China demand seen recovering fully in 2021. Rest of Asia faces downside demand risk. Economic recovery key to demand growth.
Sep 14, 2020
“In the September edition of OPEC’s Monthly Oil Market Report, we have caveated all of our forecasts by stressing the fact that the current outlook is very uncertain,” Barkindo said in a written interview to Platts ahead of the 36th Asia Pacific Petroleum Virtual Conference over Sept. 14-16.
“The latest oil demand information for the Other Asian region, which includes India but excludes China, points to the downside,” Barkindo said.
While noting that India’s oil demand decline accelerated to around 0.7 million b/d year on year in August — compared to a decline of 0.5 million b/d in July, Barkindo said: “Under the current circumstances, it will be challenging for oil demand to return to growth before 2021.”
Barkindo, however, added that OPEC’s forecast is based on its assumption that Chinese oil demand recovery will continue through the remainder of 2020 as its economy is on the path to recovery, particularly seen at the start of the second half of the year amid reporting fewer COVID-19 infection cases.
“However, as I said, there remains a high degree of uncertainty with regard to the immediate term forecast, especially taking into account the inelastic relationship between GDP and oil demand during times like these,” he said.
“Furthermore, the extent to which economies recover will be the major determinant of whether oil demand returns to the growth track next year. The speed with which fiscal stimulus measures filters through to end-users’ pockets — and the time it takes for this to translate into petroleum product demand — will be critical for the market outlook.”
Oil demand from Asia, which accounts for close to 40% of global demand, was significantly hit by the coronavirus pandemic this year, particularly in the transport sector, which has had an impact on major regional oil consumers’ crude oil procurement strategies in recent months.
OPEC and its non-OPEC partners’ focus remains on their decision taken in April to adjust overall production downward, Barkindo said. The first phase of adjustment was extended until July 31. “We are currently in the second phase of our voluntary production adjustments,” Barkindo said.
OPEC and its allies in May implemented a 9.7 million b/d production cut accord. The cut tapers to 7.7 million b/d from August to December, and then down to 5.8 million b/d from 2021 through April 2022.
With its need for constant monitoring of oil market developments, the coalition’s Joint Ministerial Monitoring Committee and Joint Technical Committee continue to meet monthly “to strengthen monitoring and keep abreast of the very dynamic market fundamentals,” he said.
“We carefully monitor developments in the Asian market, including Asian oil consumers’ procurement strategies. This feeds into the analysis that informs our decision-making process,” Barkindo added.
When asked about the outlook for Asia’s oil demand recovery to pre-pandemic levels, Barkindo said: “Based on current assumptions, a full recovery to pre-crisis levels will not appear in Other Asia during 2021.” He added that the demand recovery is highly dependent on measures aimed at containing the coronavirus pandemic and the development of a successful vaccine.
“China, on the other hand, will recover completely in 2021, should current assumptions continue to hold,” he added.
Asked whether Asia has the bandwith to take extra barrels in the coming months, Barkindo said: “This depends on crude storage and product demand. Asia will take up extra barrels as long as there is available storage capacity, including floating storage, which also closely depends on the price structure in the market.”
“Consumers will try to take up as much as they can. However, ultimately, once storage constraints are met, then it will be up to the rate of product consumption to dictate whether Asia can take up more barrels or not,” he said.
Barkindo, however, added that the current signs and indications in the market highlight the pressure from huge uncertainties and associated risks.
“We are closely monitoring the pace of the gradual recovery in product consumption,” Barkindo said. “Alternatively, if more refineries are forced to close, due to strong competition, Asian refiners would be in a better position to capture a larger market share, which would provide room for more crude imports.”
OPEC, which marked its 60th anniversary on Sept. 14, sees no change in its cooperation and dialogues with other oil producers as well as oil consumers, including in Asia, Barkindo said.
“Dialogue is a crucial cornerstone of our strategy,” Barkindo said. “This has been the case since the organization’s inception but has been particularly important given current circumstances.”
“Throughout the global lockdowns, we have held a series of bilateral video conferences with our Asian partners. All of these dialogues represent opportunities to engage with Asian consumers, listen to their views and incorporate them within our strategy,” he added.
US shale output falls to 1.5 million b/d net deficit. China oil stocks rise by 800 million barrels since start of 2019. China will need two years to clear excess oil stocks.
Sep 14, 2020
“We have a change in supply dynamics,” Luckock said at the 36th Asia Pacific Petroleum Virtual Conference, dismissing views suggesting the demise of US shale. “It’s not dead — its just on an enforced sabbatical.”
During the coronavirus pandemic, the US shale industry has taken a bit of a breather, he said.
Referring to Trafigura’s forecast in February, Luckock said: “Like most people, we were expecting solid US production growth this year [of around] 700,000 b/d,” adding that the company’s forecast was from taking particular realities of shale as a starting point.
“You need to replace 4.3 million b/d of production each year just to stay flat against that, we expected there to be around 5 million b/d of new production coming on. You will be in a net gain of 700,000 b/d — that’s what we thought pre-coronavirus.”
Trafigura’s US shale production outlook has flipped to a net deficit.
“The complete collapse in spending means that we now only expect 2.8 million b/d of new production to come on,” Luckock said. “But the underlying 4.3 million b/d decline doesn’t change. So, now we are left with an estimated net deficit of about 1.5 million b/d. That’s a massive change to our balances.”
The trend of new US shale production not offsetting the natural decline continues into next year, he said, adding that Trafigura does not expect to see growth until the very end of 2021.
“Until then, we are about 2 plus million b/d lower than we were expecting,” he noted. “But the good news is, as with all sabbaticals, they must come to an end and normal service for the shale patch will ultimately resume.”
The frayed relationship between Washington and Beijing has and will likely continue playing a major role in the US-China crude trade dynamics.
“We have the emerging and escalating strategic competition between China and the US,” Luckock said. “Regardless of who wins this November’s [presidential] election, the competition between these two sides appears to be something we are going to be seeing for some time, albeit perhaps with a different flavor depending on who is in the White House.”
He noted that China should be taking large volumes of US crude to meet its ever-growing needs under “normal” circumstances, but this wasn’t really the case earlier in the year.
Also weighing on US-Asia crude trade flows for some time will be the extraordinarily high inventory levels globally, with China effectively doubling its crude inventories since the start of last year, rising by some 800 million barrels, Luckock said.
“Even if demand does rebound to a level that is 1 million b/d higher than 2019, that still takes two years to work off this excess material,” he said.
Despite the high inventory levels, China is expected to ramp up US crude imports over the next few trading cycles as Beijing steps up efforts to comply with the Phase 1 trade deal it struck in January with Washington.
China’s crude imports from the US surged to a record high of 26.9 million barrels in July, jumping 82.6% from the previous high of 14.73 million barrels in January 2018, data from China’s General Administration of Customs showed.
The volume was estimated to cross 30 million barrels in September to hit another high, according to data intelligence firm Kpler. The country is poised to receive about 115 million barrels over July-December based on the recent buying pace, the data showed.
Ammonia is shipping's solution for the future. Sector reaching limits on fossil fuel improvements. No one solution; hinges on voyage length, sector type.
Sep 18, 2020
“The winners have already been decided and that is going to be either hydrogen or ammonia,” De Stoop told S&P Global Platts in an interview on Sept. 7. “The only problem that we have that we don’t know when it’s going to be ready and available,” he added.
“I’m speaking about an engine that is really capable of burning efficiently ammonia in a safe way because ammonia is a very toxic gas,” the tanker leader said, noting that infrastructure is crucial too.
“The world produces a certain amount of ammonia. It uses fertilizer, but the way it is produced is brown, meaning that we’re using energy to use it, which is coming from fossil fuel. So it’s a little bit ridiculous to be proud to burn ammonia or hydrogen on board your vessel” if this is the situation.
He noted there are greener ways to produce it, such as if your electricity is green and has been using renewable energy then you can co-share. He added it makes sense for the bigger vessels on longer voyages.
“Anywhere from 40 to 100 [days voyage]. It is the solution that we will have in the future,” he stated.
“However, it’s going to take time to put the infrastructure in place, and it’s going to take time to finishing the development of the engine, which I understand we are nearly there, will take about 2 years,” he added.
The International Energy Agency has also stated in a new report that biofuels, ammonia and hydrogen will meet more than 80% of shipping fuel needs by 2070, using around 13% of the world’s hydrogen production, with ammonia the outright leader. “More than 60% of the emissions reductions in 2070 come from technologies that are not commercially available today,” the Paris-based agency predicted.
De Stoop believes the industry is close to “hitting a brick wall” with current technology and getting the most out of oil-based fuels.
“In the meantime, do we try to be even more efficient on the existing technology, and it seems that we have reached a limit, and maybe there’s another 5%, 7%, potentially 10% saving on the consumption and therefore emissions,” he said.
De Stoop warned of the risks of adopting LNG or methanol, even with biofuel components as the industry looks to make good on decarbonization targets.
The International Maritime Organization, which capped the amount of sulfur in fuel oil at 0.5% from Jan. 1, 2020, from 3.5% previously, has a strategy of cutting carbon dioxide emissions per ship by 40% from 2008 levels by 2030. It then wants to cut the shipping industry’s total greenhouse gas emissions by 50% by 2050.
While LNG has lower carbon emissions, it emits methane through the supply chain and De Stoop is unsure there is the political will to tackle the leakage issue. He also drew parallels with the industry’s risks with scrubbers, equipment that removes sulfur from fuel oil so its engines can run cleanly, but which he said has had issues with regulation and economics.
“We all order LNG and then 5 years later, someone finally admits that is polluting more because we have not been able to solve the leakage problem, and everybody goes back to square one,” undermining the environment and this would “not be the right thing,” De Stoop explained.
With methanol and biofuel options, De Stoop raised the question of economics again and noted that with limited supply, shipping has to be honest with itself and how it competes in the greener fuel market. He gave the example of the airline industry which may have to lean much more heavily on the biojet solution given the difficulties of suitable alternatives and if other industries demand it too then the price of biofuels will be too expensive.
De Stoop also pointed out that with shipping itself, different cleaner fuels will suit certain sectors, differentiating between the size of ship and length and type of journey.
“We do long journeys so we need a fuel that … does not take away capacity from the fuel we need to transport. It’s going to be the same for the container guys. But if you look at ferries they run for just 2-3 hours and then they stop and they can run on batteries,” De Stoop said explaining the calorific value of a voyage.
“So it’s very important not to have, or not to believe that we’re going to have one solution across all shipping like we have at the moment. Tomorrow, everybody will have to find its own solution, which makes economic sense, locally and globally,” the tanker boss said.
S&P Global Platts Analytics believes alternative shipping fuels are still in the early stages of development and are expected to take significant time to displace oil. In Platts Analytics’ long-term outlook, non-petroleum marine fuels account for 11% of total bunker demand by 2040, with almost all of this accounted for by natural gas-based fuels.
“Alternative fuels are likely to be only one of a range of carbon reduction strategies employed by major shippers, with the others being improved fuel burn efficiency rates (most famously slow steaming, but also direct carbon capture, biofuels, batteries, fuel-efficient lubricants, and LNG bunkering),” Platts Analytics noted.
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