Page 5 - MEOG Week 12

MEOG Commentary MEOG
On the other hand, Saudi Arabia has accumu- lated more than $500bn in net foreign assets over the years, helping to shield their public finances from weaker oil revenues.
Whether or not Russia or Saudi Arabia can withstand low oil prices for longer, US shale is certainly in a more precarious position. Chev- ron and ExxonMobil, which have both invested heavily in US shale in recent years, are expected to make dramatic cuts to expenditure.
With oil demand in freefall as lockdowns are imposed across the world to slow the spread of the coronavirus, the losses from Russia and Saudi Arabia launching a war against their US competitors at this stage may outweigh any potential gain, however.
Demand destruction
The US Energy Information Administra- tion (EIA), the International Energy Agency (IEA) and OPEC have all revised down their oil demand forecasts for the year; they expect demand in the first quarter of this year to fall year on year – the first quarterly contraction in more than a decade – with the former predicting a 910,000 bpd slide and the latter anticipating a 435,000 bpd contraction.
A major contributor to this drop comes from the world’s biggest crude importer, China, where COVID-19 originated.
supply plans
Aramco plans to boost output to 12.3mn bpd in the coming months, from around 9.7mn bpd earlier this year, and eventually to 13mn bpd.
The kingdom will continue to reduce oper- ations at its local refineries in April and May to free up volumes for exports, Reuters reported on March 19 and will also boost gas output at the massive Fadhili processing complex, to provide more gas for power generation, so that around 260,000 bpd of oil can be made available for export. In addition,
In contrast, Trump this month took the
oil industry’s advice and ordered the Energy Department to start buying oil to fill the coun- try’s strategic reserves. The department said on March 19 it would seek to acquire 30mn barrels of oil and more in the future. Meanwhile Texas’ energy regulator, the Texas Railroad Commis- sion, is considering limits on production because of low prices, according to the WSJ.
Other OPEC producers also plan to ramp up supply, while Russia has said it can bring an addi- tional 300,000 bpd of oil on stream within three months. National oil firm Rosneft is expected to play a key role in providing the extra supply. It recently launched trial operations at a mid-sized West Siberian field it operates with Gazprom Neft. The company is also moving ahead with full-scale development of one of Eastern Siberia’s largest oilfields.
Meanwhile, Lukoil, which lacks the capacity to increase production in Russia, has urged the government to renew negotiations with OPEC. Russia will be able to maximise its exports as many of its refineries are due to wind down operations over the coming months for routine maintenance.
oil price outlook
As producers prepare to flood the market, the outlook for oil demand continues to weaken.
Fitch Ratings is predicting a year-on-year decline in consumption of 7-10mn bpd in the second quarter. Goldman Sachs expects Brent to average just $20 per barrel in the three-month period. The effect of the coronavirus on demand will peak in late March, at 8mn bpd, the bank said last week, forecasting a supply surplus of 3.9mn bpd and 5.7mn bpd in the first and sec- ond quarters respectively.
Output over the longer term will also be affected, as producers have cut all or most of their discretionary spending to protect their balance sheets. This means that projects that had been due to come on stream in 2021, 2022, 2023 and further ahead will be delayed.™
Week 12 25•March•2020 w w w . N E W S B A S E . c o m P5