US crude dived below the US$100 per barrel mark for the first time since 27th Feb 2008 to settle at US$91.49 per barrel on 16th Sep 2008, before recovering to US$104.55 per barrel on 19th Sep 2008. US crude fell 8.6% during the review period (Aug 19-Sep 19, 2008).Worldwide credit crunch in the aftermath of subprime crisis, appreciation of the US dollar to a one-year high against the Euro, minimal damage from Hurricane Gustav overwhelmed the geo-political risk arising from conflict in the Caucuses and potential damage by Hurricane Ike to pull down crude prices to a seven month low on 16th Sep 2008. OPEC basket and Kuwait export crude price followed the same pattern declining by 15.3% and 13.9% during the review period. Both OPEC basket and Kuwait crude settled at US$91.72 per barrel.
World oil demand is expected to grow by 0.9mn bopd to average 86.8mn bopd in 2008 (OPEC). Decline in demand from OECD countries was offset by increase in summer demand from China, Middle East and the rest of Asia by 4.0%. The decline in OECD demand is largely attributed to decline in US demand as a result of higher retail prices and worsening economic indicators. Forming of dark clouds over Wall Street with the fall of giant financial sector firms has further intensified fears of a global financial crisis which might lead to revisions in the World demand outlook.
World Oil supply was 86.3mn bopd, a rise of 3% YoY in August. Non-OPEC supply is expected to average 49.9mn bopd during 2008. (OPEC). This estimate is subject to revisions as the assessment of damage caused by Hurricane Ike in the Gulf of Mexico, where all the major oil facilities of the US are located, is still in an early stage. On the other side of the Atlantic OPEC decided to shed 520,000 bopd to 28.8mn bopd in the recently concluded meeting in Vienna citing sufficient oil supply in the markets.
The refining saw contrasting fortunes across the globe. Refining margins for WTI crude at US gulf surged by US$2.93 per barrel to US$6.16 per barrel from US$3.23 per barrel last month. (OPEC). Annual maintenance and disruptions by hurricanes is increasing crack margins despite a slowdown in product demand. Banking on the surge in US refining margins, Brent crude oil margins at Rotterdam increased to US$4.13 per barrel from US$1.39 per barrel in July. Refining margins in Asia saw a beating due to lower imports by China and higher regional output. Refining margin for Dubai crude oil in Singapore declined by US$1.93 per barrel to reach a negative US$0.25 per barrel in August.
Total US commercial stocks stood at 983.3mn barrels at the end of August 2008 compared to 988.8mn barrels at the end of July 2008 (OPEC) with Gasoline stocks declining the most by 14.8% during August 2008 to 194mn barrels from the July 2008 levels. Western European total oil stocks witnessed a decline of 10.8% during August 2008 to 1,110.6mn barrels from July 2008 levels largely due to a 15.9% decline in crude oil stocks to 469.mn barrels during the same period.
Crude Oil Prices
US crude oil lost US$5.67 (5.6%) on 15th Sep 2008 as news of Lehman Brothers bankruptcy and sale of Merrill Lynch swept the financial markets. With American international Group (AIG), North America’s largest insurer saved from a similar fate after an US$85bn bail out from the US government, the indications are clear that the impact of the sub-prime mortgage crisis hasn’t bottomed out yet. The credit crunch situation is likely to worsen which is sending down shivers in the commodities markets.
US crude oil prices have lost 28% in two month since it reached an all time high of US$145.16 per barrel on 14th Jul 2008. Strengthening of the US$, decline in demand in the OECD countries due to higher retail prices and phased removal of subsidies in the developing countries is also playing its part in pulling down the prices.
During the first week of the review period (Aug 19-Sep19 08) the crude oil prices settled slightly upward with the prices rising by 5.0% on 21 Aug 2008 amid potential supply shortfall in the wake of tension in the Caucuses and possible production disruption from the Hurricanes in the Gulf of Mexico. However since 27th Aug 2008 the markets witnessed a sustained decline of 19.0% to reach US$91.49 per barrel on 16th Sep 2008. Subsequently, the prices recovered to US$104.55 per barrel on 19th Sep 2008 as investors turned back towards the commodities to shield themselves against a possible devaluation of the US$ in the backdrop of the financial crisis and falling equity values worldwide. OPEC basket and Kuwait export crude price followed the same pattern declining by 15.3% and 13.9% during the review period. Both OPEC basket and Kuwait crude settled at US$91.72 per barrel.
In the futures market profit-taking was witnessed amid sufficient supply of oil, strengthening of the US dollar and signs of slower world economic growth. During the month of August 2008, the weekly average net positions fell to 4,300 contracts from 11,800 in July, which is the lowest level since Feb 2007.
Crude Oil Price Movements in the Middle East
An across-the-board decline was witnessed in August in the crudes in the Middle East with Bonny Light declining the most by 20.7% and BCF-17 declining the least by 14.0%. WTI/Brent differential increased from US$0.63 per barrel in July to US$3.55 per barrel in August. Brent/OPEC Reference Basket difference narrowed down from US$1.97 per barrel in July to US$0.62 per barrel in August. The difference between various crude oil prices is based on quality which in return is determined by the sulphur content present and other properties. Typically the WTI has traded at a premium of US$1 per barrel over Brent and US$2 per barrel over OPEC basket price. The variation in prices is caused by other market factors.
World Oil Demand
According to OPEC, forecast the world demand growth in 2008 will be 0.9mn bopd to average 86.8mn bopd. There has been a downward revision of 0.1mn bopd arising from a decline in OECD demand. The US, which is the largest consumer accounting for approximately 25.0% of the total world demand, witnessed a decline in demand amid worsening economic indicators and high retail prices. The US demand is projected to decline by 2.0% in 2008. Demand growth from Western European countries is expected to remain slack at 0.5% due to higher retail prices and shrinking pool of gasoline engine vehicles.
Demand growth is being led by Non-OECD countries particularly China and the Middle East and rest of Asia. With the financial markets going through turmoil in the aftermath of the sub-prime crisis, these figures are vulnerable to downward revisions as credit crunch might lead to a slowdown in economic activities world over.
World Oil Supply
According to OPEC, non-OPEC supply is expected to average 49.94mn bopd in 2008, a growth of 510,000 bopd over the previous year. There was a downward estimate of 70,000 bopd to the earlier estimates due to the BTC pipeline explosion and impact of Hurricane Gustav and Ike. Hurricane Ike appeared to have caused widespread damage in the US Gulf of Mexico. Though it is still early to assess the damage that it might have caused, it may lead to downward revision in supply.
OPEC Production
OPEC oil production averaged 32.5mn bopd in August, a decline of 20,000 bopd according to OPEC Sep 2008 monthly report. OPEC production not including Iraq was 30.12mn bopd. In the recently concluded meeting in Vienna, OPEC decided to cut its output to 28.8mn bopd (excl Iraq, Indonesia incl. Angola and Ecuador). The member countries in the conference agreed to strictly comply with the September 2007 production allocations. Anglola and Ecuador are the new members of OPEC while Indonesia’s request for withdrawal from the organisation was accepted in the meeting..
Refinery Margins and Utlisation
The refining margins have received a boost due to declining crude oil price, precautionary shutdowns in the US Gulf coast and more US draw downs of stocks. Refining margins for WTI crude at US gulf surged by US$2.93 per barrel to US$6.16 per barrel from US$3.23 per barrel last month. Banking on the surge in US refining margins, Brent crude oil margins at Rotterdam increased to US$4.13 from US$1.39. Refining margins in Asia saw a beating due to lower imports by China and higher regional output. Refining margin for Dubai crude oil in Singapore slid by US$1.93 to reach a negative US$0.25 in June.
Historically the throughput has increased during the driving season. However this time around decline in demand due to higher prices have led to lower throughput as can be seen in the table below. Throughput declined for all the countries with the exception of Japan and the UK which witnessed an increase of 0.19mn bopd and 0.02mn bopd respectively in August 2008 compared to July 2008. Similarly refinery utilization rates witnessed a declined with the exception of Japan and the UK . The utilization rate in US is likely to come down further as Hurricane Ike appears to have caused widespread damage. Low utilization rates will maintain its upward pressure on crack margins.
Refinery Product Prices
In absolute terms, the prices of all the major products witnessed a decline with Gasoil/diesel declining by at least US$25 per barrel in all the major markets. However the crack spread for gasoil for the WTI crude at the US Gulf coast surged to US$21.75 per barrel in the first week of September from US$10.75 per barrel in the corresponding period last month as hurricanes disrupted activities over there. Jet/kerosene oil prices registered a decline of around US$26 per barrel. Naphta prices declined US$17 per barrel in the Asian market and by US$16.75 per barrel in the European market.
World Oil Stocks
Total US commercial stocks stood at 983.3mn barrels at the end of Aug 2008 compared to 988.8mn barrels at the end of July 2008 with Gasoline stocks declining the most by 14.8% to 194mn barrels in Aug 2008 as compared to July 2008. The steep decline in gasoline stocks was due to lower imports and lower production from refineries. Commercial stocks in general fell in the first week of Sep 2008 to 974.6mn barrels from 983.3mn at the end of August 2008 due to production disruptions from hurricane activity.
Western European total oil stocks witnessed a decline of 10.8% in August 2008 to 1,110.6mn barrels from the July 2008 levels largely due to a 15.9% decline in crude oil stocks to 469.9mn barrels during the same period. Crude oil stocks declined amid lower production from North Sea and lower imports from BTC pipeline. In contrast distillates witnessed an increase of 6.9% in August 2008 as compared to July 2008.
Oil Production Plans in GCC
The major expansion plans are being executed by Saudi Arabia. Saudi Arabia is planning to raise production capacity to 12.5mn bopd by the end of the decade. Aramco is undertaking the major expansion plans with the largest expansion plan in place through Aramco Khurais development project which is expected to yield 1.2mn bopd by 3Q2009.
Other major expansions are coming in the UAE which is looking to expand its production capacity by 650,000 bopd by 2010. The major expansion work is being undertaken by Abu Dhabi Company for Onshore Oil Operations (ADCO) which is looking to expand its capacity to 1.8mn bopd from the current 1.4mn bopd by executing a US$3bn project ADCO phase 1 project which is expected to come online by 2010.
Kuwait Oil Company (KOC) is planning to increase oil production to 4mn bopd by 2020. The early production facility phase 1 and phase 2 are a part of this plan. Phase 2 is expected to process about 120,000 bopd of wet sour crude and 2mn cm per day of Liquefied Petroleum Gas (LPG) from Ratqa and Abdali fileds. Phase 2 will be located close to the EPF Phase1. The project is expected to come online by 2012.
The other major expansion will come online till 2030 which will be undertaken by Kuwait petroleum corporation (KPC). The Ministry of Energy and KPC plans to expand oil production in the northern fields from the current 550,000-600,000 bopd to 900,000 bopd, and sustain it over a 20-30 year period. The venture was initially proposed in 1992. The venture which is also known as Project Kuwait has a vision of a consortium of International Oil Companies (IOCs) providing the investment and technology needed to exploit reserves in the diffcult terrain in the northern fields in order to expand production
Oman is in the process of increasing its capacity by 200,000 bopd per day by 2011. PDO - Harweel Cluster Development Phase- 2A/B is expected to add 100,000 bopd by 2010.
In Qatar Maersk, which operates Al Shaheen under a production sharing deal with Qatar Petroleum, is carrying out US$5bn expansion at the Al-Shaheen Block-5, an offshore block, to raise production to 525,000 bopd by 2009 from the current 240,000 bopd.
September 26, 2008
By Global Investment House
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