Category: Nieuws

Oil and gas prices are in another mini-slump, nearly three years after they were hit by the first wave of the COVID-19 pandemic in North America and Western Europe.

But the latest downturn is part of a cycle in manufacturing activity and energy prices that has repeated with an average duration of three to four years since the early 1990s.

After adjusting for core consumer prices, the price of Brent crude has fallen by 34% from the peak in May 2022 and U.S. Henry Hub natural gas is down by 73% from the peak in August 2022.

In real terms, oil prices are in the 67th percentile for all months since 1990, down from the 86th percentile in May, while U.S. gas prices have slumped to only the 3rd percentile, down from the 86th percentile in August.

Prices have fallen in response to a combination of factors, including the impact of sanctions on Russian exports, a milder-than-normal winter, the explosion at Freeport LNG, and a slowdown in manufacturing and freight transport.

CYCLICAL RESEARCH

In the late nineteenth and early twentieth centuries, researchers identified several cycles in business activity, prices and interest rates:

• Kitchin cycles lasting 3 to 4 four years, attributed to the accumulation and liquidation of excess inventories (“Cycles and trends in economic factors”, Kitchin, 1923).
• Juglar cycles lasting 7 to 11 years, attributed to investment in longer-lived fixed assets such as machinery (“Commercial crises and their return in France, United Kingdom and United States”, Juglar, 1862).
• Kuznets cycles with a duration of 15-25 years, attributed to construction, demographics and migration (“Secular movements in production and prices”, Kuznets, 1930).
• Kondratieff waves lasting 45-60 years, attributed to the diffusion of major new technologies such as the internal combustion engine and electricity (“Long waves in economic life”, Kondratieff, 1926).

Researchers hypothesised cycles of differing durations could be nested, for example each 7-11 Juglar cycle could be decomposed into two or three separate 3-4 year Kitchin cycles.

In practice, both the magnitude and duration of short and long-term cycles proved too variable to be much use in forecasting (“Approaches to the business cycle, Zarnowitz, 1988).

And the expansion of the service sector, which is more stable than manufacturing, contributed to the marginalisation of business cycle research.

As a result, research on business cycles moved in other directions, and policymakers increasingly aimed to eliminate cyclical instability altogether.

REGULAR VARIATIONS

Notwithstanding problems identifying, classifying and explaining cycles in output, employment, prices and interest rates, the time series for manufacturing activity continues to show a strong cyclical component.

Since 1995, there have been eight cycles in U.S. manufacturing activity, based on the Institute for Supply Management’s purchasing managers’ index, averaged over 12 months to smooth some of the short-term volatility.

Troughs around October 1995, September 1998, May 2001, February 2007, January 2009, November 2012, December 2015, November 2019 and tentatively January 2023 have occurred on average every 41 months, with a range from 23 to 69 months.

Since 1995, there have also been eight cycles in oil and gas prices, based on the change in real prices compared with the prior year and averaged over 12 months.

Oil and gas cycles have been closely correlated with each other and with U.S. manufacturing activity.

On average, troughs in oil prices occur within ±3 months of a turning point in U.S. manufacturing activity, while troughs in gas prices occur within ±4 months.

LOSING MOMENTUM

U.S. manufacturing activity appears to be forming a trough at present, with the ISM index falling below the 50-point threshold dividing expansion from a contraction every month between November 2022 and January 2023.

The current manufacturing cycle is 34 months or 39 months long (depending on whether the trough is dated to April 2020 or November 2019), approaching the average duration of 41 months for cycles since 1995.

Some softness in manufacturing activity as well as oil and gas prices should therefore be expected at this point.

Not every cyclical slowdown in manufacturing turns into a full-blown recession; there have been eight manufacturing cycles since 1995 but only three were declared recessions by the U.S. National Bureau of Economic Research.

The others were mid-cycle slowdowns, often termed a “soft patch” by policymakers, followed by a re-acceleration of activity and an extension of the business cycle.

There is no way to determine in advance whether the current manufacturing slowdown will turn out to be a mid-cycle one or a cycle-ending recession. But the type matters enormously.

WHAT NEXT?

If the current slowdown proves to be a mid-cycle soft patch, gas and especially oil prices are likely to rise strongly later in 2023.

Global inventories of petroleum, especially the most cyclically sensitive components such as distillates, are still below the long-term average.

In the event the economy re-accelerates, inventories will deplete quickly, and there is little spare capacity to rebuild them in the short term.

Gas inventories are currently more comfortable after a mild winter in 2022/23 but could also deplete quickly if the economy accelerates and winter 2023/24 reverts to more average weather.

By contrast, if the current slowdown turns into a cycle-ending recession, both gas and oil stocks will accumulate and prices will come under more pressure in the near term.

The resulting accumulation of inventories and spare production capacity would create some cyclical slack and defer the onset of the next upswing in prices until 2024.

In reality, the trough identified in November 2019 occurred around April 2022 during the first wave of the pandemic, but the rebound was so strong it has moved the calculated trough in the 12-month average earlier.

Reuters by John Kemp, March 7, 2023

he European Union’s ban on Russian fuel imports that begins next week is expected to keep profit margins high this year at U.S. oil refiners, executives said on Tuesday, as global fuel trade shifts.

A Feb. 5 ban on Russian fuel product imports could keep margins high this year and strain inventories of distillate fuels and vacuum gasoil (VGO), a key Russian intermediate, refiners said on first quarter earnings calls.

Exxon Mobil (XOM.N), Marathon Petroleum (MPC.N) and Phillips 66 (MPC.N) on Tuesday posted strong 2022 refining results, citing high demand for diesel and jet fuel and elevated operating rates.

Tight fuel supplies this year will hold margins high, said Exxon Chief Executive Darren Woods, adding the tailwind could last into 2024.

Marathon’s refining margins last year surged 81.5% from a year ago to $28.82 per barrel, while rival Phillips 66’s jumped 65% to $19.73 per barrel. Valero’s margins more than doubled to $6.3 billion from a year earlier.

“Most people in the trade today think that the sanctions will actually result in a reduction in Russian refinery utilization, and you’ll see lower exports of VGO and diesel coming out of Russia when the sanctions take place,” Gary Simmons, chief commercial officer at Valero, said last week.

Lower diesel inventories with VGO and the EU ban’s potential impact on Russian exports will further bolster refining margins, Rick Hessling, a Marathon senior vice president, said Tuesday.

Marathon exports up to 350,000 barrels per day to Latin America, but is seeing “an incremental pull into Europe,” according to Brian Partee, senior vice president of global clean products. The full impact of the EU ban likely won’t be felt until the second quarter, he added.

If Russia discounts its fuel exports, they may set the “minimum price” in those marketplaces where U.S. refiners also compete, said Richard Harbison, senior vice president of refining at Phillips 66.

Russian exports into Northwest Europe accelerated ahead of the ban, which could impact U.S. exports, refiners said.

“We’re entering the sanction period of time at really historically high levels of inventory,” said Marathon’s Partee.

Still, Russian fuel has product specification that could make it difficult to place in markets unaccustomed to the fuel, he said.

“The supply assurance component is really a big unknown,” he added.

Reuters by Laura Sanicola, February 28, 2023

On December 5, 2022, the G7, European Union, Canada, Japan and Australia began implementing a $60 price cap on Russia’s seaborne crude oil exports (see EDM, December 5, 2022), which China and India quickly capitalized on.

Additional ceilings on petroleum products are expected later this year and are anticipated to have a far greater impact (Economic Times, January 17). In retaliation, Russian President Vladimir Putin announced that countries abiding by the price cap and other sanctions will be banned from receiving Russian energy (Economic Times, December 28, 2022).

It is believed that this approach will help stabilize elements of global markets, primarily benefiting low- and middle-income countries, so long as Russia remains incentivized to keep producing (Orfamerica.org, December 14, 2022; Economic Times, December 25, 2022, January 10, 2023; Asiafinancial.com, January 16). The price cap will also minimally affect parties to the policy, as most already limited Russian energy imports last spring. However, as most shipping insurers and other vital elements of the industry are incorporated in the “Price Cap Coalition,” the majority of the world’s cargo companies will be subject to it. Notably, Russia may struggle to export from freeze-prone ports due to a reliance on foreign ice-class tankers—though China is bypassing this via the few ice-tankers Beijing and Moscow own (Ec.europa.eu, December 3, 2022; Alarabiya News, January 13).

Despite these sanctions, Russia claims an increase in oil production by 2 percent to 535 million metric tonnes, with exports growing by 7 percent. Similarly, in 2022, liquefied natural gas (LNG) production increased by 8 percent to 46 billion cubic meters, while gasoline and diesel production rose by 4.3 percent and 6 percent, respectively. Together, the oil and gas industries boosted “Russian budget revenues … in 2022 by 28 percent,” or $36.7 billion (Sputnik, January 16). Via LNG taxes alone, the Kremlin may increase revenue by $3.5 billion in 2023 (High North News, January 2).

Whether these figures are to be believed, it is clear that Moscow mitigated restrictions on its energy industries, partially by granting favorable prices to China and India (Economic Times, December 25, 2022; High North News, January 16). Illustrating this shift, for the first half of 2022, most of Russia’s Arctic oil exports went to Northern Europe; by the second half of the year, only about one-third were destined for the region; and by November, shipments had almost completely pivoted to Asia (High North News, January 16).

According to a survey of experts, a median estimate of China’s oil consumption in 2023 is a record 16 million barrels a day (Xinhua, January 13). Russian energy products are an essential element of this supply, surpassing Saudi Arabia as Beijing’s primary source of oil in 2022 and supplying about 4.5 percent of its gas needs (22.22 percent of imports). China’s current Arctic crude figures are difficult to find, but clearly, Moscow’s discounted prices ensure Beijing can cheaply meet its needs in the short term while encouraging long-term projects (e.g., Power of Siberia Two pipeline and the Northern Sea Route) (English.www.gov.cn, February 24, 2022; Iea.org, accessed October 26, 2022; The Barents Observer, December 8, 2022; Anadolu Agency, December 13, 2022).

These arrangements increase China’s leverage over Moscow, instead of making it dependent. For instance, Beijing is increasingly bypassing Russia’s land trade routes, and 56 percent of Chinese energy needs come from coal (importing less than 10 percent). Furthermore, China can source fuel from other countries as it pursues energy self-sufficiency and increased Arctic influence.

For the United States and its partners, India’s case is perhaps more concerning. From April through December 2022, Russia exported about 64,000 barrels per day (b/d) of Arco and Novy Port grade Arctic crude to India (Economic Times, January 5; Argusmedia.com, January 6; Gazprom Neft, January 10, 2017). By October, India’s largest crude source was Russia (22 percent) (Xinhua, November 6, 2022). By November, Russian exports to India were a record 6.67 million barrels of Arco, Novy Port and Varandey crude, with another 4.1 million barrels sent in December, when the latter grade was imported by India for the first time (Economic Times, January 5).

All told, from June through December 2022, Russia’s crude exports to India remained above 1 million b/d, achieving an “all-time high of 1.19 million b/d in December” (Argusmedia.com, January 6). Deliveries of the Varandey blend were set to double in January 2023, which would represent a new record, though official statistics on this were not available at the time of writing.

India’s consumption of Russian fuel is clearly driven by immediate interests, but what about longer-term interests? The country will almost certainly continue its purchases from Russia while expanding Arctic cooperation with Moscow, unless something alters its calculus. Notably, in 2022, New Delhi released its official Arctic and Antarctic policies (Moes.gov.in, May, August 6, 2022). Both are concerned with research, environmental protection and the rule of law, but the Arctic strategy is distinguished by its discussion of raw materials, trade, development and security. Although not explicitly mentioned in the Arctic and Antarctic strategies, Russia is to be a primary partner in achieving these goals, again with a heavy focus on energy and trade (Economic Times, December 17, 2022).

Between China’s desire to be the primary force in the Arctic—at least in Eurasia—and its bellicose rivalry with New Delhi, India’s presence in the Arctic may be yet another point of friction (see China Brief, November 18). However, Moscow, Beijing and New Delhi share similar cultural, political and economic interests that could encourage polar cooperation (Gjia.georgetown.edu, September 16, 2022; for counterarguments, see China Brief, October 19, 2022).

Since US President Joe Biden took office, political considerations have left the US without an ambassador to India, undermining the relationship (The Japan Times, January 11; The Print, January 17). The first step toward ending India’s reliance on Russia and potential enmeshment with China is remedying this vacancy. Additionally, key strategic developing nations should receive assistance to make the most of the energy prices while mitigating Putin’s threats. Finally, countries, including the US, are still importing Russian petroleum products via India and China (Times of India, January 15). It could be that identifying the source here is difficult, or perhaps it is considered acceptable because it keeps Russian prices and profits low. In either case, this merits closer examination.

OilPrice.com by Jamestown Foundation, February 28, 2023

Despite Western-led sanctions aimed at punishing Russia over its war in Ukraine, growing demand for Russian energy imports has helped keep the country’s besieged economy afloat.

China and India, Asia’s biggest and third-biggest economies, respectively, have been the biggest drivers of the trend.

Russia’s economy shrank by just 2.1 percent in 2022 — far less than previously forecast contractions of up to 12 percent.

How much has Chinese and Indian demand for Russian energy grown?

China and India, both of which have declined to condemn Russia or impose sanctions over the war, became the biggest buyers of Russian crude oil last year as Western countries restricted imports and imposed sanctions.

China’s imports of Russian crude oil spiked 8 percent in 2022, the equivalent of 1.72 million barrels per day (bpd), according to Chinese customs data, making Russia the East Asian giant’s second-biggest supplier.

Kpler, a commodities market analysis firm, has estimated that China will import some 5.62 million bpd in February, beating the previous all-time high.

China’s imports of Russian pipeline gas and liquefied natural gas in 2022 soared 2.6 times and 2.4 times, respectively, to $3.98bn and $6.75bn, respectively.

Meanwhile, China’s imports of Russian coal last year surged 20 percent to 68.06 million tonnes.

India, which has emerged as the biggest customer of Russian oil, in January imported a record 1.4 million bpd of the commodity — a more than 9 percent rise from December.

India’s imports of thermal coal in 2022 rose nearly 15 percent to 161.18 million tonnes.

Analysts have said that cheap imports are difficult to ignore for Prime Minister Narendra Modi, who has boosted security ties with the West while maintaining warm Russia ties, as he faces both high inflation and an election year.

Turkey has also emerged as a top buyer of Russian energy crude oil and coal, with analysts pointing to Pakistan and Bangladesh as markets that are likely to follow suit and ramp up Russian energy imports at discounted prices.

Taking a page from heavily-sanctioned Iran, Russia has built up a “shadow fleet” of up to 600 old oil tankers to circumvent Western sanctions, according to the Economist Intelligence Unit (EIU).

Demand for oil storage tanks in Singapore is also surging, Bloomberg reported last month, suggesting that Russian fuel is being blended with other oil and re-exported, making it more difficult to trace.

“While Russian gas pipeline exports to Europe have obviously collapsed, Russian exports of both oil and coal have continued to flow at close to pre-war volumes,” Gavin Thompson, vice chairman for energy in the Asia Pacific at Wood Mackenzie, told Al Jazeera.

What restrictions have been placed on Russian energy exports?

The European Union began phasing in sanctions on Russian oil last year, and on December 5, imposed a ban on seaborne crude oil exports. The EU, the G7, and Australia also agreed to set a price cap on Russian crude oil at $60 per barrel, $20-30 per barrel less than its competitors depending on price fluctuations. Prices will be adjusted every two months.

The price of Russian crude oil, however, has been trending well below the $60 cap in the past two months, which means European companies can still provide secondary services like shipping, finance and insurance.

On February 5, a new round of restrictions and price caps were put in place on higher-value Russian refined oil products like diesel and cooking fuel.

The goal is not to cripple Russia completely — which would send global oil prices skyrocketing — but to “cause pain to the Kremlin,” said Matt Sherwood, the EIU’s Senior Europe and Lead commodities analyst.

“The price caps and the sanctions … still make it economical for Russia to continue producing and ship out its oil, but it also means it’s having to trade and price that oil at such a discount that it’s having an impact on its fiscal situation and its financing of its war machine,” Sherwood told Al Jazeera.

How are sanctions affecting Russia?

Following the EU’s ban on Russian oil product exports that took effect on February 5, Russia said it would cut crude oil production by 500,000 barrels a day, or about 5 percent of total volume, starting in March.

Analysts say the restrictions, the EU’s sixth package of sanctions since the war began, will be more difficult to circumvent than past measures because finding new markets for oil products is harder to do than for crude oil, which countries like China and India can refine themselves and sell for a profit.

Moscow has also said it will not trade with any country that mentions the G7 price cap in their contracts.

The EIU has predicted the emergence of two parallel global oil markets should sanctions continue: one that trades in heavily discounted Russian oil like China and India have been doing, and another that shuns Russian oil.

Despite growing exports to Asia, Russian oil and gas revenues fell 50 percent year-on-year overall in 2022, a shortfall Moscow had to make up for in other ways such as by selling its foreign currency reserves.

Revenue could continue to fall along with the price of oil as global markets adjust to the new price cap system and logistical challenges, said Thomas O’Donnell, an external global fellow at the Wilson Center and an instructor at the Free University of Berlin.

“After the first year, when there was a shock to the market when oil and gas prices were relatively high, Russia largely made up for the restrictions on selling its oil. Going forward things are more under control now,” O’Donnell told Al Jazeera.

“Now that it’s set up, we’ll see if the EU, G7 and the US will be willing to squeeze Russia and that has to do with what different people see as the dynamics of the market.”

Russia has said it expects its overall oil and gas revenues this year to drop by nearly one-quarter from 11.6 trillion roubles to 8.9 trillion roubles ($155bn to $119bn), adding to Moscow’s need to find new revenue streams.

MacKenzie said that both China and India are expected to have strong demand for Russian energy in 2023.

“Russian waterborne crude exports have already rebound to over 3 million bpd as Asian buyers continue to import Urals crude as discounts remain attractive,” he said.

“China has a much higher appetite to pick up more Russian crude than India in 2023. And Russian crude exports may need to increase in the near term if Russian distillate exports struggle to clear to new markets after the EU ban on Russian products and Russian refiners are forced to cut crude runs.”

ALJAZEERA by Erin Hale, February 28, 2023

Copenhagen Infrastructure Partners (CIP), a major in offshore wind development, has acquired a majority stake in a blue ammonia project which will be developed alongside US-based Sustainable Fuels Group (SFG).

While the financial terms of the transaction were not disclosed, CIP said it has acquired the stake in this project through its Energy Transition Fund (CI ETF I).

Located along the Gulf Coast, the project has commenced detailed engineering (FEED) and will initially consist of two phases, each with a production capacity of 4,000 tons per day (~3.0 million tons of annual production from both phases) once operational in 2027.

Furthermore, the project has entered into an agreement with International-Matex Tank Terminals (IMTT), a terminal and logistics company, to provide ammonia storage and handling services.

As disclosed, the project will use Topsoe’s SynCOR™ technology to produce blue ammonia with the lowest carbon intensity and is expected to reduce CO2e emissions by 90% (Well-To-Gate) compared to traditional ammonia production, thereby abating 5.0 million tons of CO2 per year.

CPI said that the project will form part of the CI Energy Transition Fund, which closed in August 2022 at the hard cap of €3 billion, and like all current CIP Funds, is aligned with the UN Sustainable Development Goals (SDGs) principally through the expected avoidance of greenhouse gas emissions resulting from its investments.

The CI Energy Transition Fund focuses on clean hydrogen, and other next-generation renewable technologies to facilitate the decarbonisation of hard-to-abate sectors such as agriculture and transportation.

Søren Toftgaard, Partner in Copenhagen Infrastructure Partners, commented on the acquisition: “We are developing a global portfolio of clean hydrogen and hydrogen-related products, such as clean ammonia. Blue ammonia is considered an important part of a successful energy transition, which can potentially help fill the ammonia shortage in Europe as well as being a stepping stone to the successful implementation of green projects, and we are excited to bring this project to the Gulf Coast region. Further, the agreement provides important diversification to our CI ETF I portfolio and can provide a platform for future hydrogen-related investments in the US.”

OFFSHORE Energy, February 28, 2023

The government has not yet commented on whether Porto Kòrsou is a serious candidate for the reopening of the refinery. The initiator is open to a collaboration to reopen, Prime Minister Pisas said.  

During the parliamentary meeting that took place last week, Pisas called on party members to think about possible parties in the context of reopening the refinery. This is in response to the withdrawal of the Caribbean Petroleum Refinery (CPR), because complaints have been filed against them. 

Sven Rusticus, spokesperson on behalf of Porto Kòrsou, thinks he can be of value to the development of the Isla site, also from an economic point of view. In addition, Rusticus says that the refinery has a rich history in Curaçao, and that he wants to value that history in the plans he has.  

“Besides creating employment, the redevelopment of the refinery will bring direct financial benefits,” said Rusticus. How this is all made possible is still being considered.

By Curaçao Chronicle, February 28, 2023

China’s oil refining capacity overtook the United States as the world’s largest in 2022, an industry official said on Thursday, though its production of fuel products lagged the United States due to low utilization rates.

Total refining capacity in China expanded to 920 million tonnes per year, or 18.4 million barrels per day (bpd), in 2022 Fu Xiangsheng, vice president of the China Petroleum and Chemical Industry Association, told reporters.

That compares with U.S. refining capacity as of December at 17.6 million bpd, according to the International Energy Agency’s latest oil market report.

China’s recent wave of refinery expansions has been led by state-run PetroChina and large private firms such as Zhejiang Rongsheng group and Jiangsu Shenghong Petrochemical, mainly to fill a supply gap in petrochemicals rather than transportation fuels.

China’s total refined products output last year was less than 700 million tonnes (5.1 billion barrels), at an average plant utilisation rate of around 70%, the association said, compared with more than 800 million tonnes in the United States, where average utilisation exceeded 90%.

China has 32 refineries with at least 200,000 bpd capacity each, according to the association, citing the launch of a new facility built by PetroChina (601857.SS) in Jieyang in Guangdong province as a recent example of the country’s growing capacity.

Reuters by Andrew Hayley, February 23, 2023