Market impact from attacks on Saudi Arabia, US natural gas production soars, Freight rail policy changes proposed
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Attacks on Saudi Arabian Oil Impact Markets
A weekend attack on Saudi Arabian oil infrastructure has taken out 5.7 million bbl/day of production, Aramco said. It is unclear as to whether the downtime will be measured in days, weeks or months. Rising tensions are likely to keep a risk premium of a few dollars on oil prices.
“This attack has material implications for the oil market, as a loss of 5 million barrels per day of supplies from Saudi Arabia cannot be met for long by existing inventories and the limited spare capacity of the other OPEC+ group members,” Wood Mackenzie VP for Refining, Chemicals and Oil Markets Alan Gelder said. “A geopolitical risk premium will return to the oil price.”
IHS OPIS Markit had similar comments.
“The attack also amps up the geopolitical tensions as the U.S. has blamed Iran. Rising tensions are likely to keep a risk premium on oil prices of a few dollars,” IHS said.
The rally in prices has now broken futures out of the comfort zone of around the $55/bbl level for WTI and around $60/bbl for Brent. At one point in Sunday evening trading, Brent traded as high as $71.95/bbl, while the WTI peak came in at $63.34/bbl.
Abqaiq and Khurais are main processing centers for Saudi Arabia's Arab Extra Light and Arab Light crude oil.
With strong U.S. production, the need for hefty imports domestically has been lessened.
“China, South Korea, Japan and India are the biggest takers in Asia, with China and Japan leading the pack at an average of 900 – 1,100 kilo barrels per day each,” Wood Mackenzie research director Vima Jayabalan said.
India could be most exposed as its reserves are the least. China has SPR (Strategic Petroleum Reserve) and commercial crude storage, while Korea and Japan have IEA reserves to fall back on, Jayabalan said.
Collectively, Asian demand for Saudi Arabian crude is around 5 million barrels per day; accounting for almost 72% of Saudi Arabia's crude exports, according to Wood Mackenzie.
Asian consumption of Arab Extra Light and Arab Light grades alone from the affected facilities varies between 2.5 and 2.7 million barrels per day seasonally. The region's dependence has increased significantly over the last 1.5 years.
“The impact and the next course of action will depend on the duration of the outage. Saudi Arabia has enough reserves to cover the shortfall over the next week, but if the outage extends, then filling the gap with the right type of crude quality could be a challenge. Moreover, OPEC+ output cut predominantly consists of medium and heavy sour crudes,” Jayabalan said.
"In terms of refining and petrochemicals, the spike in crude oil prices will dent margins further,” Jayabalan added.
Impact on Chemical Markets
With associated gas supplies badly disrupted due to the acute pause in oil production after the drone attacks, ethane supply is particularly under threat, which in turn means ethylene supplies will be interrupted too.
Spot prices of monoethylene glycol (MEG) and polyethylene (PE) spiked in Asia, following news of the drone attacks on oil facilities in Saudi Arabia over the weekend. These two commodities are the two main chemical exports of the region.
“Indeed, the news is already circulating that MEG plants on the Persian Gulf coast are paralysed or set to shut. This represents 5.2 million tonnes of capacities or two-thirds of the total in the whole of Saudi Arabia. The country's main MEG supplier, SABIC, has reportedly also told customers privately that supplies for October arrival would be cut significantly, while the other main MEG producer, Petro-Rabigh, doesn’t seem to be impacted at the moment," Salmon Lee, Wood Mackenzie Head of Polyesters said.
"As for polyolefins, the LLDPE price at China’s Dalian commodity exchange spiked approximately 4.5%, and polypropylene prices spiked 3.3% on Monday September 16th vs Friday September 12th close. The polyethylene markets are pricing in for the potential increase in feedstock prices. Saudi Arabia accounts for 10% of global polyethylene capacities and it exported 87% of its production to the global markets in 2018." Lee added.
Many Saudi Arabian polyethylene producers are announcing the curtailed feedstock supplies, particularly ethane, at their facilities. Major producers, including SABIC, Tasnee, Sipchem, Yansab and Saudi Kayan, announced the feedstock curtailment ranging between 30-50%. The curtailed feedstock supplies to polyethylene facilities can impact the resin supplies from Saudi Arabia, which could enable greater participation of the UAE, Qatar and the U.S. in major demand centres of Asia.
MEGlobal inaugurates Oyster Creek plant in Texas
MEGlobal on September 9 inaugurated its 750,000-tonne/year ethylene glycol (EG) unit at Oyster Creek, Texas. The plant is in final start-up stages and expected to produce on-spec product by mid-October, the company said.
The facility will produce monoethylene and diethylene glycol, products used in a number of market applications including polyester fibers, polyethylene terephthalate (PET) bottles and packaging, antifreeze and coolants, paints, resins, deicing fluids, heat transfer fluids and construction materials.
"This is a major achievement for the EQUATE Group and will benefit both Kuwait and the U.S.," said EQUATE President and CEO Dr. Ramesh Ramachandran in a statement. "With a growing global market for EG products, it will provide us with greater flexibility to satisfy our customers' needs while capitalizing on the U.S. shale gas opportunity.”
Ramachandran noted the site builds on the longstanding relationship between its Kuwaiti partner, Petrochemical Industries of Kuwait (PIC) and the U.S. partner, Dow, a relationship that was forged during the liberation of Kuwait.
It led to the formation of the EQUATE Petrochemical Company, a joint venture between Dow and PIC (42.5% each ownership) as well as Boubyan Petrochemicals Co. K.S.C. (BPC) with 9% ownership and Qurain Petrochemical Industries Co. (QPIC) with 6% ownership.
"The EQUATE Group began with a large investment in Kuwait and now comes full circle with the investment in Texas. Our ability to leverage the project execution and operational excellence expertise of Dow allowed us to deliver the project on time and on budget in the U.S. Gulf Coast which is a remarkable accomplishment," Ramachandran said.
The project achieved several milestones in its construction, including more than three million consecutive safe work hours.
The site created 55 new full-time long-term jobs, 25-35 contract jobs. It employed almost 2,000 construction workers at peak.
Commercial quantities of finished product are expected to begin shipping by November 2019.
US Natural Gas Breaks New Records
U.S. natural gas production continued to increase in August, setting a new daily production record of 92.8 billion cubic feet per day (Bcf/d) on August 19, 2019, according to estimates from IHS Markit.
Natural gas production also set a new monthly record in August, averaging more than 91 Bcf/d for the first time, the U.S. Energy Information Administration (EIA) said.
In the latest Short-Term Energy Outlook (STEO), released on September 10, 2019, the EIA forecasts dry natural gas production to average 93.4 Bcf/d from September through the end of the year.
U.S. natural gas production increased by 7.1 Bcf/d (8%) between August 2018 and August 2019, led by production gains primarily in the Northeast.
U.S. natural gas production has increased, even as natural gas prices have declined. Natural gas spot prices at the national price benchmark Henry Hub have been on a downward trend since early spring. Spot prices at other natural gas hubs across the country have continued to sell at discounts to Henry Hub.
Record growth in U.S. natural gas production continues to put downward pressure on prices. This summer, prices have continued to decline despite high levels of natural gas exports and increased consumption in the electric generation sector.
Henry Hub prices averaged $2.40 per million British thermal units (MMBtu) in June and $2.37/MMBtu in July—the lowest monthly averages for June and July since 1999—as growth in natural gas production continued to offset growth in consumption.
In its September STEO, EIA forecasts Henry Hub prices to increase through the remainder of the year, ultimately averaging $2.55/MMBtu in December.
The estimated US gas resource base increased to a record 3,374 tcf at the end of 2018, 20% more than 2 years earlier, which represents the largest 2-year increase in the assessment’s 54-year history, the Potential Gas Committee (PGC) at the Colorado School of Mines (CSM) and the American Gas Association jointly announced on September 11.
“This report verifies that our nation has more natural gas than at any point in our history, ensuring that American families and businesses can rely on this clean, affordable source of energy,” AGA Pres. Karen A. Harbert said during a briefing at the trade association’s headquarters.
The Atlantic area ranked as the country’s richest gas resource region with 41% of total U.S. traditional resources, followed by the Midcontinent with 19%, the Gulf Coast—including the Gulf of Mexico—with 16%, and the Rocky Mountains with 16%, the report said.
ACC Welcomes Proposal to Change Freight Rail Policies
The Surface Transportation Board (STB) released a series of new initiatives to improve its process for reviewing freight rail rates. The announcements follow the release of a report by the STB’s Rate Reform Task Force that found that the Board’s decades-old rate review procedures are unworkable and have failed to address the negative impacts of massive changes within the freight rail industry.
“We applaud the members of the STB for their thoughtful leadership and commitment to getting our nation’s freight rail policies back on track. Chemical manufacturers across the country have been negatively impacted by excessive freight rail charges and lack of competitive rail service for too long," The American Chemistry Council’s President & CEO Cal Dooley said in a statement.
“The Board’s proposed reforms are a positive step toward improving how the STB addresses freight rail problems, and we look forward to working with the commissioners and their staff on modernizing and streamlining outdated regulations.”