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Crude Oil Shortages Beginning To Bite In Key Markets | OilPrice.com

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Last monthOPEC and its non-OPEC allies, known as OPEC+, agreed to extend their deep production cuts through July in an effort to rebalance oversupplied markets in the face of pandemic-hit demand. The cuts were supposed to take ~10% off the markets with July’s cut clocking in at 9.6 million bpd.

But now there are signs that the pendulum could have swung a bit too far, with the markets beginning to experience shortages of key crude grades.

There are growing signs that the markets are undersupplied with Urals and Arab Light thanks to continuing deep production cuts as well as a rebound in demand by key customers such as China and Northern Asia.

The price of Urals, Russia’s flagship grade, has flipped to record premiums to the Brent crude benchmark, briefly changing hands at $2.40 a barrel above Dated Brent last week to reflect the undersupply. 

That marks a sharp turnaround compared to a discount of more than $4.50 a barrel recorded in April. Urals for delivery to Rotterdam, the main oil refinery hub in northwest Europe, were selling at a premium of $1.90 by the end of June, matching a prior record high. This, in effect, means that Rotterdam Urals were selling at ~$45 a barrel, a far cry from the $15 a barrel they commanded in early April.

Oil markets in backwardation

A similar pattern is being observed for other sour crude grades, which are commanding premium prices even with global oil demand still 10% below normal levels.

Under ordinary circumstances, medium-sour crude that Saudi Arabia and its OPEC partners pump is usually cheaper than light sweet crude with a lower sulfur content. However, OPEC, which mostly pumps medium-sour crude, has dramatically cut output to its lowest level since 1991. Further, Iran and Venezuela, which also supply medium and heavy sour crude, have both seen production severely curtailed due to U.S. sanctions as well as a lack of investment.

Consequently, Saudi Aramco has been able to raise the price of the crude it sells to refiners for three months in a row. And now for the first time ever, Aramco is selling its most dense crude, known as Arab Heavy, at the same price as its flagship Arab Light, a clear indication of strong demand for medium-heavy sour grades. Under normal circumstances, Arab Heavy sells at a discount of $2-to-$6/barrel to Arab Light. Related: Big Oil’s Investment Risk Is Spiking

To make matters even more interesting, medium-heavy sour crude for immediate delivery is commanding premiums to forward contracts, a situation known as backwardation. That’s a 180-degree turn from the situation just two and a half months ago when oil markets were in deep contango, meaning forward contracts were selling at a big premium to near-term contracts.

Production cuts working

CME data shows that oil futures in general are beginning to flirt with backwardation— a positive sign for oil markets. Back in May, the markets were in super-contango with futures for June delivery trading at just half the value of January 2021 futures; the situation is far less dramatic with futures for August delivery trading at $40.90/barrel compared with $41.54 for January 2021 futures.

These data sets are encouraging signs that OPEC+ members could largely be sticking to their pledges. Last month, Saudi Arabia and Russia warned members of the cartel that there was no room for noncompliance whatsoever after May compliance clocked in at just 74% of agreed cuts. Notably, Iraq cut just 38% of its promised cuts while Nigeria fared even worse, cutting a mere 19% of its commitments. That said, the importance of dramatic cuts by U.S. producers cannot also be overstated. In May, Reuters reported that North American producers were on course to cut 1.7 million barrels per day by the end of June with the U.S. Energy Secretary Dan Brouillette estimating that U.S. production would drop by 2 to 3 million bpd by the end of the year.

But more importantly, the latest oil price trends are confirmation that, indeed, the production cuts are working as intended by helping to rebalance the markets.

The coronavirus pandemic has caused global oil demand to fall off a cliff, with U.S. consumption falling to levels last seen nearly four decades ago. With global oil production at record highs, supply quickly overwhelmed demand leading to an acute storage crunch that triggered the historic oil price crash into negative territory. 

Source: Quartz

Oil prices have recovered ever since but remain a long way off the $60/bbl level they were trading at last December. The current oil price of ~$40/bbl could be around the breakeven that Russia needs to balance its books but far from satisfactory for Saudi Arabia, which needs ~80/bbl or majority of U.S. shale producers who need $50-$55 per barrel to break even. 

With the current level of cuts set to lapse at the end of July, it’s going to be interesting to see whether “OPEC+ is until death do us part,” as Prince Abdulaziz famously quipped a month ago.

By Alex Kimani for Oilprice.com

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Carry On Canadian Business. Carry On!

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Human Resources Officers must be very busy these days what with the general turnover of employees in our retail and business sectors. It is hard enough to find skilled people let alone potential employees willing to be trained. Then after the training, a few weeks go by then they come to you and ask for a raise. You refuse as there simply is no excess money in the budget and away they fly to wherever they come from, trained but not willing to put in the time to achieve that wanted raise.

I have had potentials come in and we give them a test to see if they do indeed know how to weld, polish or work with wood. 2-10 we hire, and one of those is gone in a week or two. Ask that they want overtime, and their laughter leaving the building is loud and unsettling. Housing starts are doing well but way behind because those trades needed to finish a project simply don’t come to the site, with delay after delay. Some people’s attitudes are just too funny. A recent graduate from a Ivy League university came in for an interview. The position was mid-management potential, but when we told them a three month period was needed and then they would make the big bucks they disappeared as fast as they arrived.

Government agencies are really no help, sending us people unsuited or unwilling to carry out the jobs we offer. Handing money over to staffing firms whose referrals are weak and ineffectual. Perhaps with the Fall and Winter upon us, these folks will have to find work and stop playing on the golf course or cottaging away. Tried to hire new arrivals in Canada but it is truly difficult to find someone who has a real identity card and is approved to live and work here. Who do we hire? Several years ago my father’s firm was rocking and rolling with all sorts of work. It was a summer day when the immigration officers arrived and 30+ employees hit the bricks almost immediately. The investigation that followed had threats of fines thrown at us by the officials. Good thing we kept excellent records, photos and digital copies. We had to prove the illegal documents given to us were as good as the real McCoy.

Restauranteurs, builders, manufacturers, finishers, trades-based firms, and warehousing are all suspect in hiring illegals, yet that becomes secondary as Toronto increases its minimum wage again bringing our payroll up another $120,000. Survival in Canada’s financial and business sectors is questionable for many. Good luck Chuck!. at least your carbon tax refund check should be arriving soon.

Steven Kaszab
Bradford, Ontario
skaszab@yahoo.ca

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Imperial to cut prices in NWT community after low river prevented resupply by barges

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NORMAN WELLS, N.W.T. – Imperial Oil says it will temporarily reduce its fuel prices in a Northwest Territories community that has seen costs skyrocket due to low water on the Mackenzie River forcing the cancellation of the summer barge resupply season.

Imperial says in a Facebook post it will cut the air transportation portion that’s included in its wholesale price in Norman Wells for diesel fuel, or heating oil, from $3.38 per litre to $1.69 per litre, starting Tuesday.

The air transportation increase, it further states, will be implemented over a longer period.

It says Imperial is closely monitoring how much fuel needs to be airlifted to the Norman Wells area to prevent runouts until the winter road season begins and supplies can be replenished.

Gasoline and heating fuel prices approached $5 a litre at the start of this month.

Norman Wells’ town council declared a local emergency on humanitarian grounds last week as some of its 700 residents said they were facing monthly fuel bills coming to more than $5,000.

“The wholesale price increase that Imperial has applied is strictly to cover the air transportation costs. There is no Imperial profit margin included on the wholesale price. Imperial does not set prices at the retail level,” Imperial’s statement on Monday said.

The statement further said Imperial is working closely with the Northwest Territories government on ways to help residents in the near term.

“Imperial Oil’s decision to lower the price of home heating fuel offers immediate relief to residents facing financial pressures. This step reflects a swift response by Imperial Oil to discussions with the GNWT and will help ease short-term financial burdens on residents,” Caroline Wawzonek, Deputy Premier and Minister of Finance and Infrastructure, said in a news release Monday.

Wawzonek also noted the Territories government has supported the community with implementation of a fund supporting businesses and communities impacted by barge cancellations. She said there have also been increases to the Senior Home Heating Subsidy in Norman Wells, and continued support for heating costs for eligible Income Assistance recipients.

Additionally, she said the government has donated $150,000 to the Norman Wells food bank.

In its declaration of a state of emergency, the town said the mayor and council recognized the recent hike in fuel prices has strained household budgets, raised transportation costs, and affected local businesses.

It added that for the next three months, water and sewer service fees will be waived for all residents and businesses.

This report by The Canadian Press was first published Oct. 21, 2024.

The Canadian Press. All rights reserved.

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U.S. vote has Canadian business leaders worried about protectionist policies: KPMG

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TORONTO – A new report says many Canadian business leaders are worried about economic uncertainties related to the looming U.S. election.

The survey by KPMG in Canada of 735 small- and medium-sized businesses says 87 per cent fear the Canadian economy could become “collateral damage” from American protectionist policies that lead to less favourable trade deals and increased tariffs

It says that due to those concerns, 85 per cent of business leaders in Canada polled are reviewing their business strategies to prepare for a change in leadership.

The concerns are primarily being felt by larger Canadian companies and sectors that are highly integrated with the U.S. economy, such as manufacturing, automotive, transportation and warehousing, energy and natural resources, as well as technology, media and telecommunications.

Shaira Nanji, a KPMG Law partner in its tax practice, says the prospect of further changes to economic and trade policies in the U.S. means some Canadian firms will need to look for ways to mitigate added costs and take advantage of potential trade relief provisions to remain competitive.

Both presidential candidates have campaigned on protectionist policies that could cause uncertainty for Canadian trade, and whoever takes the White House will be in charge during the review of the United States-Mexico-Canada Agreement in 2026.

This report by The Canadian Press was first published Oct. 22, 2024.

The Canadian Press. All rights reserved.

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