2015 18.19% 69.01%
2014 22.46% 46.24%
2013 13.13% 23.57%
2012 26.87% 46.89%
2011 33.49% 38.93%
2010 33.43% 41.12%
2009 42.94% 37.17%
2008 38.60% 47.98%

Forget Peak Oil Demand, Supply Crisis Could be Hitting First

In today’s IEA’s annual World Energy Outlook 2020 report, the OECD energy watchdog states that it doesn’t see a peak oil demand before 2040, only a possible oil demand flattening. The energy agency repeats that oil demand is effected by COVID, but all scenarios show that oil demand has not peaked yet. The energy agency contradicts here the views currently being proponed by BP and others that oil demand has peaked already. The report bluntly states that after recovering from the “exceptional ferocity” of the COVID-19 crisis, world oil demand will rise from 97.9 million bpd in 2019 to 104.1 million bpd in 2040.

Even that the agency acknowledges that demand has been hit and is lagging behind 2019 levels, overall demand will increase, only the increase will be slightly slower than expected. The Paris-based agency, financed by the OECD governments, and lately known as a main proponent of energy transition and renewables, expects that a slower increase of oil demand the coming years will be caused by clean transport policies and surging renewable energy. At the same time the IEA also reiterates that demand for petrochemicals and global growth of long-distance transport will be leading to a net increase of oil demand until 2040.

It needs to be reiterated that several major factors are very unsure that could have a major impact on global oil demand growth. The current assessments are all taking into account a wide range of proposed and/or signed energy transition and net-zero emission government policies.

These will have an impact if fully implemented by all. Looking at the current situation, especially due to COVID-related economic issues, renewable and emission reduction policies could however become sidelined, delayed or put on ice. The need for a revamp of the global economies is clear, but choices will be made by respective constituencies without full focus on climate change and renewables.

At the same time, the major future driver for oil and gas demand will be policies implemented by emerging markets. China, India and Middle Eastern countries will become much more important than is currently taken into account in several scenarios. A post-COVID economic planning will have to make choices on where to invest and how to progress. Renewables and climate-related investments could be too expensive to materialize.

Even within the OECD countries itself, high-flying plans such as the EU Green Deal or Net-Zero policies of major industries will have to tackle the call for a stable economic recovery from citizens (voters). The IEA, supported by a report of OPEC several days ago, expects that due to a post-Corona global economic rebound oil demand will be pushed back soon to pre-crisis levels of close to 100 million bpd.

The media will be focusing today largely on the peak oil demand issues, as this is being pushed forward. The discussion however seems to forget that global oil demand is very flexible, and expected to recover quickly, but oil supply is heading towards a crisis. If demand for oil is recovering, the market will be soon facing supply issues.

The latter not due to geopolitical risks, chokepoint closures or a Greek-Turkish war, but simply by a lack of new oil projects being started and hitting the market to counter demand recovery and the production decline of existing production fields. Without more attention for hard-needed investments influx in upstream projects worldwide, markets could be facing a slow but steady decline in supply.

The ongoing onslaught on IOCs and independents by activist shareholders and institutional investors to head for a Net-Zero emission production or even leaving oil and gas totally is resulting in a hidden disaster for the global economy. Demand is going to recover, levels will be reaching at least 5-10 million bpd above 2019 levels by 2030, possibly hitting 115-120 million bpd by 2040. Between 2020-2030 latter extra volumes needed is twice the Saudi Al Ghawar field production.

Where most analysis in the media really goes wrong is that it only looks at demand increase. The main issue at present to deal with is to assess the normal decline of producing fields globally. If taking a very conservative approach of 7% decline per year, we are looking at extra production to be found of 6-7 million bpd to counter yearly decline overall. Putting this in place for the period 2020-2025 we are talking about new production to come onstream of 25-30 million bpd at least.

Without investing in existing and future production, oil storage volumes worldwide will crash, showing empty barrels or tanks very soon. By repeating peak oil demand scenarios and reports, the media and financial analysts are creating a lack of urgency that will bite the hands it feeds. Maybe the IEA assessments will need to some new rational analysis than we have seen before.

For a look at all of today’s economic events, check out our economic calendar.