A closer look at the fragmentation of oil market dynamics and political interference at Petrobras.
Over the past month there's been a noticeable divergence between key global crude benchmarks, with Brent's premium to WTI widening to over USD$11 per barrel, the largest margin since 2014. Even within the US prices are varying by a significant degree; while the Permian is the fastest growing shale oil play, investment in production growth is far outstripping infrastructure spend, resulting in offtake bottlenecks with subsequent steep discounts for Midland crude trading at prices as low as USD$20 per barrel below Brent1.
Pipeline constraints are undoubtedly the cause of the immediate price disparity. However, the variation in quality of crude produced from ultra-light, tight oil plays when compared to conventional fields will, we believe, become an increasingly important factor in future pricing differentials. A significant number of US refineries are geared towards processing heavier crudes, and as light oil processing capacity in-country is reached, production growth in light oil (with an API over 40 degrees) will need to find another home.
While petrochemicals are still a significant driver of oil demand growth, in the short term, demand is likely to be weighted towards middle distillates such as diesel, jet fuel and marine gasoil, driven by new rules from the International Maritime Organisation requiring ships to switch to low sulphur fuels from 20202. Ultra-light oil isn't an ideal feedstock for middle distillates, and with a rapid and sustained decline in key heavy oil producing regions such as Venezuela, divergence in oil benchmark pricing is likely to be a recurring theme for the foreseeable future. Unusually for the oil market, participants will need to begin to analyze regional pricing dynamics in much closer detail.
- Mohammed Chunara, Associate Director, Energy & Natural Resources, KPMG in the UK
Following the end to a crippling truckers strike in Brazil, on June 1, 2018 Pedro Parente announced his resignation as CEO of Petrobras. Parente was the chief architect of the firm's painful turnaround over the past two years. But with voters increasingly angry about rising fuel prices, Parente said he would step down to leave the government a free hand to discuss the company's future. The development represents a decisive blow to President Michel Temer and his reform agenda. The biggest consequence of the resignation is to leave Petrobras exposed to more political interference. The company seems unlikely to recover its newfound ability to set diesel prices freely and is vulnerable to further losses as it becomes an arena of political dispute ahead of the election.
That said, a return to the aggressive price controls of the Dilma Rousseff years is unlikely. The Temer's administration will continue to seek ways to protect Petrobras from the cost of subsidies, compensating the company with taxpayers' money. But some limits to Petrobras' pricing policy will be considered, perhaps by changing the frequency of gasoline price changes as well, or by extending the subsidies on diesel prices. Regardless of who takes over from Parente, though, positive dynamics in the upstream sector are unlikely to be affected, either for Petrobras or other international oil companies. The negative repercussions are more limited to downstream operations.
- Divya Reddy, Practice Head, Global Energy & Natural Resources, Eurasia Group*
*Guest contributor for June edition
This Thursday, OPEC Russia cooperation seemed to become more durable when a preliminary decision of the Russia OPEC monitoring committee, to support the Russian proposal to increase production by 1 million bpd for discussion at the broader OPEC meeting on Friday, June 22, 2018.
The seems to reflect the oil market consensus that the growing demand for oil will absorb the increased production. The Brent oil price remains in the range of USD$75 per barrel, comfortable for both producers and the consumers.
- Anton Oussov, Global Head of Oil & Gas and Head of Oil & Gas in Russia and the CIS, KPMG in Russia
Note: The forecasts/analyst estimates above from Brent & Henry Hub are an indication based on third party sources and information. They do not represent the views of KPMG.