OPEC+ Extends Oil Production Cuts Into 2025
Espresso Briefing #2: Key oil market developments this week, short and sharp like your morning espresso.
7 min read
Summary
OPEC+ Meeting on June 2nd: OPEC+ agreed on Sunday to extend most of its significant oil output cuts into 2025, surpassing market expectations.
Ethiopia is banning non-electric vehicles: foreign reserves are tight while domestic hydropower is plentiful, arming them with the initial impetus for this radical policy.
Russia Attacked Four Ukrainian Power Stations Over the Weekend: Russia's latest drone and missile strikes on June 1st severely damaged four Ukrainian power stations, causing major blackouts and forcing emergency power imports from neighbouring countries, marking the sixth wave of significant attacks on Ukraine's electricity grid in the past two and a half months.
U.S. Oil Production: Record highs under President Biden, balancing energy stability and green transition efforts.
North Dakota's Oil Downturn: Significant job losses and economic challenges due to reduced fracking activities.
ExxonMobil's Guyana Controversy: Scrutiny over partnerships with contractors under criminal investigation, raising due diligence concerns.
ConocoPhillips and Marathon Oil Deal: In talks for a $22.5 billion all-stock acquisition reflecting sector consolidation.
Brent Crude Prices: Prices hovered around $80-$83 per barrel, with potential increases expected due to upcoming refinery runs.
Gasoline Margins: Robust in the Atlantic Basin due to high octane costs and low stocks, weaker in Asia from oversupply.
Diesel Margins: Have slumped since February but are stabilizing with support from low U.S. inventories.
Fuel Oil and Refinery Margins: HSFO cracks rallying on seasonal demand, with strong refinery margins expected through summer in the Atlantic Basin.
Global Refinery Operations: Outages declining since mid-April, with NOAA predicting an active hurricane season that could impact gasoline cracks.
Key Oil Market Stories
OPEC+ Extends Oil Production Cuts Into 2025
OPEC+ agreed on Sunday, June 2nd, to extend most of its significant oil output cuts into 2025, surpassing market expectations. This decision aims to stabilize the market amid slow demand growth (especially in China), high interest rates, increasing U.S. crude production, rising oil stocks in developed economies and sustained interest rates.
Current Cuts
Total Output Cuts: 5.86 million bpd, ∼5.7% of global demand.
Ongoing Cuts: 3.66 million bpd (due to expire at the end of 2024).
Voluntary Cuts: 2.2 million bpd (expiring at the end of June 2024).
New Agreements
Extended Cuts: 3.66 million bpd extended by one year until the end of 2025.
Prolonged Cuts: 2.2 million bpd extended by three months until the end of September 2024.
Gradual Phase-Out: The 2.2 million bpd of voluntary cuts will be phased out over 12 months starting from October 2024 to September 2025.
Market Implications
Demand Projections
OPEC Estimate: Demand for OPEC+ crude to average 43.65 million bpd in the second half of 2024, implying a drawdown of 2.63 million bpd if output remains at April's rate of 41.02 million bpd.
IEA Estimate: Demand for OPEC+ oil plus stocks to average 41.9 million bpd in 2024.
Prices: crude prices remain in the low $80 USD/BBL range. These extended supply cuts should keep prices hovering here in the coming weeks.
Ethiopia Bans Imports of Non‑electric Vehicles
The landlocked East African nation has unexpectedly become the first country to ban internal combustion engine cars completely, announced on January 29th, 2024. This will take effect in the near term, but an exact date has not been confirmed. This is because gasoline and diesel imports are unaffordable, eroding desperately needed foreign exchange reserves. In Ethiopia’s defence, they do have an abundance of cheap renewably generated electricity - roughly 90% of which comes from hydropower. Their Ministry of Transport and Logistics is undergoing an aggressive plan to install electric vehicle charging stations and a more stable power grid.
Today, Ethiopia reportedly has ~7,200 electric vehicles out of 1.2 million cars on its roads. This presents a significant market opportunity for the likes of BYD, Tesla, Volkswagen and other EV manufacturers in the years to come.
Russia Has Attacked Four Power Stations in Ukraine
In a series of drone and missile strikes on June 1st, Russia targeted four of Ukraine's power stations, resulting in blackouts across the country. This latest wave of attacks marks the sixth significant assault on Ukraine's electricity grid in the past two and a half months. Ukraine has recently been retaliating with attacks on Russian oil refineries and is expected to continue to do so after yesterday’s assault.
Separately, state-owned hydropower generator Ukrhydroenergo claims that Russia has targeted facilities in five Ukrainian regions, including two hydropower plants that sustained significant damage. It estimates that since the start of Russia’s invasion in February 2022, there have been more than 110 attacks on its hydropower plants and pumped storage power stations.
U.S. Oil Production and Economic Impacts
U.S. oil production has hit record highs under President Biden, outpacing both Saudi Arabia and Russia. Despite Biden's strong climate agenda, his administration has seen an increase in both oil and gas output. This increase is attributed to maintaining energy stability while transitioning to greener alternatives like electric vehicles and renewables. Federal onshore drilling permits have also increased under Biden compared to his predecessor.
North Dakota's Oil Industry Downturn
Despite the above record high American oil production, in North Dakota, the once-thriving oil industry is experiencing a significant downturn. The number of fracking crews has drastically reduced, leading to widespread job losses and economic challenges for local communities. Williston, a city heavily reliant on oil revenues, faces severe financial strain with plummeting sales tax receipts and downgraded credit ratings. This downturn highlights the risks of economic dependency on a single industry, as evidenced by the region's current struggles compared to past oil booms and busts.
ExxonMobil's Controversy in Guyana
ExxonMobil faces scrutiny over its involvement with contractors in Guyana who are under investigation for drug trafficking and other criminal activities. The contractors, Nazar and Azruddin Mohamed, have significant political connections and are crucial players in Guyana's burgeoning oil sector. This controversy has raised questions about Exxon's due diligence and the potential risks associated with its partnerships in the region.
ConocoPhillips in Talks to Purchase Marathon Oil
ConocoPhillips is in talks to acquire Marathon Oil in a $22.5 billion all-stock deal, reflecting ongoing consolidation in the oil sector.
Short-term Market Analysis
Brent Crude Prices and Structure
Brent crude prices hovered around $80 to $83 USD per barrel last week. Despite this increase, the market remains in contango, indicating a surplus of prompt crude. However, with refinery runs expected to rise from June to September, onshore crude stock draws are anticipated, potentially pushing prices higher. This assumes OPEC+ will maintain current production cuts at their June 2nd meeting. Historically, Brent contango phases have been short-lived, typically lasting less than four weeks, with the current phase starting on May 7.
Gasoline Margins
Gasoline cracks in the Atlantic Basin remain robust, outperforming pre-2022 levels despite being slightly lower than forecasted. High octane costs and low stocks in Europe and the US are sustaining these cracks. In contrast, Asian gasoline cracks are weaker due to oversupply, exacerbated by increased high-octane MTBE exports from China. However, supply outages in Indonesia and seasonal summer driving demand could support a near-term recovery.
Diesel Margins
Global diesel margins have slumped by about half since February, significantly affecting refiners' profits. This decline is driven by continued Russian exports despite sanctions, coupled with record outputs from China and India. The oversupply in the market has led to reduced profitability for refineries, creating additional pressure on the industry.
Fuel Oil and Refinery Margins
HSFO cracks are rallying due to seasonal power generation demand in the Middle East and feedstock demand in China, while VLSFO cracks remain stable. Refinery margins in the Atlantic Basin (U.S. and Europe) are strong and are expected to remain so through the summer. In Singapore, margins are near breakeven, limiting the potential for increased runs despite no immediate plans for run cuts.
Global Refinery Operations and Stock Movements
Global refinery outages have been declining since mid-April, with significant decreases expected in the US, Europe, and Africa. Meanwhile, global onshore crude stocks outside China drew down for the first time since April, marking the beginning of an anticipated extended period of stock draws. The National Oceanic and Atmospheric Administration (NOAA) has predicted an active hurricane season, which could impact gasoline cracks if significant storms enter the Gulf of Mexico.
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