BP warns of volatile future for oil market as it returns to profit

Firm prepares to cut thousands of jobs worldwide as pandemic creates uncertainty. BP has warned that the oil market continues to face a volatile future because of the coronavirus pandemic as it prepares to cut thousands of jobs from its global workforce within weeks.

The oil giant returned to a modest underlying profit of $86m (£66m) in the third quarter but warned on Tuesday that the effects of the Covid-19 outbreak had created a “challenging” environment for the company.

The underlying profit, which is the figure most keenly watched by the market, was better than the $120m loss predicted by equity analysts, but was a fraction of the $2.3bn reported for the same quarter last year, because of the collapse of global oil prices.

The price of Brent crude averaged $42 a barrel in the third quarter, up from $30 over the previous quarter, when BP slumped to a $6.7bn underlying loss that included a string of writedowns on its exploration assets.

BP said the “ongoing impacts of the Covid-19 pandemic continue to create a volatile and challenging trading environment”, and added that the recovery remained uncertain.

The oil company delivered the warning less than a week after its share price plunged to lows not seen since 1994.

BP is cutting 10,000 jobs from its global business at a cost of $1.4bn to weather the downturn and help shore up its finances as it shifts towards low-carbon energy. Investor jitters over the global industry, and BP’s bold climate targets, have caused the oil company’s share price to tumble to 26-year lows of 200p a share in recent weeks. It fell further, down more than 2% to just below 196p a share, following the latest quarterly results.

BP said it had reduced its headcount by about 2,800 people so far, in part through a voluntary redundancy programme. Thousands more will follow in the coming weeks with BP aiming to complete the majority of the cuts this year.

Bernard Looney, BP’s chief executive, assured investors that the company would keep its existing dividend policy in place after reducing it by half in August, the first cut since the Deepwater Horizon oil spill in 2010. He also promised that the oil giant’s move towards low-carbon energy would be based on projects which offer strong returns.

“Having set out our new strategy in detail, our priority is execution and, despite a challenging environment, we are doing just that – performing while transforming,” he said.

Looney said in May that the collapse in oil market prices triggered by the coronavirus meant he was “more convinced than ever” that BP’s low-carbon transition was necessary. The company took its first steps into the offshore wind market months later by taking a $1.1bn stake in two US offshore wind projects being developed by the Norwegian state oil company Equinor.

BP’s energy economists have said demand for oil may never recover after the pandemic, which has taken a heavy toll on transport industries, and may be on the brink of an unprecedented decades-long decline.

The company slashed the value of its oil assets this year to reflect its view that oil price forecasts would be below expectations as a result of the pandemic. The write-offs led to a net loss of $16.8bn in the second quarter, but in the absence of further writedowns BP reported a fifth consecutive net loss of $500m for the last quarter.

The Guardian, Editor: Jillian Ambrose, October 30

Adnoc’s new unit begins derivatives trading

The Abu Dhabi National Oil Company (Adnoc) said that its new trading entity Adnoc Trading has started derivatives trading as a direct market participant.

This represents a major milestone for the company, as it moves from being a traditional marketer of its products to a more sophisticated global trader.

Adnoc has incorporated two trading units, Adnoc Trading (AT), which focuses on the trading of crude oil, and Adnoc Global Trading (AGT) a joint venture with ENI and OMV that will focus on the trading of refined products. The new offices of both AT and AGT are located in Abu Dhabi’s International Financial Centre at Abu Dhabi Global Market (ADGM).

Adnoc Trading is now operational and Adnoc Global Trading is on track in establishing the required processes, procedures and systems to begin operations in the coming months. The AGT trading team are already optimizing Adnoc’s flows (crude, feedstock and product optimization), and, as its new trading systems are finalized will ramp up its activities.

By entering trading, Adnoc is able to offer a broader range of services to its customers and capture more value through new revenue streams from the sale of its growing crude and refined products portfolio. This significant step is a critical enabler of Adnoc’s 2030 strategy and its drive to become a more commercially-driven and performance-led organization.

Dr Sultan Ahmed Al Jaber, UAE Minister of Industry and Advanced Technology and Adnoc Group CEO, said: “This historic achievement is yet another important milestone for Adnoc as we become a more modern, agile and progressive energy company. Our steadfast focus is on providing a better service to our customers, while also stretching the margin from every barrel of oil that we produce, refine and trade. Our move into trading supports both of these goals.

“The opening of our trading offices at Abu Dhabi Global Market (ADGM) further reinforces its position and reputation as a leading and growing commodities trading hub for our nation and the Middle East region.”

The opening of its trading offices further demonstrates Adnoc’s resilience in overcoming the unprecedented challenges of the Covid-19 pandemic.

Khaled Salmeen, Executive Director of Adnoc’s Marketing, Supply and Trading directorate and Chairman of Adnoc Trading said: “Adnoc has continually adapted during Covid-19 to deliver on its commitments to domestic and international customers, including our landmark move to forward pricing of Abu Dhabi crudes. In 2020, our plans for Adnoc Trading and Adnoc Global Trading become a reality. In the weeks and months ahead, Trading will become integral to how Adnoc manages its business, helping us to better manage our product flows, deliver greater efficiencies, and provide our customers with a broader service and more integrated solutions.”

Safeguards are in place to oversee and track all trading activity. The trading systems used by AGT and AT have undergone thorough testing to ensure that they are ‘air-tight and water-tight’ before operations begin. In order to manage and control risk, the expert trading teams use a suite of energy trading and risk management systems that cover the full life cycle of every trade.

The establishment of Adnoc’s new trading entities is part of the company’s broader transformation in its customer-facing Marketing, Supply and Trading directorate (MS&T). Adnoc’s marketing arm is moving from a supplier that customers historically collected products from, to a more customer and market-centric, shipping & integrated logistics, storage and trading organization.

By better integrating its marketing related companies and capabilities, Adnoc will provide a broader service to its customers, better manage and optimize its product flows and ultimately deliver greater value to its customers, its shareholders and the UAE.

In shipping, Adnoc Logistics & Services (Adnoc L&S) is the largest, fully integrated logistics and shipping company in the UAE and provides highly specialized services that cover the entire oil and gas supply chain. Adnoc L&S is expanding its merchant fleet in line with Adnoc’s growing upstream and downstream portfolio and the company’s move into trading.

In storage, in addition to substantial storage in the UAE and international storage in Japan and India, Adnoc announced in 2019 a strategic investment in global storage terminal owner and operator VTTI BV (VTTI). VTTI is an independent global owner of 15 hydrocarbon storage terminals across 14 different countries, many of which are in locations that are complementary to Adnoc’s trade flows.

Finally, by entering trading, Adnoc will be able to provide a wider offering to its customers, more nimbly take advantage of changing market dynamics, and better manage its product flows, assets and risks.

Trade Arabia News Service, October 30

How long will China continue to prop up the oil market?

China has played a significant role in supporting global oil demand recovery in recent months by importing its highest-on-record crude volumes since May. Customs import data from the world’s top oil importer continue to show strong arrivals of crude as ports and customs continue to process cargoes that have waited for weeks to discharge.

However, with demand recovery in the rest of Asia still wobbling and refining margins in the region still depressed, the oil market and oil analysts have one primary concern about demand on their minds. How long can China support the fragile global oil market, when backlogged cargoes are finally processed and demand outside China is still weak, with the outlook getting weaker as the second wave of coronavirus infections is sweeping across major developed economies?

Over the past five months, China’s crude oil imports haven’t fallen below 11 million barrels per day (bpd), with June arrivals of 12.9 million bpd smashing the previous record from May by more than 1.5 million bpd.

The key reason for the record level of Chinese imports over the spring and summer was the buying spree of China’s refiners in March and April when oil prices crashed and hit the lowest in more than 15 years at the end of April. State and independent refiners rushed to stock up on dirt-cheap oil loading in the spring, which started to show up in Chinese imports as early as in May.

The Chinese recovery from the pandemic supported the global demand recovery early in the summer, while arrivals of cheap cargoes purchased in the spring continued to give the oil market hopes later in the summer when demand recovery elsewhere started to falter with the second wave of COVID-19.

China’s ports were so congested with cargoes that tankers had to wait for weeks to discharge the crude, which then clears customs and is shown in the customs import figures.

Port congestions have started to ease in recent weeks, however, suggesting that Chinese imports are on the road to return to ‘normal’ levels in the coming months.

“After growing for five consecutive months, floating storage in China fell for the first time, indicating that port congestion has started to ease,” OilX’s oil analysts Juan Carlos Rodriguez and Valantis Markogiannakis wrote in a report earlier this month.

China’s oil imports continue to grow compared with previous years, but they are easing off the record-highs seen this summer.

But what will happen once the backlogged cargoes are processed? Can the world’s largest oil importer continue to support oil demand recovery when major economies in Europe are back again under tougher restrictions on social gatherings? Will Chinese refiners have an incentive to process more crude when fuel demand in the rest of Asia is still weak?

According to Refinitiv Oil Research, reported by Reuters’ columnist Clyde Russell, China’s October oil imports will likely see the last effect of the backlogged cargoes, with some 635,800 bpd estimated to have been delayed from September to October.

After that, it’s anyone’s guess how much oil China would import at what could be the normal levels.

Some independent refiners, the so-called teapots, have reportedly already used up their government-allocated import quotas for 2020, and could be inactive on the market for the rest of the year.

On a bullish note, a large private refiner is said to be stocking up on millions of barrels of crude from the Middle East in preparations for trial runs at a new refinery, helping to absorb some of the crude oil from the Middle East amid an otherwise depressed market with stalled demand recovery.

The market could probably be fairly certain that Chinese oil imports in the coming months are unlikely to beat the records from earlier this year.

Yet, the unclear outlook about China’s import volumes in the fourth quarter adds another uncertainty for the oil market to deal with until the end of 2020, on top of the increasingly uncertain outlook about demand recovery and supply growth from Libya.

OilPrice.com, Editor: Tsvetana Paraskova, October 30

Oil Prices Collapse As Demand Recovery Stalls, With Market ‘Now Seriously Worried’

Global crude oil prices fell sharply on Tuesday, building on several days of losses, in the face of a stalled U.S. recovery in gasoline demand, Saudi Arabia’s move to cut prices of its oil sales contracts even as Opec+ increases output, and a looming slowdown in Chinese imports of crude oil.

“Today’s oil price move is a clear sign that the market now seriously worries about the future of oil demand,” said Paola Rodriguez-Masiu, an analyst at consultancy Rystad Energy. It is no longer just “a bearish-bullish daily trading game that sends prices swinging.”

Oil prices had seemed frozen for several weeks, trading inside a tight $2-3 per barrel range, but a gentle decline that began at the end of last week has now accelerated. U.S. crude oil benchmark West Texas Intermediate (WTI) fell 7% to around $37 per barrel by shortly before mid-afternoon in the U.S., while European benchmark Brent had fallen 5% to just above $40 per barrel.

After it was decimated in March amid widespread travel and stay-at-home restrictions, U.S. gasoline consumption had recovered by the end of June to around 90% of last year’s levels. Since then, however, it has largely stayed put. Even the lowest Labor Day gasoline prices in 16 years—$2.22 per gallon, according to the Energy Information Administration (EIA)—were not enough to get Americans back out on the roads in sufficient numbers to clear the over-supply. As the summer driving season in the U.S. comes to an end, the stalled gasoline demand recovery has raised concerns that the new normal of post-pandemic life could translate into less fuel consumption than before.

For oil bulls, more bad news came over the weekend (September 5-6), when oil trade publications, including S&P Global Platts, began reporting that Saudi Arabia’s state-owned oil company, Saudi Aramco, had lowered its “official selling prices” (OSPs) for October sales of its crude oil—a sign that it is seeking to bolster demand for its products. Aramco lowered the price of its cargoes sailing to Asia in particular by large margins.

“This is the first time since June that the Saudis have set [the Asia OSP for a key oil grade] at a discount to the Oman/Dubai benchmark,” wrote ING analysts Warren Patterson and Wenyu Yao in a note. “Clearly this suggests that the market is not tightening as quickly as many had anticipated, with supply edging higher, and with demand clearly faltering.”

Aramco is one of several state oil companies that sets the price of its crude oil in relation to international benchmark prices, in its case to the Dubai/Oman benchmark, which are calculated by oil pricing agencies, such as S&P Platts, based on recent trades in the market. In the latest pricing update, Aramco set the price of its one of its most popular types of crude oil, called Arab Light, at a price of 50¢ per barrel below the Oman/Dubai benchmark price for buyers located in Asia. This means that, if the Oman/Dubai benchmark price were $40 per barrel, an Asian buyer could buy a barrel of Arab Light crude at $39.50. Such price “differentials” against the benchmark may seem small, but since a standard oil shipment consists of 1-2 million barrels aboard massive oil tankers, even a 50¢ per barrel price decrease results in a discount of $500,000 to $1 million: a big buying incentive.

Saudi Arabia’s move to goose demand for its crude comes even as the group of oil-producing nations known as Opec, plus ally Russia, is gradually easing up on output cuts first instituted after the Covid-19 pandemic resulted in a huge market over-supply. After collectively cutting output by 9.7 million barrels per day (b/d) or around 10% of total global oil production beginning in May, Opec and Russia agreed on July 15 that they would start easing back those cuts to 7.7 million b/d in August.

“Economies around the world are opening up, although this is a cautious and gradual process,” said Prince Abdulaziz bin Salman, Saudi Arabia’s oil minister, at the time.

Meanwhile reports began circulating early this week that China’s imports of crude oil, while still robust, had retreated somewhat in August from the record number of barrels imported in June. Markets likely flinched at the news not because China’s 11 million-some barrels per day of crude imports in August were meager, but because China’s economic engine has been one of the world’s few resilient drivers of oil demand. Any signs that its prodigious appetite for oil is weakening would have big implications for oil demand in coming months.

Reduced imports could also signal that Chinese crude imports from previous months were driven in large part by stockpiling, as its state oil companies took advantage of oil prices that were at one point limping along at around $20 per barrel.

Forbes.com, Editor: Scott Carpenter, September 8

Oil Industry Talent Has Fled Or Been Fired, So What Comes Next?

Talk of a talent shortage when the oil industry is laying off workers en masse may sound counterintuitive. However, a few years from now, the industry will recover, if its past cyclical boom-and-bust nature is any guide.

And when that happens, the oil industry will have to hire again. But it may not find enough talent to fill in the gap.

U.S. Layoffs Reach 100,000 and Counting

Some of the more than 100,000 workers laid off in the U.S. oil and gas industry in the past few months alone are likely to consider changing their career path – permanently. Tesla, for example, has plans to hire as many as 65,000 workers by the end of this year, and people are scrambling for any open spot in the attractive company.

Others who have been let go in the oil industry have simply retired.

This means that a whole new kind of talent will need to be tapped.

Although it is unlikely that the same number of additional jobs will be needed again in the future, considering the increased automation in the industry, oil and gas companies will have to hire employees among the younger generations to fill the gap.

The young generations, however, are not particularly attracted to work in the fossil fuel industry because they see it as misaligned with their values of working for a social and environmental-conscious employer. Other employers and sectors – like Tesla, for example – don’t have the same problem.

Avoiding the Talent Gap

The current crisis and the tens of thousands of layoffs every month since March are setting the stage for a massive talent shortage in just a few short years – but oil companies are not sitting idling by. Despite cutting jobs en masse, Big Oil is not giving up on internships as it looks to avoid repeating the mistakes it made during the previous downturns when it had to pay retirees to train the new recruits once prices and markets recovered.

Supermajors such as Chevron and BP are keeping their internships and university graduate recruitment efforts even though they are slashing around 15 percent of their respective workforce, HR executives told The Wall Street Journal.

“We don’t want to repeat history,” Chevron’s Chief Human Resources Officer Rhonda Morris told the Journal.

Extraction, Oilfield Services Jobs Hardest Hit

The current crisis will go down as the steepest crash in oil demand and prices in history, which forced production curtailments in the U.S., and resulted in thousands of employees in the sector losing their jobs. The hardest-hit sector? Extraction and oilfield services.

An estimated 118,000 fossil fuel workers lost their jobs between March and July – a 15.5-percent drop in employment, according to research firm BW Research Partnership. Oil lost the most workers of the fossil fuels, shedding 69,400 jobs or 17 percent of pre-crisis employment, with most job losses in extraction activities, BW Research said. Texas leads the number of layoffs, followed by Louisiana and Oklahoma.

The situation in the oilfield services sector is even more dramatic. Employment in the oilfield services and equipment sector fell by more than 9,300 jobs in July, which brings total job losses due to pandemic-related demand destruction to 99,253, the Petroleum Equipment and Services Association (PESA) said in its monthly report in August. Year over year, oilfield services employment dropped by 15.1 percent – from 785,106 jobs in June 2019 to 664,936 in 2020.

When the industry enters the next boom cycle, it may not need all these jobs – some of them could be eliminated due to greater efficiency and automation. But while it might not need all those employees, it will need many.

The question is, will there be enough people interested in working in the industry from which it can choose?

Some who have lost their jobs are considering completely different career paths and are planning never to return to the boom-and-bust job insecurity in the oil and gas sector, even though it can be quite lucrative.

Others, like oil workers in Scotland, for example, are looking to be retrained to use their skillsets in the renewables sector, as actions to tackle climate change could impact careers in oil.

For new hires, oil and gas companies have the tough task of convincing young generations that work in the industry is not necessarily the image of a roughneck spending days on a rig, toiling at a wellhead while polluting the world with dirty oil.

The Conundrum that is Generation Z

While salary is often the biggest draw for working in the industry, many young people would choose other industries with similar pay because of their perception that oil and gas is an industry of the past.

Petroleum Engineering is by far the highest-earning Bachelor’s degree major with median earnings of $120,000, the University of Georgetown said in a 2018 report ‘The Economic Value of College Majors.’

Millennials and Generation Z rank salary as the top motivator in a job, according to a 2017 survey by EY.

But money isn’t everything.

The survey also found that 62 percent of Generation Z respondents consider a career in oil and gas unappealing, and 39 percent rank it as “very unappealing,” compared with just 4 percent of respondents who see it as “very appealing.”

Two out of three teens believe the oil and gas industry causes problems rather than solves them, the survey showed.

It will be very difficult for oil and gas to change these perceptions among Generation Z amid growing calls from investors and the general public for the industry to start tackling climate change and stop greenwashing the problem.

Still, there is one strong sales pitch that the oil and gas can use to reach out to younger generations – the digital transformation.

Increased automation and ubiquitous use of the latest technologies, including machine learning and AI, can be a major attraction for young talent to the industry with roles such as data scientists or software engineers for the digital natives who would rather work with the latest tech than settle for a role in a company of any sector using substandard technology.

By Tsvetana Paraskova for Oilprice.com, September 6 2020

Banks’ retreat from commodities is set to derail small traders

European banks have grown wary of financing commodity traders, raising borrowing costs and endangering smaller firms in the market for raw materials.

ABN Amro Bank NV is pulling out of trade and commodity finance altogether. ING Groep NV will likely enforce stricter monitoring and control over commodity deals it finances to reduce risks, said a person familiar with the matter. BNP Paribas SA, formerly a powerhouse in commodity-trade finance, is scaling back, a person familiar with the company said.

Banks are responding to the rout in oil prices, a spate of alleged frauds, a drift into riskier forms of lending and investor pressure over climate change. Their retreat is likely to concentrate the business of transporting oil, metal and grain in the hands of large traders that still have access to cheap funding.

Smaller traders, in contrast, are finding it increasingly difficult to borrow from banks, prompting some of them to seek out new sources of financing. That could come from their larger rivals or from trade-finance funds. Some will be pushed out of business altogether, according to industry executives, bankers and lawyers.

“The biggest impact will be on smaller players,” said Jarek Kozlowski, chief financial officer at power-and-gas trader TrailStone Group. “They will have difficulty finding funding.”

Banks fund traders through traditional forms of trade finance such as letters of credit—a payment guarantee to suppliers—as well as revolving-credit and borrowing-base facilities. In doing so, they grease the supply chains that ship oil, metal and grain from producers to consumers. Trading houses rely on borrowed money because the cargoes they handle can be worth tens of millions of dollars. Higher funding costs pose a danger because they run on thin margins.

Commodity trading is already dominated by a clutch of global players, including European traders Vitol Group, Trafigura Group Pte. Ltd. and Mercuria Energy Group Ltd., and U.S. agricultural giants Archer Daniels Midland Co., Bunge Ltd. and Cargill Inc. Banks will keep competing to lend to large traders, preventing a large rise in their borrowing costs, said Philip Prowse, a partner who specializes in commodities trade finance at law firm HFW in London.

“The big traders are very resilient and will always be well-supplied by the big banks,” said Mr. Prowse. “There will be very little left for the traders beneath that very large size.”

A drop in competition could help boost margins at the largest traders by enabling them to charge more from oil refiners, copper smelters and other customers while paying less for commodities, said Craig Pirrong, a finance professor at the University of Houston. Doing so could raise prices for end consumers and put more pressure on commodity producers, such as miners and energy companies.

Smaller traders are more exposed. Banks have become more cautious about lending to them since a series of blowups earlier this year, said Marie-Christine Olive, Citigroup’s head of natural resources for Europe, the Middle East and Africa.

“There’s a flight to quality,” said Ms. Olive. “How many [commodity traders] will be left?”

Singapore energy trader Hin Leong Trading Pte. Ltd. was placed under judicial management in April, owing $3.5 billion, mostly to banks. Founder Lim Oon Kuin was charged with abetment of forgery in August.

Other traders to hit financial trouble include GP Global Group, a trading, refining and logistics company in the United Arab Emirates. In July, GP said it would restructure after finding itself “unable to get full support from a few financial institutions” despite constantly seeking credit lines to fund its trading activity. An external restructuring officer at FTI Consulting is hopeful that an agreement with creditors will be reached, a GP spokesperson said.

Several of this year’s implosions—including those of Hontop Energy (Singapore) Pte. Ltd. and ZenRock Commodities Trading Pte. Ltd.—have taken place in Singapore. That has raised concern about the city-state’s oversight of trading firms.

Regulations designed to make the financial system safer after the 2007-2009 crisis have made low-risk, high-volume trade finance less attractive, according to John MacNamara, chief executive of consulting firm Carshalton Commodities Ltd. This prompted banks to take greater risks by lending on an unsecured basis, skimping on due diligence, and insuring a smaller portion of their loans.

“Banks have rather dropped their trousers to get new business in terms of trade finance,” Mr. MacNamara said. “The unintended consequence of Basel III was we took more risks.”

The threat of sanctions has also prompted banks to retreat, said Mr. Prowse. BNP Paribas shrank its business after pleading guilty to crimes of violating U.S. sanctions in 2014.

Commodity-trade finance isn’t the money spinner it once was. Revenue has slid over the past five years, and the coronavirus pandemic dealt another blow. Turnover from commodity-trade finance dropped to $1.7 billion in the first half of 2020, down almost a third from the same period last year, according to Coalition, which tracks data on banks.

Then there is pressure from investors on European banks to reduce the amount they lend to carbon-intensive industries, a particular issue for companies that earn most of their money from coal. Natixis SA, for example, in May said it would withdraw from the thermal-coal sector in members of the European Union and Organization for Economic Cooperation and Development by 2030.

Société Générale SA remains committed to the business of financing natural resources, but it is consolidating in Asia to serve key clients from Hong Kong, said a person familiar with the matter. The move was earlier reported by Bloomberg News.

ING is likely to raise borrowing costs and reconsider lending in the absence of collateral, the person familiar with its planning said. A spokesman said the Dutch lender currently has no plans to exit from the business.

WSJ, Editor: Joe Wallace, September 6, 2020, Photo by Sharon McCutcheon on Unsplash

Bloated diesel stocks weigh down global oil market: Opinion Kemp

Poor distillate consumption and margins are weighing on refiners’ demand for crude, in turn hampering efforts by OPEC+ to rebalance the oil market and push crude prices higher

LONDON: Global distillate markets remain heavily oversupplied, sending margins tumbling to multi-decade lows, despite refiners’ efforts to restrain crude processing and switch to maximising gasoline production.

Poor distillate consumption and margins are weighing on refiners’ demand for crude, in turn hampering efforts by OPEC+ to rebalance the oil market and push crude prices higher.

Production of distillates, including diesel, jet fuel, gasoil and heating oil, is running head of consumption, mostly because of the downturn in manufacturing and aviation, with a resulting increase in inventories.

In an effort to reverse the oversupply, US refiners have restrained their crude processing, limiting throughput to 13.5 million barrels per day last week, almost 19 per cent below the five-year average.

Refineries have also adjusted the set points on their equipment to maximise production of gasoline at the expense of distillates, pushing the gasoline-distillate ratio to 1.7:1, up from 1.4:1 a year ago.

Even so, US distillate inventories are stuck at 179 million barrels, close to their highest since the early 1980s, and 32 million barrels above the five-year seasonal average.

For the next several months bloated inventories will restrain refiners’ crude processing and buying as they try to reduce distillate stocks to more normal levels.

The problem is not confined to the United States. Distillate stocks are well above normal around the world as the coronavirus pandemic disrupts manufacturing, construction and passenger transportation.

In Northwest Europe, margins for transforming Brent crude into gasoil have tumbled to just $3 per barrel, down from more than $6 a month ago and $16 at the start of the year.

Until there is a clear signal excess distillate inventories are being absorbed, they will continue to limit upward moves in crude prices.

Reuters September 18, 2020

Vitol expects tough second half as oil trading flatlines

LONDON (Reuters) – After extreme oil volatility that provided traders with bumper profits in the first half of the year, the market is now stuck in a lower gear, fatigued by the realities of COVID-19.

Lower overall oil supplies after production cuts implemented by the OPEC+ group of producers, as well as tepid fuel demand, are dampening price movements.

“If you look at market liquidity, paper activity, ICE futures volumes or gasoil or jet swaps … everything had a very active Q2, but activity seems to have reduced in Q3,” Russell Hardy, chief executive of the world’s biggest trader, Vitol, told Reuters.

“Is that because the market is tired and has been at $40 a barrel for so long, because everybody is working from home or because oil demand is significantly less than what it was and so there is less activity to hedge?”

Major trading firms see an uncertain path as the world economy flatlines after a stunted V-shaped recovery served to subdue speculative trade and hedging for physical oil assets.

The United States and India are battling runaway rates of contagion while large European economies are experiencing second waves of COVID-19 infections, potentially leading to national lockdowns

For the first time in years, major trading houses are not going to post a rise in year-end traded oil volumes.

“Obviously, with crude trading, it’s difficult to maintain business volumes because there is less crude to market and trade; there’s less being produced,” Hardy said.

On refined products, meanwhile, the trading firms that thrive from market disconnects between regions – known as arbitrage – see fewer ways to make a buck.

“In the Atlantic basin, refiners are running to meet relatively poor downstream demand. The result is that refineries are importing and exporting less. Consequently, the local market presents fewer opportunities,” Hardy said.

The Vitol boss told a conference in Singapore last week that he did not expect gasoline and diesel demand to return to previous levels until the fourth quarter of 2021.

While BP BP.L and others posit scenarios that peak oil demand may have been reached already, Vitol believes that there is still significant growth to come in Asia. Last year the trader forecast peak global oil demand to be reached around 2034.

“We haven’t revised our 10-year view since COVID,” Hardy said. “When we redo the study, we’ll probably come up with lower peak oil demand than before … but we think Asian demand growth will pull through and take us beyond 2019 in the years to come.”

Reuters, September 2021, by Julia Payne, Dmitry Zhdannikov

Shell launches major cost-cutting drive to prepare for energy transition

LONDON (Reuters) – Royal Dutch Shell is looking to slash up to 40% off the cost of producing oil and gas in a major drive to save cash so it can overhaul its business and focus more on renewable energy and power markets, sources told Reuters.

Shell’s new cost-cutting review, known internally as Project Reshape and expected to be completed this year, will affect its three main divisions and any savings will come on top of a $4 billion target set in the wake of the COVID-19 crisis.

Reducing costs is vital for Shell’s plans to move into the power sector and renewables where margins are relatively low. Competition is also likely to intensify with utilities and rival oil firms including BP and Total all battling for market share as economies around the world go green.

“We had a great model but is it right for the future? There will be differences, this is not just about structure but culture and about the type of company we want to be,” said a senior Shell source, who declined to be named.

Last year, Shell’s overall operating costs came to $38 billion and capital spending totalled $24 billion.

Shell is exploring ways to reduce spending on oil and gas production, its largest division known as upstream, by 30% to 40% through cuts in operating costs and capital spending on new projects, two sources involved with the review told Reuters.

Shell now wants to focus its oil and gas production on a few key hubs, including the Gulf of Mexico, Nigeria and the North Sea, the sources said.

The company’s integrated gas division, which runs Shell’s liquefied natural gas (LNG) operations as well as some gas production, is also looking at deep cuts, the sources said.

For downstream, the review is focusing on cutting costs from Shell’s network of 45,000 service stations – the world’s biggest – which is seen as one its “most high-value activities” and is expected to play a pivotal role in the transition, two more sources involved with the review told Reuters.

“We are undergoing a strategic review of the organisation, which intends to ensure we are set up to thrive throughout the energy transition and be a simpler organisation, which is also cost competitive. We are looking at a range of options and scenarios at this time, which are being carefully evaluated,” a spokeswoman for Shell said in a statement.

Shell’s restructuring drive mirrors moves in recent months by European rivals BP and Eni which both plan to reduce their focus on oil and gas in the coming decade and build new low-carbon businesses.

The review, which company sources say is the largest in Shell’s modern history, is expected to be completed by the end of 2020 when Shell wants to announce a major restructuring. It will hold an investor day in February 2021.

Speaking to analysts on July 30, Shell Chief Executive Ben van Beurden said Shell had launched a programme to “redesign” the Anglo-Dutch company.

LOW-CARBON FUELS

Teams in Shell’s three main divisions are also studying how to reshape the business by cutting thousands of jobs and removing management layers both to save money and create a nimbler company as it prepares to restructure, the sources said.

Shell, which had 83,000 employees at the end of 2019, carried out a major cost-cutting drive after its $54 billion acquisition of BG Group 2016, which has helped boost its cash generation significantly in recent years.

Shell’s operating costs, which include production, manufacturing, sales, distribution, administration and research and development expenses, fell by 15%, or roughly $7 billion, between 2014 and 2017.

But the sharp global economic slowdown in the wake of the COVID-19 epidemic coupled with Shell’s plans to slash its carbon emissions to net zero by 2050 have led to the new push.

Shell cut its 2020 capital expenditure plans by $5 billion to $20 billion in the wake of the collapse in oil and gas prices due to the pandemic amid warnings it could have lasting effects on global energy demand.

Van Beurden said in July that Shell was on track to deliver $3 billion to $4 billion in cost savings by the end of March 2021, including through job cuts and suspending bonuses.

He said travel restrictions during the pandemic had accelerated the digitalisation of Shell while machine learning was being rolled out to minimise outages and shorten maintenance time at refineries, oil and gas platforms and LNG plants.

Besides cutting costs at its downstream retail business, Shell is pressing ahead with plans to reduce the number of its oil refineries to 10 from 17 last year. It has already agreed to sell three.

The review of refining operations also includes finding ways to sharply increase the production of low-carbon fuels such biofuels, chemicals and lubricants. That could be done by using low-carbon raw materials such as cooking oil, one source said.

Reuters, Ron Bousso, September 21

5 biggest pitfalls to burn money in tank terminal investments

The tank terminal market is very fragmented, with more than a thousand terminal operators and five thousand terminals worldwide. Furthermore, the market dynamics these terminals operate within can be quite complex, making it hard for investors to assess the true value of a prospective asset. In this blog, we’d like to present you with the 5 biggest pitfalls to burn money in terminal investments.

Tank terminals are considered infrastructure assets with a low-risk profile that generate stable revenue streams. Therefore, it’s hardly surprising that we see a significant uptick in interest for tank terminals investments during these uncertain economic times.However, we have also seen even seasoned investors getting lost in the world of tank terminals.

The tank terminal market is very fragmented, with more than a thousand terminal operators and five thousand terminals worldwide. Furthermore, the market dynamics these terminals operate within can be quite complex, making it hard for investors to assess the true value of a prospective asset.

In this blog, we’d like to present you with the 5 biggest pitfalls to burn money in terminal investments. 

1. Lacking knowledge

When assessing the market worth for a tank terminal, only looking at the bottom line will not be enough. Competitive value comes from collecting and understanding data on a terminal’s location, infrastructure, activity level, et cetera. 

That’s why it’s key to get access to industry-specific knowledge and get a complete picture of the asset you are interested in.

2. Paying a price which is too high

Given the complexity and dynamic of the Tank terminal industry, make sure you have a solid understanding of the key performance indicators of the terminal. What are the throughput levels? What are excess throughput levels? How are contracts being structured? What are the occupancy rates of the jetties?

Only if and when you partner with an advisor who understands the industry and will provide you with the essential and detailed insights, you can build your investment case and valuation model, minimizing the risk of bidding too high.

3. Lacking an exit plan

Even though this is true for all sorts of investments, you’ll need to pair a sound investment plan with a solid divestment strategy. Knowing when to sell is just as valuable as knowing when to buy. When market dynamics are changing and divestment of your assets is the smart move to make, a solid exit strategy is invaluable when it’s time to act.

4. Low probability of winning the bid

Being a successful investor is not only about being able to identify a good investment opportunity; it’s also about knowing when to pass on a bid. 

If there is too much competition or if you expect you will be willing to pay the expected price, it is better to exit the process at an early stage. By using a phased approach, you’ll never end up investing a tremendous amount of time and money on a bid that would never be successful.

5. Expecting high returns for low-risk investment

You can’t have your cake and eat it, too. While investments in infrastructure assets like storage terminals are often a great addition to your investment portfolio, be sure to have realistic expectations of your return on investment. While it may seem a bit ‘boring’ in the world of stock shorting, high-frequency trading and venture capital, investing in tank terminals is considered a low-risk investment with respectable returns.

What’s next?

Now you know what you shouldn’t do, you might want to know what you should do to become a successful investor in the tank terminal industry. 

Download our whitepaper “What you must know before investing in tank terminals.”