1st December 2023

Good morning crew.

Here’s Both Barrels to wrap up another hectic week in the energy space:

• 👀 Shades of 2014 as OPEC cuts while US surges

• 🇧🇷 Brazil joins the gang

• ✈️ Oxy in Omaha

• 🚢 The rise of dark tanker transfers

• ➕ plus a boon year for Malaysia; BP takes full ownership of Lightsource bp; more delays for Trans Mountain?

Have a great weekend. Catch you Monday.

📈 THE NUMBERS

Despite further OPEC cuts, oil prices fell. Why?

Probably because the market sees the cuts as an admission from OPEC that demand is not as strong as they’ve been insisting. The fact they felt the need to cut further is a bearish signal.

The current environment, with US shale output growing fast, also has shades of the 2014 downturn. More on that below…

🗞️ WELL-HEADLINES

 🗽 North America

• Oxy’s jet spotted in Omaha - which is where its biggest investor, Warren Buffet, famously lives. Oxy is rumoured to be lining up a ~$12bn bid for CrownRock. The jet’s movements are reminiscent of 2019 when Oxy acquired Anadarko for $55bn. Deal announcement imminent?

• US crude output hits new high - on the same day that OPEC+ announces deeper cuts, US liquids (crude + NGLS + condensates) production hit a new record high of ~20 mmb/d in September.

• EIG teases more LNG deals - the investor, which is currently in talks to acquire a multi-billion dollar stake in the Australia Pacific LNG project, has said it will soon announce another LNG deal of comparable size.

• Even more delays for Trans Mountain? - the developers of the troubled Trans Mountain pipeline extension want to install a smaller pipeline for a section of the route due to “very challenging” construction conditions. If the request is denied, they say it will delay the project by another 2 months.

• US tops up SPR - the government has purchased a modest 2.7 mmbbls to help refill the SPR. Only another 200 mmbbls or so to get it back to where it was a couple of years ago…

🏰 Europe

• “Dark” tanker transfers on the rise - increasing numbers of oil tankers are transferring their loads at seas to other tankers and switching off their trackers to dodge sanctions. Estimates suggest this happened 792 times in Q3 (vs ~180 in Q1 22), with most happening in Russian waters.

• Waldorf not for sale - the UK indy has said that, after considering various strategic options, it isn’t looking to sell itself. Organic cash flow, an undrawn credit facility, and divestment of US assets has put the company in a stable financial position.

• Europe needs gas - the head of Uniper, a major German utility bailed out by the govt last year, commented that Europe needs more LNG to ease its energy crisis but should move towards hydrogen in the long term. Or Europe could get real and start encouraging domestic gas production…It has no shortage of resources.

⛩️ Asia & Oceania

• Some Black Sea exports resume - some crude loadings have restarted at one of the Black Sea’s key export terminals for Kazakhstan crude that had been closed due to storms. The dire weather has disrupted up to 2 mmb/d of exports from the region.

• A fruitful year for Malaysian exploration - the country announced that in 2023 it made 19 new discoveries and added over 1 bnboe of new resources. It drilled 25 exploration wells, the highest number in a single year since 2015.

• Stuck LNG tanker freed - the vessel lost power on 28th November, blocking other tankers from loading at the 4.5 mtpa APLNG facility, but has now been removed from the terminal.

🦁 Africa

• Total exits Natref refinery - the major sold its 36% stake in the South African refinery to the Prax Group as part of its strategy to “divest non-core assets”. The value of the deal was kept under wraps.

🌍 GEOPOLITICS & MACRO

• OPEC+, what went down? - lots to digest but here are the highlights:

  • Saudi and Russia are extending their voluntary additional 1 mmb/d and 0.5 mmb/d cuts until the end of Q1 2024.

  • Some other OPEC+ members will cut an additional ~700 kb/d: Iraq (223k), UAE (163k), Kuwait (135k), Kazakhstan (82k), Algeria (51k) Oman (42k). These are effectively the “new” cuts.

  • This takes the total voluntary cut to ~2.2 mmb/d, which is in addition to the cuts agreed earlier this year. By my calculations, that takes the total volumes that OPEC+ is holding back to ~5.9 mmb/d. That’s a lot of spare capacity…

  • Note that the baselines against which these cuts are made have changed for some countries so these cuts do not necessarily represent an overall reduction in supply. For example, the UAE is cutting by 163k but its baseline increased by 200 kb/d so its production will actually go up by 40 kb/d. Confusing. I know.

  • Brazil is joining OPEC+. No details were released about whether it would participate in production quotas.

  • Angola is rejecting its quota and says it will break it, presumably putting its future in the cartel in doubt.

• US aiming to halve Russian energy revenue by 2030 - a US diplomat told the FT that sanctions will need to stay in place “for years to come” to reach that goal. Consider me skeptical. Sanctions have so far been fairly ineffective and Russia is gradually shifting its energy sales towards Asia.

💨 CARBON, CLIMATE, & OTHER ENERGY STUFF

• BP acquires full stake in Lightsource bp - the major already owned a 50% interest in the solar developer and has bought the remaining 50% for £254m.

• COP agreement on “loss and damage” fund - a commitment by developed nations to provide ~$400m to compensate poorer countries for damage caused by climate change has been hailed as a first big succes at the summit. Meanwhile, the UK’s King Charles, PM Sunak, and Foreign Secretary Cameron all took separate private jets to travel to Dubai…“Do as I say, not as I do”.

🛢️ BOTTOM OF THE BARREL

I’m old enough to remember the oil price war of 2014.

In fact, I entered the industry as a fresh-faced wide-eyed oil analyst just as the bottom was falling out of oil prices.

A baptism of fire indeed.

It was a classic price war. US shale was the relentless, swashbuckling new kid on the block, growing at eye watering rates. Drill, baby, drill.

The old guard in the Middle East, with far lower production costs, were not about to let their market share be eaten up by this new maverick. And they certainly wouldn’t keep cutting output to support their new rival.

So Saudi et al opened the taps. It was chaos. Oil prices sank from $110 to $29/bbl. Hundreds of shale producers went bust. The whole global industry suffered for years. But it worked.

Eventually order was restored to oil markets and US output stabilized as producers, pressured by burnt investors, promised more discipline.

Fast forward nearly 10 years, and US growth is again surprising to the upside while OPEC+ throttles its output.

With the cartel now holding back nearly 6 mmb/d of output, I can’t see them cutting again to make way for more US volumes.

The short-term oil market feels fragile. Only one OPEC spat or demand disappointment away from a sharp downward correction.

History doesn’t repeat itself, but it rhymes.

👋 BEFORE YOU GO 

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Thanks for reading. Have a day out there.