Highlights from APPEC 2019 in Singapore
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Highlights from APPEC 2019 in Singapore

A team from Ursa traveled this week to Singapore to attend the Asia Pacific Petroleum Conference (APPEC), one of the major events on the oil industry calendar.

 

There was no shortage of topics to talk about. 

 

This year’s event took place against the backdrop of the US-China trade war, worries over the health of the global economy, the firing of the Saudi oil minister, US sanctions against Venezuela & Iran, IMO 2020, to name a few. 

 

Here’s a sample of some of the comments we heard from speakers:

 

Loss of supply

There is a record amount of crude off-the-market estimated at 2.5 million barrels per day (bpd), mostly medium-heavy sour. 

 

Will any of this come back in 2020? What if that happens in the face of weakening growth in oil demand? How dangerous is this for the flat price?

 

APPEC 2019

 

Everyone thinks about the flat price weakness being a function of demand right now. But it’s also about supply. People are discounting oil prices because the supply off-the-market is mostly due to US sanctions efforts in Venezuela and Iran.

 

Iran & Venezuela 

US sanctions against Iran are likely to stay in place through the next presidential election in 2020. It seems like an intractable problem. 

 

For Venezuela, what if the current regime flees to Cuba? Venezuela will be open to investment again, though it doesn’t mean production will shoot up right away.

 

Political risk impacts 40% of OPEC production. That risk comes from sanctions, militant activity, untested political change. There is a considerable amount of oil availability that needs to be discounted.  

 

OPEC production cuts

The OPEC+ pact has committed to preventing inventories from rising too much. Given the supply growth in the US and other areas of the world, they will be in perpetual supply management mode.

 

US shale  

The US developing the capacity to export oil and load VLCCs represents a sea-change in the availability of light sweet crude. 

 

US refiners are geared toward running on heavy sour and will have to push out this excess. When this hits the Atlantic Basin, Brent and Brent-related grades will suffer.

 

US shale growth will slow dramatically in the medium-term over the next one to three years. We won’t see 1 million bpd growth every year. At the same time, you will see growth outside shale, from Gulf of Mexico, Norway, Brazil. All supply growth won’t be light sweet.

 

Comments by OPEC Secretary-General 

“The global oil market is generally on solid footing thanks in part to the efforts of OPEC and non-OPEC partners,” said Mohammed Barkindo. 

 

“Yes, the current market is experiencing a measure of uncertainty, but we must take pause and consider the big picture. Where we are today is in stark contrast to 2015-16,” he said. 

 

Aramco IPO

Why would someone want to buy shares in Aramco? I don’t see the Aramco IPO so much as an equity play. If the company is valued at $2 trillion today, can it grow to $10 trillion? If you buy shares today will you be able to sell them 10 years later and make money?

 

Buying  Aramco shares is more like buying a bond. You’ll get a decent dividend, but there are significant risks. What kind of rights will minority shareholders get?

 

Long-term oil demand

There are concerns about long-term oil demand trends. The UN expects world population to reach 9.7 billion in 2050 which means an additional 27 million barrels per day. However, oil intensity has been falling over time thanks to new sources of energy and improving efficiency. The energy intensity of the world economy is one-fifth of what it was 40 years ago.

 

 APPEC 2019

 

Impact of trade war

An all-out trade war between the US and China would lower global GDP growth to the low-2% range which would be devastating for oil demand.

 

Oil demand was spectacular from fourth quarter 2017 to second quarter 2018 which illustrates well the significance of global activity to oil demand growth. 

 

A key driver was middle distillate demand because of world trade. This underscores the importance of global trade growth to distillate demand growth.

 

Much of the current slowdown in distillate demand growth is attributable to the slowdown in global trade.

 

Future of transportation

By 2040 electrification of the vehicle fleet could displace 13.7m bpd of oil demand this is more than the 2018 oil consumption of the Middle East, African and Latin America combined.

 

While demand for transportation fuels faces the threats from the adoption of electric engines and stricter environmental legislations, the petrochemical sector is set to take the driver’s seat for oil demand growth.

 

Losing Asian market share

Middle East suppliers are losing longstanding offtakers, as North America transitions from being an importer of last resort, the source of marginal demand, to one where the need for international barrels is decreasing.

 

Asia’s reliance on the Middle East is high, but the Middle East is no longer the only player in town. The US is taking a growing share of Asia’s market. The US destination of its crude exports is quickly finding homes in Asia, and about 50% of total US exports go to Asia.

 

On average, across the big Middle East exporters, 80% of all barrels go to Asia. So the importance of Asia to the Middle East is even higher

 

IMO 2020

What Asia wants is lighter and lighter, but what MENA provides is heavier and heavier. Middle East crudes will struggle with the sulfur limits imposed by IMO 2020. There is the risk of permanent discount of heavy sour crudes.

 

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