1.  Energy prices and production:

Oil prices continued to rise last week despite the uncertainty surrounding COVID-19.  New York futures closed at $29.43 and Brent at $32.50. As US storage capacity is limited, it is questionable whether cash oil prices are as high as speculators have driven futures. US crude stocks decreased slightly the week before, raising the question of whether there is enough demand to consume new production.  Washington now is allowing producers to put crude that they can’t sell to refineries or put into commercial storage to be pumped temporarily into the Strategic Petroleum Reserve. By the end of this week, much of the US will no longer be under mandatory lockdowns. It seems the new standard for imposing the harsh social restrictions that appeared to have worked in other countries is whether hospitals are swamped with new cases. Otherwise, it will be up to individuals and their employers to determine what precautions against contracting the coronavirus should be taken. Numerous polls say that the bulk of Americans are so concerned about the virus that they will take precautions to the extent possible. The numbers regarding supply and demand are all over the board. Two months ago, we were seeing the drop in demand estimates ranging from 10 to 40 million b/d from the pre-virus 100 million b/d. In the last few weeks, we have seen most of China, Europe, and the US lower restrictions on energy-consuming activities. While fewer restrictions will increase the demand for gasoline in those regions, there will still be large segments of the global economy that will not see much of an increase in oil demand. While China, the US, and Europe are the largest consumers of oil, much of the world, especially in Africa, Latin America, South Asia, and the Middle East, is only beginning to deal with COVID-19 by imposing lockdowns. These countries have only limited medical facilities and are almost sure to suffer many fatalities before the pandemic is over. Air travel, which is down 90 percent and container shipping down by some 25 percent, is unlikely to rebound anytime soon.  Consumers released from mandatory lockdowns are likely to return to work, if it is still available, and purchase essentials such as food and medicine. However, many are unlikely to risk contracting the coronavirus on non-essential activities such as entertainment, recreation, and non-essential shopping. The former high level of demand for petroleum liquids, mostly trucks and personal travel, which supports these activities, is unlikely to return soon. It is likely to be several months before we have a good picture of whether the demand for energy will stabilize or increase. The IEA said in its latest Oil Market Report that global oil demand hit its nadir in April down by 25.2 million b/d and will still be down by 21.5 million b/d in May. The IEA revised up its global oil demand figure for 2020, projecting a decline of 8.6 million b/d for the year, which is slightly better than the drop of 9.3 million b/d that the agency saw last month. Still, that is the largest decline of demand in the history of the oil market. However, the agency is somewhat optimistic in saying that in the second half of the year, gasoline demand will “return to normal.” But that assumes “no continued impact from confinement measures,” a rather significant caveat. “Our global 2020 forecast assumes the virus is largely under control at the global level and that containment measures do not return on a significant scale,” the report said. “It is on the supply side where market forces have demonstrated their power and shown that the pain of lower prices affects all producers,” the IEA said in its report. “We see massive cuts in output from countries outside the OPEC+ agreement and faster than expected.” The agency said non-OPEC countries could lose 4 million b/d by June, “with perhaps more to come.” And because the OPEC+ deal went into effect in May, total global supply could decline by 12 million b/d in May compared to April. US oil production continues to decline as drillers shut-in wells and cut back spending. New data from Rystad Energy predicts US oil production declines of roughly 2 million b/d by the end of June. “Actual production cuts are probably larger and occur not only as a result of shut-ins but also due to a natural decline from existing wells when new wells and drilling decline,” Rystad said in a statement.  Energy expert Philip Verleger, in an article for Energy Intelligence, reports that the magnitude of output declines is much larger. His latest research shows that production as of May 10th is down by almost 4 million b/d from its peak. The sharp decline in rigs, drilling, and completion activity means that the steep decline rates endemic to shale drilling will overwhelm what little new production comes online. Standard Chartered said that if the activity were to remain stuck at current levels, US production in the five main shale basins would fall by 2.89 million b/d by the end of 2020. Those declines would come on top of the output that has only been shut in temporarily. Standard Chartered envisions a “squashed-W pattern” for supply, in which temporarily idled production comes back online in a few months, but more structural declines continue after that. The EIA, characteristically, is much more optimistic about the state of US supply. The agency said on Tuesday that it only sees a 0.5 million b/d decline in oil production this year, compared to 2019. Notably, Secretary of Energy Dan Brouillette says production will increase in the third and fourth quarters as the economy roars back. Others aren’t so sunny. A report from Wood Mackenzie released on Wednesday says that oil demand will take years to recover. The Secretary of Energy may predict “greatness” ahead, but others see a long, protracted economic recovery.           

  2.  Geopolitical instability:

Iraq:  The new prime minister has appointed finance minister Ali Allawi as acting oil minister after parliament postponed a vote on the oil ministry post. Allawi, who had served in previous governments following the US invasion in 2003, was appointed finance minister last week as parliament granted its vote of confidence to Prime Minister Mustafa al-Kadhimi, most of his cabinet and his government program. Allawi, a former professor at Oxford University, was appointed by the Interim Iraq Governing Council in 2003 as both minister of trade and minister of defense and remained in his post until 2004. He later served as minister of finance in the Iraqi transitional government from 2005 to 2006. Baghdad has been conducting negotiations with the international oil companies that are producing domestic oil on postponing payments to them and cutting costs as the government grapples with the crude price crash. Iraq is committed to the OPEC+ oil production cuts agreement, the acting oil minister said Thursday. A Reuters report on Wednesday, citing unnamed Iraqi officials, said the country was cutting its oil output by around 700,000 b/d after failing to persuade global oil companies operating its giant fields to agree to deeper reductions.  The Islamic State capitalized on deteriorating US-Iraqi relations as the pandemic further distracted the unfinished fight against it. Last year, Iraqi F-16 fighter jets would swoop across the vast deserts of Anbar province twice a week, surveilling militants from the Islamic State group. The pilots were “watching for leaks” across the Syrian border. Now Iraq’s F-16 program “is almost gone,” the official said in interviews this month outlining the state of the high-profile fighter jet program. Three senior Western security officials familiar with the program confirmed that the program’s operational effectiveness is diminished. The Kurdistan semi-autonomous region of Iraq is ready to hand over to the federal government 250,000 b/d of oil production and its revenues. At the end of 2019, Kurdistan and Baghdad agreed that KRG would transfer oil revenues and 250,000 b/d to the federal government. Kurdistan failed to send oil or cash to the capital due to falling oil prices and the impact of the coronavirus. After weeks of negotiations, the spokesman for Kurdistan’s Regional Government said, “Within the framework of the agreement, we are willing to deliver 250,000 b/d to the federal government and are committed to transferring the revenues generated from oil sales to the Iraqi state treasury.”
Iran: The government is quarantining part of the oil-rich southwest of the country for the next week, with all main routes into the area closed, the semi-official Tasnim news agency reported. All banks, offices, and businesses in Abadan county, which is home to the Middle East’s oldest oil refinery and the traditional heart of Iran’s energy industry, will be shut, Tasnim said, citing the public affairs office of the county governor. Tehran reported an increase in the daily number of new Covid-19 cases earlier last week. The growth came a month after officials decided to loosen some restrictions on businesses and public activity. The Islamic Republic has so far reported more than 107,000 cases and some 6,640 deaths, according to the latest official figures. The Health Ministry stopped giving provincial breakdowns more than a month ago to prevent people from traveling into areas where the virus is less prevalent. The militant rhetoric emanating from Tehran has been much subdued in recent weeks as the government deals with the US embargo, low oil prices, and coronavirus; the latter has likely hit Iran harder than any other state in the Middle East. Libya: A withering bombardment shook Tripoli last week as the eastern-based forces of Khalifa Haftar fought overnight for new territory in the southern suburbs after losing ground recently around the city. Tripoli residents described the bombardment as the worst so far after weeks of fighting as the GNA attempts to end Haftar’s campaign to seize the capital and push his forces out of artillery range. Haftar’s Libyan National Army (LNA) has been trying to capture Tripoli for 13 months. Turkish military aid this year for the internationally recognized Government of National Accord (GNA) has helped it regain some ground. The LNA, backed by the United Arab Emirates, Egypt, and Russia, announced a new air campaign last week, but most bombardment since then has been through artillery. Last month the pro-GNA forces recaptured a string of towns in the northwest from the LNA, re-establishing their control between Tripoli and the Tunisian border. Turkey’s intervention in the Libyan conflict six months ago has altered the course of the war, boosting the prospects and military strength of the United Nations-backed GNA in the capital. However, Turkey’s deployment of troops, mercenaries, and sophisticated equipment to help its Libyan allies have failed to lift Haftar’s siege of Tripoli while emboldening his allies and pushing him to resort to more devastating air power.

Venezuela: Russia’s Rosneft confirmed on Friday that it had discontinued all operations in Venezuela, including joint ventures, trading, and oilfield services, as the firm looks to avoid further US sanctions for doing business with Venezuela. Rosneft announced the sale of its Venezuelan assets to a company 100-percent owned by the Russian government.

source: The Energy Bulletin Weekly- https://energybulletin.org