The general market
Before the recent drop in oil prices, the general Brent trading price had been confined to the range of US$ 100 – 120 /bbl said, Richard Mallinson, Energy Aspects at Sulphur 2014. However, this was only until summer 2014 when prices dropped to the US$ 80s, the lowest prices the industry has seen in four years. This is partly due to geopolitical tensions and the fact that ‘Saudi Arabia has continued to pump above 10 million bpd, thereby creating a glut.’ Also Mallinson said, Germany has taken a turn for the worse, which has had a big impact on market confidence as ‘German GDP fell’.
Looking at Asia, ‘Japanese demand has plummeted as cheaper coal and LNG have substituted fuel and crude burn.’ When it comes to China it is environmental compliance that is putting a cap on GDP and oil demand growth. In Asia, and China in particular, it was said by Mallinson that it is macroeconomics that translates into the oil demand story and in smaller non-OECD Asia, oil was being supported until energy reforms began and this has also placed a cap on the market.
Focus on North America
When it comes to the oil and gas sector, North America really can’t be ignored at the moment and at Sulphur 2014 Mallinson of course focused on it in his presentation. He said, that ‘US gas prices are higher this year, but remain low by international standards.’ Also, there is continued growth and it is showing no signs of ceasing to accelerate. On top of this, there is no oversupply in the US market due to the significant drop in imports and the small leaks in condensates from the US to Asia and Canada as well as small government granted US exports.
However, prices can impact a market as strong as this. If gas prices drop then drilling is going to drop also. However, low gas prices have helped consumers and industrial users. But further money problems can also impact the North American oil and gas market as Mallinson said, ‘US independents have funded production growth through cheap credit, leading to rapidly rising debt levels. Consequently, as a sector, US independents are free cash flow negative and vulnerable if credit drive up.’ And this places huge pressure on shale which has been the buoy for the American oil and gas industry as continuous drilling is needed to maintain current production levels.
When it comes to the refining sector, Mallison of course commented on the usual; that the crude advantage US refineries are benefitting from is battering European refineries and that there is not the global demand to absorb the excess refined products now coming out of the US. He also said that in the Middle East, there is still new capacity being added to the refining sector in order to meet growing demand and as the region seeks to become one of the biggest exporters of the four main refinery products. Yet, it was Europe and Asia that Mallison focused on at Sulphur 2014 and a very interesting slide said the following:
‘Bearish for both European and Asian refining:
- Lower pull on Med gasoline, at least for now, until demand trends reassert themselves.
- Lower pull on med gasoline, due to higher output and as Middle Eastern countries move to higher spec gasoil (ULSD).
- Potentially a plus for Med ULSD prices but a minus for gasoil makers in Italy, Greece and The Black Sea.
- Higher jet fuel exports, increased jet flow to European markets likely to keep US jet values under pressure.
- Higher naphtha output, increased competition for European/Russian naphtha flows to Asia, ultimately depresses netbacks in Europe.
- Increased Middle East flow to African markets, though this hurts Asia more than Europe (directly).
- Ultimately should encourage capacity rationalisation in the Med to rebalance.’
When it comes to sulfur and the oil and gas sector, Mallison pointed out that of course, specifications are changing and fuels need to be cleaner and as a whole the sector is looking to reduce heavy output. He also pointed out that the refining sector is already reacting to this and is upgrading in advance of clean specs for both domestic and export markets the world over. He did point out however, that there will be a lot of excess sulfur on the market once specifications come in to play.
To conclude discussions Mallison looked to the future with some more interesting points the looked at the price forecast upside risk. Mallison named them to be ‘supply outages returning, shale disappointing. Geopolitical risks surrounding Iraq, Nigeria, Syria, Libya and Russian policy as well as demand recovery.’ When looking at downside risk, Mallison listed, ‘Europe slumps into a recession. Iranian/Iraqi supplies increasing. Further concerns around China. Saudi price wars.’ But he did conclude by pointing out that there are many risks and factors that can affect the oil and gas sector, which makes it such an interesting sector to follow.
Written by Claira Lloyd
Read the article online at: https://www.hydrocarbonengineering.com/the-environment/21112014/oil-gas-sulfur-sulphur-2014/