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.

Financial Roller-Coaster Ride Independents to Force Consolidation Increase

At the same time that British independent Premier Oil and Norwegian equity rival Chrysaor are agreeing to a merger, wiping out billions of shareholder debts, Irish listed independent Tullow shocks the market with a dual warning about lower cash earnings and a harsh debt-cutting plan. The Irish independent, mainly focusing on African oil and gas plays, stated that it will announce plans in November to lower its $3billion (€2.55 billion) net debt pile amid depressed oil prices.

Last month Tullow already gave a profit warning, indicating that it faces a potential cash shortfall if no action is taken. More details are to be expected on November 25, when Tullow is holding a so-called capital markets day (CMD). On September 9, the company stated that it has made an $1.3 billion loss for H12020, mainly driven by asset write-downs. The new statements are now fuelling doubts about the future of the company, supporting more assets to be sold and well as possible new refinancing discussions.

With its new CEO Rahul Dhir the company is heading for a perfect storm it seems, as current financial markets are not anymore in love with hydrocarbon based companies. Some light is still there, as the company also revealed that it has passed a biannual test of its liquidity projections by its group of lenders behind a $1.8 billion reserve-based lending (RBL) facility and maintained $500 million of liquidity headroom as of the start of October.

The coming months however the internal and external developments are not very promising. On April 2022 the company will have be able to repay around $650 million of senior bonds, which looking at present financials could lead to a “liquidity shortfall”.

The above painted situation is also being worsened by the fact that Tullow Oil shares have lost more than 90% of their value in the last 12 months. A combination of new management, asset write downs, lower oil prices and less than positive exploration adventures, have been causing a share price crash. Analysts are worried that the future could be in doubt. Even that the market still expects that Tullow Oil could receive around $500 million by the end of 2020 from the agreed sale of Ugandan assets, there are still major hurdles on the road. Not only is the sale of part of Tullow’s onshore Kenyan fields under review, the current market situation could even lead to a renegotiation process of the sales.

Tullow’s news stands in the shadow of another surprise move, this time with a focus on the North Sea arena. British oil independent Premier Oil has agreed to merge with a private equity rival Chrysaor. The deal will not only create the North Sea’s biggest oil and gas producer but almost wiping out current shareholders. The so-called merger is in reality a take-over by Chrysaor, wiping out £2.3billion debt mountain and puts new bosses in charge. The deal will keep Premier Oil listed in London, but with Chrysaor holding 77% of the stakes in the new company.

The deal is going to hurt the investors of Premier Oil hard, as creditors stand to get £950million in cash and 10.6 per cent of the new business, existing Premier Oil shareholders will be left with just 5 per cent. The market is reacting positively, showing shares to climb extremely. With a total production volume of 250,000 bpd of oil and gas, the company is going to be the largest producer on the North Sea.

Linda Cook, the boss of Chrysaor backer Harbour Energy and a former Shell executive, will be the first woman chief executive of a major listed UK energy company. Premier Oil also holds assets in Asia and Latin America. The main reason for the so-called merger has been the high debt levels of Premier Oil, which have now been removed. Still, doubts exist about the future of the new entity.

Even that Chrysaor, which is backed by private equity firms Harbour and EIG, is a major North Sea producer, due to acquiring British fields from Shell and Conoco Phillips, to integrate both will be not easy. At the same time, the focus assets area is not an easy one and financially challenging. Current oil and gas prices are not showing enough upward potential to be utterly optimistic. North Sea production is a high-cost area, as also is being shown by oil majors such as Equinor.

The coming months more mergers, bankruptcies and hostile take-overs are to be expected. The current high-profile role of US-EU based investors could however be a short-lived phenomenon. It will be more rational and attractive to see when Asian and Arab institutionals and sovereign wealth funds will enter the market in full force.

Financial activism is a Western phenomenon, realism is Asia-MENA’s forte. Share-prices are historically low, oil and gas prices weak, financial markets closed for hydrocarbons. It will be High Noon but this time with some other Cowboys. With some developments wiping out the value of existing shareholders, another reason for conventional investors to leave the market is emerging!

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

Oil Market Optimism to be Hit by Q2 Financials IOCs?

The American Petroleum Institute (API) report yesterday evening a 6.83 million-barrels draw in crude oil inventories for the week ending July 24, in stark contrast to market expectations of a 450, 000-barrel rise. The verdict however is still out, as today more definitive US stocks data is due for release by the Energy Information Administration (EIA), the oil advisory of the US Department of Energy. Financials are again supporting the mantra that they see crude oil prices paring gains with continued growth concerns capping further upsides at current levels.

Still, as IG market strategist Pan Jingyi stated, “the surprise draw in crude oil inventories according to the API report had played a part in supporting prices overnight, though WTI can be seen staying relatively more cautious with a buildup in official EIA crude inventory expected on Wednesday”. Axicorp’s chief global analyst Stephen Innes is even more optimistic, expecting that “the enormity of the inventory draw should be sufficient to hold the bears at bay and temporarily alleviate some concerns about ongoing demand distress”.

Still, even that bulls are making headlines, the bears are just quietly waiting for their chance to surprise. The latter is based on the growing concerns about COVID-19 2nd waves in major consumer markets, not only in USA, but increasingly in the EU and UK markets. An unexpected growth is being reported of Corona infections, leading to a long list of regions in the OECD being put on Orange (only necessary travel) or even in lockdown again. Asian countries, especially India and Japan are also looking at the abyss.

For the demand of oil, the current re-emergence of lockdowns and renewed travel restrictions will have a direct impact on pure speculative optimism of demand growth. The summer season, known to be the US driving season with high transport fuel demand, is also in Europe a major market. Lower tourism, especially by plane or cars, will put demand levels back to way below average. At the same time, tourism spending in Mediterranean countries or France and Germany will be hit, putting current fragile economic growth (from Corona-levels) at risk of already on ice.

By looking at the surprise positive figures reported by China and some minor other countries can not or shouldn’t deflect attention for a possible 2nd wave of Corona and a still looming unemployment wave of unknown proportions. Demand is currently artificially pushed up by stimulus packages, while financial facts on the ground are extremely black. The long list of lay-offs in Europe and bankruptcies is staggering. In the coming months, most national stimulus packages in Europe will end, some literally after the summer season. A possible Indian summer scenario for economic figures is clearly visible but people seem to be only charmed by the red and orange coloring.

The optimism about the widely published EU Corona Fund packages, set at EUR750 billion, is also based on shaky grounds. Not only is the implementation still an issue, as the European Parliament is now having the ball in its corner, but possible recipients (Italy, Spain, Greece) have not even yet a strategy proposal how to use the available funding. The current situation looks to be a hot air balloon, that without structural economic changes in the Southern European Area no funds are going to be disbursed at all.

Still, oil producers, such as OPEC or US shale producers, are seeing light at the end of the tunnel. Reports are tumbling over each other showing demand increases to continue, and a supply-demand crisis appearing. Increased production by OPEC and others however more likely will result in a renewed oil glut in the market for H2 2020. Officially, global crude output is set to increase next month as OPEC+ sticks with its schedule of tapering coordinated production cuts from 9.7 million b/d to 7.7 million b/d from August 1.

The next couple of the oil market could be in a shock again. Norway’s Equinor will report second-quarter earnings on Friday, with Austria’s OMV, Italy’s Eni, France’s Total and Anglo-Dutch company Shell set to report next week. The U.K.’s BP will unveil their quarterly results on August 4. US oils also will report. ConocoPhillips will report earnings on July 30, with Exxon Mobil and Chevron expected to follow on July 31.

The current oil market’s positive vibes will most probably be crushed and mangled by historically red financial figures. The reaction could be violent if realism gets back to the market. The world’s largest oil, Saudi Aramco, is expected to also report its financials on August 9. No relief however is even to be expected from the King of Oil, as Aramco’s revenues and profit margins are also hit very hard.

If no miracle happens, the oil market is in for a negative run for the next 5-6 months. If US shale and OPEC+ compliance is also lowered, aka production increases, more oil will be hitting the market than financial analysts and hedge-funds are taking into account. Supply-demand is not yet in an equilibrium, while external indicators are negative. IOC financial reporting the next days will give an indication of the last couple of months, but should also be assessed as a pre-cursor for more pain. If big oil fails to be showing positive figures, leading to investment cuts, smaller ones, even oil producing countries, could be hitting a rock very soon. Lower oil prices due to increased production is not what the future needs.

East Med Acquisitions on the Uptake? US Major Enters Fray by Acquiring Noble Energy

In a statement made by Chevron it stated that it has entered into a definitive agreement with Noble Energy, to acquire all of the outstanding shares of Noble Energy in an all-stock transaction valued at $5 billion.

The total value of the deal is slated to be US$13 billion. The main underlying reason for the acquisition by Chevron is that it will provide it with additional low-cost, proved reserves and attractive undeveloped resources that will enhance an already advantaged upstream portfolio. Chevron reiterates that the Noble Energy acquisition will be bring low-capital, cash-generating offshore assets in Israel. Chevron also looks at Noble Energy to expand is in the leading U.S. unconventional position with de-risked acreage in the DJ Basin and 92,000 largely contiguous and adjacent acres in the Permian Basin.

Chevron CEO Michael Wirth stated that the Noble Energy acquisition is “a cost-effective opportunity for the company to acquire additional proved reserves and resources. Noble Energy’s multi-asset, high-quality portfolio will enhance geographic diversity, increase capital flexibility, and improve our ability to generate strong cash flow. Chevron also reiterated that “the new combination is expected to unlock value for shareholders, generating anticipated annual run-rate cost synergies of approximately $300 million before tax, and it is expected to be accretive to free cash flow, earnings, and book returns one year after close”.

Noble Energy assets:

U.S. onshore

DJ Basin – New unconventional position with competitive returns that can be further developed leveraging Chevron’s proven factory-model approach.

Permian Basin – Complementary acreage that enhances Chevron’s strong position in the Delaware Basin.

Other ­– An integrated midstream business and an established position in the Eagle Ford.

International

Israel – Large-scale, producing Eastern Mediterranean position that diversifies Chevron’s portfolio and is expected to generate strong returns and cash flow with low capital requirements.

West Africa – Strong position in Equatorial Guinea with further growth opportunities.

The Optimism shown however should be assessed still looking at the ongoing East Med and global oil and gas markets developments. Last week Noble reported that COVID has hit its operations and revenues hard. Due to a 10% volume drop and weakness in oil prices, with WTI averaging less than $28 per barrel in Q2-2020, Noble Energy’s earnings will be lower. Some of the US onshore production is being restored, concentrating low-cost DJ Basins wells online while gas production from offshore Israel will also climb.

Still, Noble Energy reiterated that due to COVID and energy markets slump earnings will fall significantly. But its outlook is now looking better. Taking into account that its US onshore production dropped by almost 8% to 248,000 b of oil equivalent per day (-3.4% oil and natural gas Israel -21%). Noble Energy still is optimistic about oil price H2 2020, as it should be significant higher.

For Israeli gas sales volume from the Tamar and Leviathan fields it expects a substantial increase. However, looking at the current Israeli COVID issues and East Med economic recovery, statements made about higher volumes should be questioned. Sales from Tamar and Leviathan to Egypt’s Dolphinus Holdings are expected to be large from this month onwards, based a long-term agreement to supply a total of 3 trillion cubic feet of gas to Dolphinus for 15 years, with supplies starting from January 2020, ramping up in July 2020, and increasing further in July 2022.

This could again be very optimistic when assessing the Israeli economic situation, Egypt’s struggling economy and a lack of interest for Egyptian LNG on the global markets at present. Some major setback should be expected. Other new projects, such as its Alen Gas Monetization project, which is slated to start up in early-2021, in Equatorial Guinea, could also be facing headwinds.

Chevron is taking significant risk at present. The combination of onshore US shale and East Med offshore gas, before COVID-19, would have been very promising and commercially attractive. At present, especially at the global gas market, and East Med especially, too many risks are out there to become very comfortable. Not only COVID-19 and economic risks are still there, or even re-emerging, East Med’s geopolitical situation is far from positive. Demand is low, while outright potential geopolitical risks (Turkey, Greece, Cyprus, Egypt-Libya) don’t bode well for optimistic investment strategies.

Chevron’s take-over agreement for Noble Energy is the second East Med linked M&A deal the last week. Today, London-Tel Aviv listed international oil company Energean announced that at its General Meeting (GM) has passed the resolution for the assets of Italian independent Edison. Energean, already holding assets offshore Adriatic, Greece and Israel, announced July 4 the conditional acquisition of Edison E&P for $750 million plus $100 million of contingent consideration. The acquisition of Edison E&P, exclusive of the Algerian assets and Norwegian subsidiary, which was the subject of the above resolution, is expected to be completed later in 2020.

 

Betting on Offshore Oil and Gas could be Challenging, as Sector Hit by COVID and China Risks

A long list of international offshore drilling operators are reporting negative figures, or are even going out of business. The hey-days of the GOM, North Sea or West Africa are already long over, but even new emerging plays in Brazil, Arctic, Middle East or East Africa are showing worrying developments.

Investors and oil companies are looking at their portfolio investments and offshore drilling is not a favorite right now. This week several reports were published by leading offshore rig data experts, such as Rystad Energy and Westwood, indicating a major crisis emerging, while the light at the end of the tunnel is not yet seen.

Globally, offshore drilling activity continued to slip in week 29 of 2020, with the number of jackup rigs dropping by one to 322 and floaters by one to 105, according to energy analyst Westwood Global Energy Group.

Rystad in its update of the oil and gas drilling market stated that the sector will be hitting a 20-year low. Based on its own research, the consultants stated that global drilling will drop 23% from 71,946 wells onshore and offshore in 2019 to 55,350 this year.

The latter decline is based on current economic figures, but already “the lowest since at least the beginning of the century”. For 2021 a more optimistic figures of 61,000 wells is expected, but this will depend on COVID-related recovery scenarios worldwide. By 2025, activity levels are expected to increase to more than 68,000 but still well below 2019 levels.

Onshore figures

Onshore figures are dramatic, but some green spots are available if you look deeply. Rystad is still optimistic about Brazil, China and Australia, which will “continue to offer exciting opportunities”, with 20%-40% growth prospects for drilling. Looking however at messages coming out of these countries, optimism could be build on shaky fundamentals.  Rystad also indicated that offshore markets will see “highs and lows” and maintain a “flattish level” over the next five years.

Fitch Ratings

International rating agency Fitch Ratings is very pessimistic about exploration-focused oilfield service (OFS) companies. The rating agency stated that the sector will face the largest demand decline as a result of oil and gas producers cutting their capex and operating expenditure. These developments will be the same for drillers. Both sectors are going to feel the negative impact of cuts in oil and gas producers’ capital programs, where exploration investment cuts are expected to be a reduction of 20%-30% in 2020 yoy.

Fitch reported also OFS companies serving projects with high full-cycle costs, such as deep-water offshore assets or shale basins, will also be affected. North America-focused Nabors (B-/Rating Watch Negative) and Precision Drilling (B+/Negative) are exposed to the volatile spending patterns of US shale producers.

OFS diversified companies, exposed to the entire life-cycle of a well, are more resilient. Fitch is reasonably positive about ADES International (B+/Stable), currently servicing  customers in Saudi Arabia and Kuwait, while Eurasia Drilling (BB+/Stable) is focused on Russia. Even that they both will be effected by OPEC+ production cuts, their overall performance will continue as their producing areas are lower-cost geographies.

The current overall global downturn will be for an extended period of time, as the OFS market will experience a recovery lag of four to six quarters. Even if oil and gas prices will recover slowly, oil and gas producers, the main clients, will be very cautious about increasing exploration and drilling activity. Even if utilization rates for rigs and vessels will improve to 2019 levels in 2021, day rates and need for new builds will be lagging behind 1-1.5 years at the least.

At the same time, most offshore drillers will be faced very soon by a combination of threats. Most OFS and drilling companies have been stacking an increased amount of assets. The latter is seen as cost saving measure. Still they are facing lower revenues and cash flows the next coming years. This combination is maybe for some even very toxic.

Fitch warns that OFS companies with significant debt maturities up to 2022 will face refinancing challenges. A combination of low operation cash flow generation and lacking access to capital markets could lead to a potential shake out.  Ongoing crisis measures in the sector is also not promising, as shedding workforce or closing production facilities by shipyards worldwide decreases flexibility to react to changing markets, and puts several blockades already in place in time of recovery.  Sembcorp Marine or Noble Drilling are prime examples of the current crisis situation.

Offshore drilling market

The offshore drilling market could even be facing another major threat, if the news coming out of India is right. In light of the India-China military and geopolitical rivalry, offshore drilling companies and shipyards are now in the crosshairs of the Indian officials.

Potential direct links between international drillers and the Chinese government could be a future threat to the sector. At least in India after that the Indian government has started an assessment of the position of Chinese government-linked investors in Dubai-based Shelf Drilling. The latter offshore driller holds almost 30 per cent market share in India’s shallow water oil drilling market, in terms of drilling rigs on charter.

The issue has come on the table due to the fact that the Indian government and its agencies have restricted, or even banned, the use of Chinese products and services in the country, following the recent flare-up along the border. Shell Drilling, listed on the Oslo Stock Exchange, and a major largest pure-play jack-up oil drilling rig contractor, works in India mostly for state-owned ONGC Ltd, India’s biggest explorer of oil and gas.

News that China Merchants and Great Wall Ocean Strategy & Technology Fund (China Merchants), a $1-billion marine industry-focused fund sponsored by China Merchants Group (CMG), is the largest shareholder of Shelf Drilling with a 19.7 per cent stake, is a possible major security issue.

China Merchants is a $1 trillion diversified group fully owned by the Chinese state. The jack-up rigs were constructed at China Merchants Heavy Industries (CMHI), the world’s largest CJ jack-up drilling rig manufacturer. Shelf Drilling operates eight rigs in India of which seven are currently on contract with ONGC out of the 25 jack-up rigs chartered by ONGC. All seven are deployed in the hyper-sensitive Arabian Sea region. Several of these are located near Mumbai, the financial capital of India.

According to Indian government officials, the presence of the Chinese government in the “strategic and sensitive offshore oil drilling sector” has become a matter of concern. Since years, Chinese companies linked to the Beijing government are barred from bidding for Indian port construction and operation contracts mainly due to the sour political relations between the two sides. India is also discussing to classify exploration and drilling of oil and gas as a strategically sensitive sector (both economically and for national security), and accordingly provide protection and oversight by restricting participation in the sector to entities.

Taking the Indian developments to a more global power play, the Indian views could be taken over soon by others too. An emerging anti-China position in the EU and USA could result the coming months in a focus on Chinese maritime sector investments and the stranglehold some of these Chinese parties have. Offshore oil and gas projects are until now not regarded very sensitive, but looking at the current production regions and maritime position, an opposite position could be supported very soon.

If these issues are going to play a role, the OFS, and especially offshore rig markets, will be heading for a major restructuring. Blocking or restraining Chinese government interference and power play in oil and gas developments are likely to see some support in Washington, Brussels and India. Domestic support for the struggling maritime sectors in these regions is already available. For offshore vessel or jackup companies it looks to be time of reassessing their options. Better to be prepared than to be confronted by political and security facts without a warning.

For all non-Chinese parties in offshore drilling it will be a necessity to keep an eye on the Indian developments, while addressing other options. COVID already is a Black Swan of unknown importance. Threats from Chinese interference could be having major impact on the valuations of them all.

Did COVID Kill LNG Natural Gas Dreams?

The current minimum amount of positive figures or green shoots are swiftly removed by new depressing figures of crude oil stock volumes in USA or lower estimates of OECD and MENA region GDP figures for 2020. The total impact is still unclear, but one thing has become obvious, energy demand and supply is under pressure, but not yet balancing out the right way.

At present, the main focus when talking about energy demand destruction is on crude oil and its products. Clearly, oil is struggling, but its sister, natural gas is totally on life-support.

The Golden Age of Gas, as presented by the International Energy Agency at the beginning of the 21st Century, seems to be a very short Age, as we are now entering a possible Ice Age of Gas. Demand worldwide is fledgling, main consumer markets are showing no increased demand figures, while the future demand is in doubt.

With being promoted worldwide as the energy transition fuel, natural gas and LNG have been promoted exponentially. The world’s leading oil and gas companies, such as Shell, ENI, Total, in cooperation with national oils QP, ADNOC, Gazprom and others, all have made the ‘rational’ choice to invest in the natural gas E&P sectors from the end of the 1990s onwards.

Success seemed inevitable, as natural gas or LNG was the preferred fuel of choice.

Nobody expected however a main competitor on the horizon, US shale gas. The latter’s revolutionary capture of the global market destabilized the projected gas market fundamentals and brought price levels down substantially. Demand still grew, as prices were very competitive, but supply continued to outpace it.

Still, investments in on- and offshore gas projects kept pouring in, as seen in East Med, offshore Nile Delta Egypt, Australia and Qatar. The global gas market shook on its fundamentals. The emergence of COVID-19 however could be a major shock to its total future. At present, a long list of gas producers is filing for bankruptcy, such as US company Chesapeake and more than 200 US shale producers, or are considering a total reassessment of ongoing and future investment projects.

The Golden Age of Gas has become an Ice Age of Gas.

The latter is for sure the case for LNG projects worldwide, that are not only confronted by COVID-19 but a total out of touch with the market supply volume the coming years. Without COVID-19 the market already would have been hitting a major slump due to overproduction and sluggish demand growth.

New projected production volumes, especially in East Med, Mozambique, Brazil, Australia and even in the GCC (Qatar, Saudi Arabia, Abu Dhabi), are going to be very hard to sell at commercial price levels. Some even expect that if no real measures are being taken, and production expansion continues, major LNG and gas producers could be facing the same dark scenarios as WTI in April. Negative prices are not out of reach, if the market refuses to go to a restructuring very soon.

Non-American gas producers should understand that with oil prices hovering around $40 per barrel Brent additional shale oil and gas production will come again online. Higher price settings for crude oil and NGLs will boost US shale gas production for sure. Without increased US domestic demand the only way is out, entering the global markets.

Future investment projects in Qatar, Saudi Arabia and East Med, are facing enormous challenges. Qatar’s LNG strategy has been working for decades, proponing the Peninsula into the Ivy League of gas producers, but now could become a boomerang full of pain. The end to the Qatari production moratorium, in principle a wise choice, however has come at the wrong time. Demand for these additional volumes doesn’t exist.

The multibillion investments presented by Doha in E&P and additional LNG carriers could be a major blow to its commercial existence. The same is the case for the high-profile East Med gas adventures of Egypt, Israel and Cyprus. The continuing exploration success stories presented by Italy’s ENI, French major Total and others in Egypt or Cyprus have become a new version of a Pyrrhic victory. Giant reserves are being found, LNG production is available, but customers are hiding or retreating even. Domestic regional demand will not be enough to counter supply, while European customers can receive LNG volumes at lower prices.

This time success or a Golden Age scenario has turned into a major black hole. Investments are made, commitments are there, reserves proven but demand is down, due to a virus. Not even Asia’s gigantic markets are able to take advantage, as their own situation is also dire.

Some analysts warned already in the 1990s that the high profile transition from oil to gas producer, as stated by Shell, BP and others, could backfire. Current financials are not yet showing it in full, but profit margins of the main gas producing oil majors will be lower for a longer time. No option anymore to counter lower gas prices by higher oil margins, as they have lost a pivotal oil market position since years.

National oils, especially QP, ADNOC or its counterparts Gazprom and others, are in the same boat. Gazprom reported, as shown by Russia’s Federal Customs Service (FCS), that it being hit by lower export gas prices and volumes. FCS data show that the company’s gas export revenues in the first five months of the year plunged 52.6% to $9.7 billion, while shipments declined 23% to 73 billion cubic meters (Bcm). May’s export revenues came to $1.1 billion – which is 15% lower than April. Physical exports were down 1.7% m-o-m to 11.9 Bcm. When compared to 2019 figures, Gazprom’s May 2020’s export revenues were 61% lower and volumes were 24% down.

Going for the well-known transition fuel natural gas is currently putting these companies on a rowing boat and not anymore a speedboat. Profitability of the natural gas upstream and downstream sector has always been low, especially when looking at the crude oil hey-days. Investors now also will start to reassess their involvement.

Lower ROIs, a bleaker future than presented and a still continuing immense gas supply glut, is not something investors are happy about. Seems that IOCs and NOCs are now looking at a home-made Sword of Damocles. COVID-19 even can make it worse if major economic policies, such as the EU’s Green Deal, are going to be implemented earlier. Without even the option of being the energy transition’s fuel of choice, natural gas could be put on a slow burner for the next decade. The current bearish gas market, due to prices averaging under $2/MMBtu in 2020, no light is at the end of the tunnel.

LNG’s overall situation is even worrying, as costs are higher than commercials are offering at present.

Worldwide LNG projects are also partly doomed, as LNG price settings are either putting projects on ice or major delays of FID is to expected. Global Energy Monitor reports in its Gas Bubble 2020 report that LNG projects that are still within the pre-construction phase have experienced a “widespread pullback, including the quiet abandonment of a large number of projects.” The same report reiterated that for the period between 2014 and 2020, the failure rate for proposed LNG export terminal projects is 61%.

It also identified 29 LNG export terminal projects that have since 2014 either been delayed, cancelled, abandoned or are facing substantial challenges. The report also states that in total, companies had announced plans to build $758 billion of projects that are as yet in the pre-construction phase. But with 20 projects now in jeopardy, including nine in the United States, that planned capital outlay could be reduced by $292 billion, or 38%, if the delays persist indefinitely.

Shell Impairments Support Bearish Market

In contrast to the current optimism in the MSM about oil prices, increased demand and a possible return of global economic growth, the Dutch IOC put a huge damper on the latter. As already stated before current optimism in the market is not based on fundamentals but mainly on a perceived optimism at institutional investors and banks. The current upsurge in oil prices is still unfounded, as now also Shell reiterates by taking an impairment of between $15-22 billion for 2020.

With a slew of bad figures, the IOC is in line with British oil major BP’s actions the last weeks. The impact of the COVID-19 pandemic and its disastrous effects on energy demand and economic growth is slowly becoming clear some parties. Big Oil has been hit severely in Q2 2020, more than analysts have agreed upon before. As Shell stated none of its business groups has been left unscathed.

Not only the results in Q2 2020 has been dramatic, the company, as also stated by BP and others, but COVID and the unexpected oil and gas demand destruction will also have a long-term effect on commodity prices. The market slowly starts to realize that not only crude oil and natural gas/LNG has been hit, downstream at the same time has been hit too. The total write-down of $15-22 billion is dramatic, but maybe it will not even be the full amount in the coming years.

As indicated before, oil prices are hit and will be depressed for the long term. For 2020 higher price ranges almost are out of reach, as the drop in demand for crude oil and gas is still large. Some green leaves have been shown in Asia and some European countries, but the latter is still very weak. Re-emergence of COVID hotspots in EU and Asia, combined with continuing dramatic developments in the USA, Latin-America and Africa, are no real basis for higher price settings.

At the same time, the current crude oil storage volumes are still at historic high levels, leaving no real room for a surge in prices, even if demand would increase substantially. In its update, Shell reiterated that all positive signs in the market are very fragile.

The Dutch major indicated that its own oil-product sales volumes are expected to be between 3.5 million to 4.5 million bpd in Q2 2020, which is a dramatic 3.1-2.1 million bpd drop from the same period last year.

Market analysts should however look not only at the overall production or delivery figures but at the company’s assessments of oil prices in the coming years. For 2020, Shell, as BP, is much less bullish than financial institutions such as Bank of America (BofA)or others. BofA’s Global Research team stated last week that it lifts its oil price forecast for this year and next as demand recovers from coronavirus-linked shutdowns, the OPEC+ output cut deal curtails supply, and producers slash capital expenditure.

The bank expected Brent crude oil averaging $43.70 per barrel in 2020, up from a previous estimate of $37. In 2021 and 2022, the bank forecasts average prices of $50 and $55 a barrel respectively. BofA also forecast that “a pattern of falling inventories across most regions should emerge as we move into H2 2020. This optimism is clearly out of reach with real fundamentals on the ground. Norwegian consultancy Rystad Energy, however, has warned that the downside risk in oil markets is still very much alive. In its report Shell stated that it expects a Brent oil price of $35 for 2020, reaching $40 per barrel in 2021, $50 2022 and 46$ in 2023. Even that the price expectations are based on long term 2020 real terms, even these figures look for 2020-2021 still a bit optimistic.

Taking into account Shell (and BP) reporting, the short-term looks bleak. At least 2020 in plain terms looks like a possible write-off. If optimism on share markets is also hit by reality, a new negative spiral could hit markets. When only looking at fundamentals, combined with increased economic and geopolitical unrest globally, there is no real justification for oil market optimism in 2020. The next 6 months will be very volatile. Optimism should instead be pointed towards 2021. The price upward potential for 2021 is clearly available.

Low investments upstream, combined with large-scale shutdowns and bankruptcies are prime factors to take into account. Even if demand stays subdued, the market could change from a demand-driven to a supply constraint market. An average crude oil price (Brent) of above $40 per barrel is wishful thinking in 2020. 2021 could be bullish, pushing the bears back into hibernation. When looking at share prices, 2020 is however already interesting, if you have a long-term view. Current PE levels are still reasonable, but will most probably become hot end of 2020 – beginning 2021.

“Never Sell Shell” Adage Goes into Dustbin, IOC Future in Doubt?

With a surprise statement to the financial world, the Dutch-British oil giant has changed its dividend policy with a bang, removing part of the attraction to institutional investors. For the first time since 1945 Shell has cut its first-quarter payout by two-thirds amid coronavirus crisis.

Shell cuts dividend for first time since WW2

The FTSE largest dividend payer has decided to cut its dividend due to the collapse of global oil prices due to the coronavirus pandemic. At present financial centers are reeling from the news, as the Shell dividend was a major basis to hold the company’s shares for thousands of retail investors and pension funds. In a reaction Shell’s CEO Ben van Beurden, stated that the company would take “prudent steps” to protect its financial resilience “under extremely challenging conditions” caused by Covid-19.

One of the main underlying issues for the dramatic decision by Shell are the dramatic financial figures reported for Q1 2020. In its financial statement the IOC reported that its profits in Q1 tumbled by 46% to $2.9bn (£2.3bn), in comparison to $5.3bn in Q1 2019. Van Beurden reiterated that the dividend cut is based on the need to address the continued deterioration in the macroeconomic outlook and the significant mid- and long-term uncertainty.

He also said that it was meant to bolster the company’s resilience, underpin the strength of Shell’s balance sheet and support the long-term value creation. The company still will pay out a total dividend of $3.5bn for the quarter to its shareholders.

Shell’s move has come at a difficult time

As the financial world is fully focusing on the impact of Corona, the global lockdown and expected negative economic growth for 2020. At the same time, Shell’s competitors, such as British oil giant BP, are not yet deciding to cut their dividend. Bernard Looney, BP’s CEO, stated this week that the board had decided not to cut its dividend for the first quarter despite plunging to a loss. The BP executive however has indicated that there could be dividend cuts coming if the current situation deteriorates further.

Shell’s decision will have shocked its shareholders, especially the retail investors, but also pension funds, as most of them will have been counting on the historical payouts for their total investment returns. The fact that Shell has decided to go this way is a real sign that the privately owned oil and gas sector is fighting for its survival.

Whatever optimism is still there in the market, the last 24 hours partly supported by better than expected storage figures in the USA, will disappear for sure when investors and analysts start to understand that the situation is very dire. Large IOCs and independents will be able to survive the current onslaught, due to their balance sheets and cash available, but the future of others, especially high-cost producers, will be very dark.

The Shell move is not a one-time issue, it is a sign that investors are entering a new world. Without the attractiveness of high dividend pay-outs, the overall attractiveness is becoming bleak. If the Shell example is going to be followed by others, institutional investors and retail investors will for sure have a look at their total portfolio in oil and gas, and most probably will head to other sectors based on ROIs and other issues.

Lower investment attractiveness is a real threat, as future investment strategies of IOCs and Independents will depend on the views held in the market. If returns are threatened, and a sacrosanct Shell dividend is removed, financing costs for most will increase substantially.

Another still undervalued issue of most IOCs and Independents could now also for once emerge on the desks of analysts. Most privately owned oil and gas companies have no real reserve potential to build a future on. If there is no change in attitude at the HQs of the likes of Shell, BP, ExxonMobil or Statoil, these companies are going to fight an uphill battle they will lose.

With an average of 3-5 years of reserves/production ratios, most are in dire need to find or acquire more reserves to prolong their life. Cutting dividends is dramatic, blood is on the wall in investment land, but if Shell and others are not going to invest in upstream assets right now, as prices are attractive, more blood is going to be spilled.

OPEC and G20 Meeting Outcome Increases Instability in the Oil Market

The outcome of the G20-OPEC+ oil production cut discussion is very disappointing. The agreed-upon 10+ million bpd production cut is based on semantics and not on facts able to hold in the market.

After a long OPEC+ meeting, including a long list of non-OPEC producers, a disputable outcome was presented, with a Mexican standoff threatening even a full agreement until now. The position taken by minor oil producer Mexico has ransomed the discussion the last days.

Media coverage of the hardline position taken by Mexico, refusing to cut production as requested, and the meddling of Washington in the matter, has increased the fog in the oil market. OPEC leader Saudi Arabia’s attempt to quell some of the fears existing in the market that the oil price war between Moscow – Riyadh and Washington is continuing has fallen flat. Even if there will be an agreement in the coming days, to present by a full fanfare of politicians worldwide as a breakthrough, fundamentals didn’t change, and downward pressure on oil prices is to continue.

The last days it has become clear that there is a real power struggle ongoing in oil markets, in which the three main oil producers are heading to a High Noon Scenario and not a Mexican standoff. By putting up a fog of semantics, promising to stabilize the market, but in reality going only back, in the most optimistic scenario, to the scenario of before the OPEC+ price war started, oil markets are in for a nasty surprise.

History has shown that OPEC+ oil production cut compliance has always been a major issue, the only ones keeping to the letter of the agreement have only been Saudi Arabia, UAE, Kuwait and some other GCC producers.

Russia, one of the two pillars under the OPEC+ agreements, has never committed 100% to the agreements. To expect OPEC+ and a long-list of non-OPEC producers to cut the set amounts of the preliminary new agreement is the same as believing in Santa Claus or the Easter Bunny. When you grow up you get disappointed as the latter has been put in place to sweeten and fool kids to comply with targets set by parents.

The same is for the current oil market agreements. Without any doubt, non-OPEC producers are going to fail their commitments. At the same time, OPEC+ is going to be fighting internally to keep their own commitments in place. The market should realize that several main OPEC producers are not even in the agreement, such as Iran, Libya and Venezuela. Any production increase by these parties is not blocked, while the agreement is meant to stabilize markets.

The position of the USA is critical, as OPEC+ has stated before, but the Trump Administration’s standpoint of voluntarily production cuts by its US based producers is non-functional. Without real cuts in US shale, the main culprit behind the current volatile global market, no deal will even survive the next weeks. Washington’s offer to buy US shale volumes for its SPR is only supporting shale, not the market in reality. It is a protectionist government statement with as only target to support the fledgling shale oil production owners. The market should however still see it as additional production to be taken out of the global market in due course.

Overall the whole media circus around the OPEC+ and G20 meetings didn’t change the market at all. Fundamentals are still very negative, as demand destruction continues, hitting levels of more than 20+ million bpd, not being removed by any of the current agreements.

The latter is also not based only on production increases but on Corona Virus related lockdowns and economic growth decline. Until the latter is being removed, no light is at the end of the tunnel. By continuing the survival of some culprits in the current stalemate, US shale and non-OPEC production increases, the market’s oil ship is still heading towards a rock.

By taking out 10+ million bpd, even at January 2020 levels, storage volumes will increase, ending up with a major shakedown in upstream. If there is no storage available, production needs to be shut in. This weekend’s agreements are only delaying the inevitable, production shut-ins and Chapter 11s.

At the same time, the continuation of the oil price war is still a real option. Moscow, Riyadh and Washington are not yet eager to end their market share strategies. The ongoing pressure on Saudi Arabia by Washington and a list of activist US Senators is also going to backfire. The political pressure put on Saudi Crown Prince Mohammed bin Salman by Washington power brokers, even threatening Saudi Arabia of losing its preferential military support status, will not be taken lightly. Russia is quiet in the latter, showing another possible chess move towards MBS, maybe offering to step into the void. The current US pressure is out of touch with reality, threatening a further conflict with Saudi Arabia and possibly UAE and others.

The end of the current Mexican standoff and the signing of an official full agreement will not be a long-term support mechanism. Oil prices the coming days will show a higher volatility even than before. Possible price gains the next days could be wiped away by a deeper analysis of the real issues in the market. The downward potential on oil prices has even increased substantially. Market players’ subdued optimism at present could change into a deep disappointment.

At the same time, OPEC+ and the US/G20 moves have clearly brought to light that the current market cant be managed. The demand destruction is too high, while oil production is not easily able to be removed. Pain for smaller oil producers, independents and minnows will increase to built up, as OPEC and IOCs are not willing to shut down in reality. Prices will increase, current price moves are not realistic. Current oil prices above $20 per barrel will be hit hard. Prices could move to $15-10 per barrel easily. Until the Corona impact is removed, no real positive options are available. Low oil prices will continue, even after Corona, until mid-2021, as storage buildup is mitigating any upward options.

By Dr. Cyril Widdershoven, PhD, Berry Commodities