EOA Daily Energy Report

Surprise... Surprise.. Crude Quality Hits Again!

CHART OF THE DAY: Bullish for Oil

Figure (1)

Commentary:

1- The western flank of the Permian is becoming lighter and gassier, a sign that most of the growth in production in the tight plays is condensates. This is bullish for oil but bearish for NGLs.

2- While this is bullish for oil with implications for global oil trade, we expect oil companies to rapidly adjust their drilling strategies.

EOA’s Main Takeaway:

Crude quality matters. Although the increase in US condensate production may have caused concerns, it has a low impact simply because the surge is taking place in a specific area.  In addition, companies are likely to rethink their drilling strategies to focus on zones with lower API  similar to what happened in the eastern part of the Permian in Texas prior to 2017.  We discussed this subject in detail in our Weekly Newsletter on Feb 6.

This is another proof that the US shale industry is still young and in the learning phase.

STORY OF THE DAY: Bearish for Oil

TRADEWINDS: Chinese shipowners beat Greeks to top 2022 S&P chart with $15bn spend

Summary:

TradeWinds today reported that Chinese owners were the biggest spenders on secondhand vessels last year, surpassing Greek companies.  Citing VesselsValue’s senior content analyst, Rebecca Galanopoulos Jones, TradeWinds said that Chinese buyers spent $14.92bn on 542 vessels, Greek owners spent $9.77bn on 376 ships, while UAE owners spent $5.14bn on 271 ships. 

"These figures probably reflect a spate of deals for older tankers going to unknown interests in China and the UAE as a “shadow fleet” was created to move sanctioned Russian oil," TradeWinds wrote.

EOA’s Main Takeaway:

Amid sanctions on Russian oil exports, it is likely that some of these Chinese and UAE purchases are linked to efforts seeking to transport embargoed Russian oil clandestinely, or move “laundered” Russian oil – a subject we have been frequently covering in our Weekly Newsletter.  What this indicates is that a decline in Russian oil exports will be limited and sanctions, including price caps, will become toothless over time.  Additionally, and as more ships become available, the discount on Russian oil will be reduced.   

NEWS OF THE DAY: A Mixed Bag!

1-      REUTERS: Gulf nations to remain major oil suppliers to India for a 'long time', minister says

EOA’S Main Takeaway: A reconfiguration in the shares of oil producers in the Indian market due to discounted Russian oil will not affect the future of trade between India and top Gulf suppliers, particularly Saudi Arabia and Iraq. Saudi Arabia and Iraq will remain what we call “base suppliers”, but there will be times just like now—amid heavily discounted Russian oil in the market— when other producers will surpass them for a limited period.  Indian refiners are opportunistic buyers.

2-      BLOOMBERG: Reliance, BPCL Among Buyers Using UAE Currency for Russian Oil

EOA’s Main Takeaway: Russia does not want to use the US dollar, but wants a stable currency pegged to the dollar like the UAE Dirham. Moscow also needs a robust banking system such as that in the UAE.  Meanwhile, using the UAE currency will serve the interests of Independent Indian refiners who want to mitigate the impact of government intervention reflected in excess profit taxes and restrictions on oil exports.

3-      TRADEWINDS: Turkey’s Ceyhan oil terminal resumes operations after earthquake

EOA’S Main Takeaway: The Iraqi crude pipeline to Turkey's Ceyhan oil terminal—which carries the Kirkuk Blend produced in Iraq's northern Kurdish region— has resumed operations.  However, the uncertain situation in Turkey following the devastating earthquake, and considering the ongoing aftershocks, implies that operations have yet to return to normal. However, any impact due to the recent closure will be regional and will be felt mostly in countries that import this type of oil from Ceyhan, including Italy and Israel.

4-      CNBC: Azeri BTC crude loadings suspended at a major oil export hub in Turkey after earthquakes

EOA’s Main Takeaway: According to CNBC, “three trader sources estimated the force majeure could be in place for up to 10 days.” This indicates that until now we don’t know the full impact of the recent earthquake in Turkey on oil infrastructure. The impact will also be regional and will be felt mostly in countries that depend on importing oil from Ceyhan.

5-      WSJ: Fossil-Fuel Addiction Is Getting Harder for Oil Giants to Kick

EOA’s Main Takeaway: BP’s U-turn cannot be separated from the European Union’s sharp U-turn: returning to coal and oil.  BP’s reaction is logical since the company was pushed by the bloc to shift away from oil. And as many green polices fail over time, governments and energy companies will come to realize that more investments are needed in the oil sector to meet growing oil demand. 

6-      REUTERS: Ship-to-ship loadings of Russian Urals oil hit record in Med. in January – data

EOA’s Main Takeaway: This is exactly what our team expected:  the flow of Russian oil to Asia will keep increasing and traders will resort to cost-effective measures to maintain the trade. Additional sanctions will NOT change this trend.  It’s worth bearing in mind that  Iran was the master of such shipping practices with the help of China.  Russia, in its turn, took a page out of Iran’s book and made 1,000 books out of it.

7-      BLOOMBERG: China’s Oil Market Makes Comeback on Covid Zero Exit and Exports

EOA’s Main Takeaway: As we stated in our 2023 Oil Market Outlook, the rebound will mostly take place in the transportation sector, which is heavily dependent on oil. It will take time for the whole economy to recover, and for growth in oil demand to return to normal levels. We will see the impact in the second half of the year, mostly in the fourth quarter.

8-      BLOOMBERG: France's Latest Nuclear Halt Is a Reminder of Long-Lasting Nature of Problem

EOA’s Main Takeaway: Europe’s energy challenges existed prior to Russia’s invasion of Ukraine. The conflict has only made them worse. In France, long months of maintenance at a key nuclear reactor like the Chinon-1 show that the EU is still far away from energy security. In 2021, France contributed 52% of the EU total nuclear energy production.

 9- EIA Inventory Data

The Energy Information Administration (EIA) today reported an increase in commercial crude oil inventories by 2.4 million barrels (mb) to 455 mb, which is higher than the levels that could drive oil prices above $100 by more than 50 mb, based on our estimates (our estimates are based on several factors from which we deduce the level of inventories that will increase prices).

The EIA also reported an increase in gasoline inventories by 5 mb to 239.6 mb, and in distillate inventories by 2.9 mb to 120.5 mb.

Figure (1) shows US crude oil inventories in 2023 compared to previous years.  You can find more details on US oil inventories and weekly oil data in our detailed  Weekly Oil Data report.

Figure (1)

US Crude Oil Inventories (mb)

Source: EIA, 2023 and EOA, 2023