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Vol. 27, No.5 Week of January 30, 2022
Providing coverage of Alaska and northern Canada's oil and gas industry

ANS tops 90 bucks

Demand ignores omicron, global supply tight; Beijing in pre-Olympic lockdown

Steve Sutherlin

Petroleum News

Alaska North Slope crude broke the $90 mark Jan. 26, settling at $90.51 per barrel - a gain of $1.68 over the previous day’s close. West Texas Intermediate gained $1.75 to close at $87.35, while Brent gained $1.76 to close at $89.86.

Brent broke above $90 in early trading, rising to $90.35, but it slid back into the upper $80s prior to the day’s close.

A few factors have driven prices to these levels, not seen since 2014.

On the demand side, the omicron variant of COVID-19 has failed to hammer demand for motor fuels as severely as feared when omicron first surfaced to short-circuit the post-COVID rally in November.

With respect to ANS, demand on the West Coast has remained robust.

The reopening of India and heavy Chinese buying have sopped up surpluses of cargoes on the Pacific, as evidenced by the continuing premium on ANS relative to Brent.

Omicron, however, may be blunting motor fuel demand in China, as the Asian nation continues to impose draconian lockdowns as part of its zero-COVID policy. Beijing residents have been hit with abrupt lockdowns as officials attempt to tamp down cases in advance of the Winter Olympics, which opens Feb. 4. That action may accelerate; a Jan. 26 ABC report said China has announced dozens of cases detected among Winter Games personnel.

Additionally, Chinese factories are shutting down for the Chinese New Year holiday - officially the first week of February, but practically, the shutdowns last several weeks.

Indeed, the 55-cent premium of ANS over Brent Jan 26 is smaller than it has been lately - averaging over a dollar since omicron emerged.

Supply-wise, global oil supplies are tight, exacerbated by the failure of the Organization of the Petroleum Exporting Countries and its allied producing countries to meet announced oil production increases to rachet back curtailments imposed at the onset of the pandemic.

In December, OPEC+ added only 250,000 barrels per day, 40% shy of the 400,000 bpd the group had planned, according to the International Energy Agency.

The problem is ongoing. OPEC+ production is now running 790,000 bpd below its target production rate, the IEA said.

Wild cards in the deck

Beyond the structural issues of supply and demand, wild card events loom possible in the future, adding uncertainty for the direction of oil markets.

Futures markets have been influenced by escalating tensions between Russia and the West as Russia rattles sabers along the borders of Ukraine.

The emerging crisis raises political risk premium, Velandera Energy Partners CFO Manish Raj told MarketWatch.

“Whereas the Russian-Ukrainian crisis directly affects the regional natural gas prices, crude oil prices are generally aloof, since little Russian oil transits through Ukraine,” he said. “Still, the possibility of an armed conflict is a serious development, and has wide geopolitical ramifications, thereby boosting oil price premiums.”

An energy-centric crisis that isn’t Middle East-focused is unusual, Simon Henderson, director of the Bernstein Program on Gulf and Energy Policy at the Washington Institute for Near East Policy wrote in a Jan. 24 opinion piece appearing in The Hill.

High oil prices are good for oil-rich countries but destabilizing for those that missed out on hydrocarbon wealth, he said.

“Salvation by Saudi Arabia - the stock solution to many energy crises in the past - is unlikely,” Henderson said. “Pumping at record levels, its ability to produce even more oil in the short term is limited.”

Iran talks stall

When talks about restoring the 2015 nuclear deal with Iran began in April 2021, there was optimism that Iran might restore oil production later in the year once free of U.S sanctions on its oil imports. Those talks appear to be stalling.

Three U.S. State Department officials have departed or stepped back from the talks because they felt the need to be tougher on Iran, the Wall Street Journal reported Jan. 24.

Goldman Sachs said in a Jan. 17 commodities research note that due to lack of progress in the talks, it is pushing back its estimate of a ramp up in Iran’s production to the second quarter of 2023.

Goldman said it now sees oil inventory draws narrowing but persisting into Q1 2022, with the global surplus in Q2 2022 “smaller than seasonal” at 400,000 bpd.

By summer, Goldman expects Organization for Economic Cooperation and Development inventories to hit the lowest level since 2000, with OPEC+ spare capacity to hit historically low levels of 1.2 million bpd.

Prices fly; investment stalls

As oil prices climb, investment in new oil and gas projects has stalled as investors shun industries that produce fossil fuels and heavy carbon emissions, according to Michele Della Vigna, Goldman Sachs head of natural resources research.

Capital markets engagement on climate change has reached elevated levels, Della Vigna said in a Jan. 20 briefing.

“Because of this shift, the industry finds itself severely capital constrained on traditional hydrocarbon investment in different ways,” he said. “For smaller exploration and production companies it’s about getting financing. For larger integrated oil and gas companies it’s about decarbonizing.”

Either way, companies can no longer scale oil and gas projects as in the past, he said. The resulting supply tightness “ultimately generates what could be one of the most interesting commodity up-cycles we’ve seen in decades.”

In previous recoveries, the norm was a doubling of capex within two or three years, but in the current one, Goldman expects capex increases closer to 20% in two or three years, Della Vigna said. Due to political uncertainty, carbon intensive businesses are delaying and reducing investment decisions.

The phenomenon is not limited to oil and gas.

Shipping, oil and gas, cement, and steel companies are investing 40% less of cash flow than in their long-term history, he said. “If you reinvest 40% less of your cash flow, the result is you’ve got a lot more money to use for balance sheet strengthening - but that has already largely happened - dividends and buybacks, which clearly are increasing, and at some point, M&A.”

“From a pure economic perspective, higher oil and gas prices accelerate the energy transition,” Della Vigna said. “They just do it in a way that can be disruptive from a social perspective.”

M&A deals soar in 2021

Global upstream merger and acquisition deals rebounded to pre-COVID-19 levels in 2021, reaching $181 billion, a 70% increase over 2020, Rystad Energy said in a Jan. 21 release.

“The total deal value for 2021 was the highest in three years and almost reached the highs seen in 2017 and 2018 of $205 billion and $199 billion, respectively,” Rystad said.

Big deals made a comeback on high commodity prices and a strengthening market, the consultancy said. Deals of more than $1 billion accounted for $126 billion of the global total.

Of the $1 billion-plus deals, 13 were company acquisitions together valued at around $65 billion, it said.

“Two large Australia-focused mergers - one between Santos and Oil Search and another between Woodside Petroleum and BHP - contributed about $22 billion, while other $1 billion-plus company acquisitions were focused on North American assets,” Rystad said.

In 2021 gas accounted for 56% of all traded resources, up from 43% in 2020, while oil accounted for 31%, and natural gas liquids 9%.

“With a strong potential deal pipeline, continuous pressure on companies to transform amid a global push to lower carbon emissions while simultaneously delivering profitable oil and gas production, and an average oil price of above $60 per barrel expected for 2022, the upstream M&A market is likely to stay active for the foreseeable future,” said Ilka Haarmann, Rystad senior analyst.

The upstream M&A market looks set to continue to strengthen, with deals in the United States likely to remain a crucial driver of global deal value, Rystad said, adding that large sales in other regions may occur, particularly if majors continue to streamline portfolios.

“While resources under development and production can receive high values in the current environment, buyers appear to be more cautious about discovered resources,” Rystad said. “Without larger changes in the macroeconomic environment, this discrepancy could persist.”

A further steady increase in valuations for producing and under development resources appears unlikely, based on historical values, Rystad said.

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