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U.S. refiners aim to lock in crude volumes after getting burned by shut-ins

June 23/2020

MOSCOW (MRC) -- U.S. refiners and other buyers of crude oil are reworking some of their supply contracts to guarantee volumes after many were cut off unexpectedly when a price collapse this spring led drillers to curtail production, sources said, said Hydrocarbonprocessing.

The effort reflects concern in the refining industry about the possibility of another drop in oil prices as world markets continue to reel from the economic fallout of the coronavirus outbreak.

Sellers will likely be forced to agree to the terms as buyers remain scarce in the oil market, traders and analysts said. U.S. oil prices crashed into negative territory for the first time in history in April as the pandemic crushed energy demand, prompting oil producers to shut in about 2 million barrels per day (bpd) of production, or nearly a fifth of the countrys output.

Normally a drop in prices is good for refiners, but only when they can get their hands on the cheap supply. Typically, physical crude sales agreements between buyers and suppliers at the wellhead specify a price differential to a floating benchmark that can rise or fall with the markets, but do not specify volumes that must be sold, allowing suppliers to hold back sales when the price is too low.

Now they are trying to install volume thresholds into the lease contracts, one of the sources, who works at an oil producer company, told Reuters. The seller typically has little clout in a lease agreement, said Sandy Fielden, analyst at Morningstar.

Adding a volume clause helps guarantee supplies for buyers, but to make such a change now is acting after the horse has bolted and the only producers who can meet the volume requirements are those with enough tankage at the wellhead to give them that flexibility."

Some producers are now also selling at discounted rates after failing to deliver in previous months when they shut wells, in order to avoid legal disputes with buyers, some of the sources said. Youre losing the price benefit now, but refiners are mad, another source at a shale producer said. There are a bunch of lease contracts that are going to read differently."

Some U.S. oil producers declared force majeure, an emergency clause typically set aside for acts of god or wars that provides some legal cover to breach contracts. But such declarations have drawn criticism from refining groups.

As MRC informed previously, global oil consumption cut by up to a third. What happens next in the oil market depends on how quickly and completely the global economy emerges from lockdown, and whether the recessionary hit lingers through the rest of this year and into 2021.

Earlier this year, BP said the deadly coronavirus outbreak could cut global oil demand growth by 40 per cent in 2020, putting pressure on Opec producers and Russia to curb supplies to keep prices in check.

We remind that, in September 2019, six world's major petrochemical companies in Flanders, Belgium, North Rhine-Westphalia, Germany, and the Netherlands (Trilateral Region) announced the creation of a consortium to jointly investigate how naphtha or gas steam crackers could be operated using renewable electricity instead of fossil fuels. The Cracker of the Future consortium, which includes BASF, Borealis, BP, LyondellBasell, SABIC and Total, aims to produce base chemicals while also significantly reducing carbon emissions. The companies agreed to invest in R&D and knowledge sharing as they assess the possibility of transitioning their base chemical production to renewable electricity.

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

According to MRC's ScanPlast report, Russia's estimated PE consumption totalled 721,290 tonnes in the first four month of 2020, up by 4% year on year. Low density polyethylene (LDPE) and linear low density polyethylene (LLDPE) shipments grew partially because of the increased capacity utilisation at ZapSibNeftekhim.  At the same time, PP shipments to the Russian market totalled 347,440 tonnes in January-April 2020 (calculated by the formula production minus export plus import). Supply exclusively of PP random copolymer increased.
Author:Anna Larionova
Tags:petroleum products, crude oil, PP, PE, ethylene, propylene, petrochemistry.
Category:General News
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