Physical oil and futures align to tell story of a tighter market

MOSCOW (MRC) -- The physical crude oil market and the structure of the oil futures curve have rarely been more aligned over the past few years than in recent weeks, and they tell a counterintuitive story of a tight oil market next year, reported Reuters.

While OPEC and the International Energy Agency point to a swelling oil glut next year due to booming non-OPEC supplies including in the United States, the physical market offers a different story.

Traders are prepared to pay near-record premiums for sweeter barrels as new marine fuel regulations from 2020 encourage refiners to switch to crude grades that produce smaller quantities of high-sulfur fuel oil.

However, premiums for heavier grades, which produce more fuel oil, also continue to rally due to a deficit created by US sanctions on Iran and Venezuela.

In addition, the structure of the oil futures market shows that premiums of front months to later dates – known as backwardation - have narrowed in recent weeks, also suggesting the market’s expectations of a glut are diminishing somewhat.

To be sure, benchmark oil futures do not necessarily follow the physical market and could still decline next year if global oil demand falls because of the U.S.-China trade dispute or if US oil output surprises again on the upside.

Soaring physical crude prices are also negatively impacting refining margins, often prompting refiners to cut processing.

New marine fuel rules have created a rally in certain crude oil grades. From January 2020, the United Nations’ International Maritime Organization (IMO) will ban ships from using fuels with a sulfur content above 0.5%, compared with 3.5% now, unless they have sulfur-cleaning kits called scrubbers.

Nigeria’s biggest crude stream, Qua Iboe, is valued at a premium of USD3.30 a barrel, the highest since 2013, Refinitiv Eikon data shows. Azeri Light, or BTC, has a premium of USD5.10 to the benchmark, its highest since 2013.

Both crudes are valued especially highly by simple refineries as they are ideal for producing IMO-compliant bunker fuel oil, said Eugene Lindell, an analyst at JBC Energy in Vienna.

"The focus now is on not producing high-sulfur fuel oil at all costs. If you are a simple refinery, it comes down to choosing the right crude,” he said.

“The end result is a lot of people are going to be seeking these grades and that boosts the price. They will remain strong and may increase further."

While the rally in those two light, sweet grades stands out, sour crudes such as Russian Urals have been supported by other factors. Urals in northwest Europe is trading at a premium of USD1 a barrel to dated Brent, a record high.

"The strength in sour crudes, despite IMO 2020, is due to the loss of sour crude supplies from Venezuela and Iran and high demand for heavy molecules to feed the conversion units of more complex refineries," analysts at Energy Aspects wrote.

US sanctions on Iran and Venezuela have forced the two OPEC members to cut oil exports sharply, tightening the market for sour crude.

Voluntary OPEC cuts due to a supply pact that producers are expected to renew in December have also curbed output. Expectations of a growth slowdown in U.S. shale could also tighten the market further.

North Sea crude grades, which underpin the Brent futures contract, are also rallying. Ekofisk, one of the five grades that can set the value of dated Brent, jumped to its highest since 2013 on Tuesday.

The rally in physical crude is being reflected in strengthening time spreads in the Brent futures market, even though the outright price at USD62 a barrel is well below this year’s high of USD75.

The first-month Brent contract is trading at a premium to the second month, indicating current tight supply. Backwardation persists for future months, although it becomes shallower next year.

"We expect Brent oil prices to continue trading around our ISD60-a-barrel forecast with backwardation likely to persist as the ongoing OPEC cuts and slowing shale activity offset rising other non-OPEC supply and moderate demand growth," Goldman Sachs said in a report this month.
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MOSCOW (MRC) -- With Saudi Aramco yet to name any major foreign investors in its upcoming share sale, Malaysia’s state energy company Petronas decided to take a pass, reported Reuters.

Expectations that Aramco customers and allies around the world would take significant stakes in the company have so far not materialized, with the listing looking like it will be reliant on local retail and institutional investors.

Petronas follows Russia’s second largest oil producer Lukoil in turning its back on the initial public offering (IPO) which is likely to rank Aramco as the world’s most valuable company.

Petronas and Aramco have a joint venture in a USD27 billion refinery and petrochemicals complex in southern Malaysia that is set to start commercial operations this year.

Aramco kicked off the sale process on Nov. 3 after a series of false starts and Petronas, which has a joint venture with the Saudi firm in Malaysia, said it had been asked to invest.

"Petronas would like to confirm that after due consideration, the company has decided not to participate in Saudi Aramco’s initial public offering exercise," Petronas said in an emailed statement.

Aramco is a major oil supplier to China, Japan and South Korea and their plans for the IPO are not yet clear, however, the head of Japan’s largest refiner said earlier this month that Japanese companies were unlikely to invest because it was difficult to ascertain Aramco’s true value.

Aramco plans to sell 1.5% of the company, looking to raise up to USD25.6 billion and giving the company a potential market value of between USD1.6 trillion and USD1.7 trillion.

It is the centerpiece of Crown Prince Mohammed bin Salman’s plans to diversify the Saudi economy away from its reliance on oil.

But the company has canceled marketing roadshows for its listing outside of the Gulf because of the lack of interest from foreign institutional investors.

That has raised questions about to what extent the listing can really diversify the country’s economic interests.

"Just selling a 1.5% stake in an oil company is not really going to achieve an enormous amount," said Charles Hollis, a former UK-Saudi diplomat and director at intelligence consultancy Falanx Assynt.

Aramco did not immediately respond to a request for comment on potential anchor investments or the impact its IPO will have on diversifying the economy.

Saudi Arabia’s Samba Financial Group said on Thursday that the IPO has attracted about 73 billion riyals (USD19.47 billion) in institutional and retail orders so far.

Although no major state company or fund has stepped forward, talks have been taking place with sovereign investors including the Abu Dhabi Investment Authority, Singapore’s GIC and other funds, sources have told Reuters.

As MRC informed earlier, Saudi Aramco, which temporarily lost half of its oil production following the September 14 attacks on two key oil facilities, is running its local refineries at full capacity and is forging ahead with plans to start up new refineries. The company is also starting up a joint venture refinery in Malaysia next year. According to Aramco's bond prospectus released in April, the refining and petrochemical joint venture with Petronas - the Malaysian national oil company - collectively known as PRefChem, was supposed to start this year.

The PRefChem joint venture includes a 300,000 b/d refinery, an integrated steam cracker with capacity to produce 1.3 million mt of ethylene located in Johor, Malaysia. Aramco was supposed to provide a significant portion of PRefChem's crude supply under a long-term supply agreement. Jazan and PrefChem will help Aramco reach a gross refining capacity of 5.6 million b/d, it said in the prospectus. The company currently owns and has stakes in four refineries abroad with a total refining capacity exceeding 2 million b/d.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and polyprolypele (PP).

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 1,436,390 tonnes in the first eight months of 2019, up by 9% year on year. Shipments of all PE grades increased. At the same time, the PP consumption in the Russian market was 909,260 tonnes in January-August 2019, up by 10% year on year. Shipments of PP block copolymer and homopolymer PP increased.

Saudi Aramco is an integrated oil and chemicals company, a global leader in hydrocarbon production, refining processes and distribution, as well as one of the largest global oil exporters. It manages proven reserves of crude oil and condensate estimated at 261.1bn barrels, and produces 9.54 million bbl daily. Headquartered in Dhahran, Saudi Arabia, the company employs over 61,000 staff in 77 countries.
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MOSCOW (MRC) -- Exxon Mobil reported a 49% decline in third-quarter earnings on lower oil prices and higher costs, reported CNBC.

Exxon earned USD3.2 billion in the third quarter, down from USD6.2 billion in the same period a year ago.

The company spent USD7.7 billion on capital and exploration expenditures, including in the key Permian Basin area. Oil-equivalent production rose 3% compared to a year earlier, reaching 3.9 million barrels per day. Liquid production and natural gas volumes also increased by 4% and 1%, respectively.

The largest spike came from production in the Permian Basin, which grew 7% from the second quarter of 2019, and more than 70% year-over-year.

"We are making excellent progress on our long-term growth strategy," Exxon Chairman and CEO Darren Woods said. "Growth in the Permian continues to drive increased liquids production and we are ahead of schedule for first oil in Guyana. The value of our position in Guyana improved further this quarter with an additional discovery, our fourth this year. We are also making good progress on our advantaged investments in the Downstream and Chemical," he added.

Woods also said that Exxon made progress on divesting its assets, which the company forecasts will generate USD15 billion in cash by 2025.

"The competitiveness of our portfolio was further enhanced with the divestment of non-strategic assets, reaching almost a third of our 2021 objective of USD15 billion," he said.

Earnings were boosted by a favorable USD300 million tax-related item.

For the year, Exxon stock is down 1% through Thursday’s close, lagging both the S&P 500 and the energy sector. The S&P 500 is up 21% in 2019 while the energy sector is up 1%.

Last quarter, Exxon beat top and bottom line estimates, as strength in the company’s upstream business offset weakness in the refining and chemical divisions. Profit did decline by 21%, however.

Falling oil prices, oversupply concerns and high production are among the factors that have hit the energy sector hard. It’s also especially vulnerable to any signs of a global growth slowdown.

As MRC informed before, in September 2019, ExxonMobil announced plans to spend GBP140 million over the next two years in an additional investment program at its Fife ethylene plant (UK), which has a capacity of more than 800,000 t/y.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and polyprolypele (PP).

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 1,589,580 tonnes in the first nine months of 2019, up by 7% year on year. Shipments of all PE grades increased. The estimated PP consumption in the Russian market was 976,790 tonnes in January-September 2019, up by 4% year on year. Shipments of PP block copolymer and homopolymer PP increased.

ExxonMobil is the largest non-government owned company in the energy industry and produces about 3% of the world's oil and about 2% of the world's energy.
MRC

MOSCOW (MRC) -- Brazil’s state-run oil company Petrobras SA has started the binding phase for the sale of four refineries, reported Hydrocarbonprocessing with reference to a filing.

In this first divestment phase, Petrobras has put up for sale refineries Abreu e Lima, Landulpho Alves, Presidente Getulio Vargas and Alberto Pasqualini. Potential buyers will receive invitation letters.

As MRC wrote previously, in October 2017, Petrobras’s minority stakes in Braskem and Deten Quimica was excluded from Petrobras’s divestment program, according to a government decree published in Brazil’s Official Gazette. The decree prevented Petrobras from immediately selling its minority stake in Braskem, which had been announced a year earlier. A new decree will be required to release the stock sale.

And this week, Brazilian polyolefins producer Braskem named the current chairman of the board, Roberto Simoes, as the company's new CEO, replacing Fernando Musa. Musa will remain CEO through 31 December to help Simoes transition to the new role, Braskem said. Simoes's appointment will become effective on 1 January.

We also remind that Braskem is no longer pursuing a petrochemical project, which would have included an ethane cracker, in West Virginia. And the company is seeking to sell the land that would have housed the cracker. The project, announced in 2013, had been on Braskem's back burner for several years.

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 1,589,580 tonnes in the first nine months of 2019, up by 7% year on year. Shipments of all PE grades increased. The estimated PP consumption in the Russian market was 976,790 tonnes in January-September 2019, up by 4% year on year. Shipments of PP block copolymer and homopolymer PP increased.

Headquartered in Rio de Janeiro, Petrobras is an integrated energy firm. Petrobras' activities include exploration, exploitation and production of oil from reservoir wells, shale and other rocks as well as refining, processing, trade and transport of oil and oil products, natural gas and other fluid hydrocarbons, in addition to other energy-related activities.
MRC

MOSCOW (MRC) -- LyondellBasell announced construction on its propylene oxide (PO) and tertiary butyl alcohol (TBA) plant has surpassed 20 percent completion, with work shifting from foundation and infrastructure construction to vertical assembly, according to Hydrocarbonprocessing.

A key milestone of the project’s progress was marked by the recent delivery of a 25-story-tall, 601-ton distillation tower, which will be the tallest piece of equipment to be installed.

"We’ve moved another step closer to delivering our PO/TBA project, with construction taking place simultaneously at two of our sites," said Dan Coombs, LyondellBasell executive vice president for Global Manufacturing, Projects and Refining. "This project creates a long-term value for our investors and we remain on track to bring our largest PO/TBA facility in the world online in 2021."

The first pieces of structural steel are being safely installed at both construction sites, and installation of tanks, cooling towers and the flare will begin soon at the Channelview site.

"As our infrastructure work wraps up, we’ll soon begin to see the plants emerge from both construction sites as these large pieces of equipment are installed," said Joe Dorsch, PO/TBA project director. "We are one year into construction and our team has safely achieved several key milestones, which speaks to their talent and dedication."

Once in operation, the PO/TBA plant will produce 1 billion pounds (470,000 metric tons) of PO and 2.2 billion pounds (1 million metric tons) of TBA annually.

Based on an analysis by the Greater Houston Partnership, LyondellBasell’s USD2.4 billion PO/TBA project is estimated to generate more than USD450 million in tax benefits for the county, school district, community college and other local taxing districts over a 10-year period. The total project will create more than 2,200 construction jobs at the peak of construction and 160 permanent positions.

As MRC wrote previously, LyondellBasell has recetnly announced that Hyundai Chemical, a joint venture between Hyundai Oilbank and Lotte Chemical, has selected LyondellBasell's Lupotech T process technology for a low-density polyethylene (LDPE) and ethylene vinyl acetate (EVA) copolymers plant to be built in South Korea. The facility, to be built in Daesan, will have 300,000 t/y of capacity. No additional details of the project were available.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and polyprolypele (PP).

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 1,589,580 tonnes in the first nine months of 2019, up by 7% year on year. Shipments of all PE grades increased. The estimated PP consumption in the Russian market was 976,790 tonnes in January-September 2019, up by 4% year on year. Shipments of PP block copolymer and homopolymer PP increased.

LyondellBasell is one of the largest plastics, chemicals and refining companies in the world. Driven by its 13,000 employees around the globe, LyondellBasell produces materials and products that are key to advancing solutions to modern challenges like enhancing food safety through lightweight and flexible packaging, protecting the purity of water supplies through stronger and more versatile pipes, and improving the safety, comfort and fuel efficiency of many of the cars and trucks on the road. LyondellBasell sells products into approximately 100 countries and is the world's largest licensor of polyolefin technologies.
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