Oil futures rose on Monday as the cost of buying oil in the future swelled as Saudi Arabia announced that it was raising June crude prices to most of the world.
This after rising tensions between Israel and the Middle East and the reduced chance of an imminent ceasefire in the Gaza Strip stoked the chances that the Israel-Hamas conflict could widen further in the oil-rich region.
Oil Trading Price: Good time to trade oil
Brent crude futures had gained 43 cents, or 0.5%, to $83.39 a barrel by 1300 GMT. US West Texas Intermediate crude futures rose as well, gaining 51 cents, or 0.7%, to $78.62 a barrel.
The contracts had both posted their biggest weekly loss in three months the previous week, with Brent falling more than 7% and WTI dropping 6.8% on weak U.S. jobs data and speculation about the timing of a Federal Reserve interest rate cut.
Oil trading trends: Shell earns billions in crude trading
Despite the stuttering peace talks that had briefly lowered the geoeconomic risk premium of the oil trading price – in other words, the perceived danger of buying oil – there was trouble brewing, with Hamas reportedly demanding an end to the war in exchange for releasing of hostages and Israel said it was preparing for a ‘mother of all attacks’ in southern Gaza, which seemed to augur a new spike in the oil trading price.
Oil Trading Price: Saudi Arabia supporting the price
Lending further support to the oil trading price, Saudi Arabia also raised the official selling prices (OSPs) for its crude that it sells to Asia, Northwest Europe and the Mediterranean in June; the move signals that the kingdom expects relatively robust demand over the European summer.
In China, the world’s biggest crude importer, the latest data released in May showed that services activity grew at the fastest pace in 15 months — with a record-high increase in input prices — as new orders and business optimism climbed.
Such hope for a sustained recovery in the country’s economy would also be a factor in the oil trading price.
Oil trading price: Shell rocks Malaysia markets
The energy giant Shell is in talks to sell its sprawling petrol station business in Malaysia to Saudi Aramco, its state-owned counterpart, according to four sources in the industry.
The Malaysian business is the biggest that the European major has around the world, and is seen by the sources as a property worth up to $1 billion.
Shell runs around 950 fuel stations in Malaysia, second only to the state oil and gas company Petronas.
Negotiations, which started in late 2023, are expected to result in a deal sometime in the next few months, a source said.
The initial oil trading price was incorporated in the talks with the sources saying the deal could be worth 4 billion to 5 billion ringgit ($844 million to $1.06 billion).
Outside its retail activities, Shell’s operations in Malaysia involve the sale of industrial lubricants, offshore crude oil and natural gas production in Sarawak and Sabah, and involvement in two liquefied natural gas (LNG) joint ventures.
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The proposed divestment is in line with the company’s efforts, under the leadership of CEO Wael Sawan, to sharpen its focus on the most profitable parts of its business.
Shell recently announced plans to sell around 500 gas stations over the next two years, amid a reshuffle that also sees its refinery and petrochemical complex in Singapore going on sale.
The Malaysian fuel station sale is part of a larger move, another link in ‘a chain of assets’ that the company is ‘relinquishing or they are getting rid of’, he said, referring to its refinery on Bukom Island across from Singapore that serves the network.
Oil trading price: Saudi Aramco battle
However, Saudi Aramco has no fuel stations in Malaysia, but a strong foothold in the region and the world, with a 50% share in the 300,000-barrel per day Pengerang refinery in Johor, a joint venture with Petronas that serves the domestic and export markets as well.
Aramco also operates fuel stations in its home base of Saudi Arabia and internationally has ventures with France’s TotalEnergies and South Korea’s S-Oil Corp.
In a statement issued on Monday, the oil major Shell said it had agreed to offload its majority stake in a South African downstream unit – Shell Downstream SA (SDSA) – as part of a review of its business in several countries.
‘This decision to reshape our downstream portfolio and dispose the stake in SDSA was not taken lightly,’ Shell said in a statement.
The announcement did not specify when the exit would take place.
Oil trading price: Shell to leave SA?
SDSA is a joint venture between Shell South Africa and Thebe Investment Corporation, a black empowerment company that resulted from Shell’s divestment from its Shell South Africa Marketing and Shell South Refining businesses a decade ago: Thebe owns 28% equity stake.
Shell’s other operations in Africa are unaffected by this divestment. While Shell would be leaving South Africa after more than a century in the country, it would still be active in South Africa: Shell’s offshore exploration is still on.
Environmental campaigners opposed the company’s offshore exploration efforts, and the oil major has also fought challenges through the court.
Shell stressed that it plans to keep SDSA running during the divestment process and ‘retain the Shell brand in the region’, but a Thebe spokesman was not immediately available for comment.
The divestment includes SDSA’s central asset, the refinery in Durban, which is South Africa’s largest, and the first to operate on a fully commercial scale.
Since early 2022, the refinery has been in shutdown after Shell and its equally owned joint venture partner BP decided to freeze capital spending amid a growing crisis in the energy industry sparked by rising prices following the Covid-19 pandemic.
Earlier that year, heavy flooding in the region, which killed nearly 400 people that year, also damaged the plant that provided about 35% of the country’s refining capacity.
The shutdown has exacerbated the pressure created by the volatility of the oil trading price and South Africa’s ability to find energy.
The state-owned Central Energy Fund had recently expressed interest in buying Sapref, which has a nameplate capacity of 180,000 barrels per day, in response to energy security concerns.
But on Monday, an energy official said that the parties had signed a nondisclosure agreement and that she could not comment.
Oil trading price: South Africa petroleum industry
Now, South Africa is a net importer of refined petroleum products. The closures have also harmed national energy security. Both Sapref and the second-largest refinery in Durban, Enref, have closed. The shutdowns continue to affect the oil trading price.
When the oil industry meets this week in Houston for its annual conference for showcasing offshore energy projects and equipment, the big discoveries in the past 18 months offshore Guyana, Namibia and the US Gulf Coast are bound to take centre-stage.
The US shale boom, which brought abundant, cheap oil to the surface, combined with the reputed financial losses from costs run up on previous offshore projects, had relegated the deepwater to a back-burner in the industry.
Oil trading price: Deepwater plays
Nevertheless, the newest deepwater plays are described as attractive due to their long term production, low breakeven costs, large resource play, and low carbon footprint, according to Pablo Medina, head of new ventures at Welligence.
‘Deepwater is in fashion again,’ Medina told me. He noted that this renewed interest is helping to drive the oil-trading price.
Spending on all-new deepwater drilling now is expected to climb to a 12-year high in 2024, with capital expenditure fuelled by spending on both new and existing deepwater fields projected to reach $130.7 billion by 2027, a nearly 30% increase from 2023, according to the consultancy Rystad Energy.
James West, a senior managing director at the financial firm Evercore, added: ‘The return of offshore, deepwater operations is going to be a big topic at OTC, and Namibia is going to be the talk of the show.’
It won’t be the only such development off west coast Africa that is poised to influence the oil trading price.
With the price of oil trading at more than $70 per barrel today, Matt Hale, vice president of supply chain research at Rystad told the Rystad Energy Forum in Houston this month, energy producers now expect a payback of their multibillion-dollar deepwater investments in six years or less. That’s short, given that the lifespan of deepwater wells far outstrips shale.
Further excitement in offshore exploration has also been spurred by technology and new finds: the Portuguese oil company Galp Energia recently estimated the Mopane field off Namibia to contain as much as 10 billion barrels of oil.
Interestingly, current technology has led to the milestone of the first platform in the world to handle pressures as high as 20,000 psi – Chevron and TotalEnergies’ Anchor project in the Gulf of Mexico, off the coast of Louisiana.
The Anchor platform is about to start production and is expected to peak at 75,000 barrels per day and to operate for 30 years.
Guyana’s Stabroek block in the country’s offshore is demonstrating that it can produce on the cheap – competitive deepwater with the best deepwater in the world.
In the next six years, more than half of its recoverable resources will be produced at a breakeven oil trading price of less than $30 per barrel.
Rystad calculates that this is roughly equivalent to the breakeven cost of some 80% of the recoverable resources in Norway’s deepwater.
Rising interest in deepwater exploration is strengthening bid levels and takeaways for offshore drilling contractors, with daily rates for some vessels now exceeding $500,000, and term lengths elongating as vessel supplies dwindle.
According to Leslie Cook, an upstream supply chain analyst at Wood Mackenzie, ‘we are entering this euphoric period over the next 18 months, where the (deepwater rig) market will flatten out’ – alluding to a maturing, yet buoyant, market that moves with the tides of developments that influence the price of oil trading.
At this week’s annual three-day offshore energy projects and equipment show in Houston, Guyana, Namibia, and the US Gulf Coast are likely to be main talking points – reminder of the deeper discoveries that have re-ignited interest in offshore drilling projects.
After a lean spell for offshore exploration, beset by competition from cheaper US shale and ballooning cost overruns, deepwater is back with a vengeance.
Projects now attract a premium for their longevity, low breakeven costs, substantial resource base, and lower emissions, said Pablo Medina, head of new ventures at Welligence.
‘Deepwater is in vogue again,’ Medina said. ‘And when that kind of appetite comes back it will add to the price of oil that is traded.’
Capital investment in brand-new deepwater drilling will hit a 12-year high next year, according to data by the Norwegian research firm Rystad Energy.
By 2027, investments in both new and existing deepwater fields will skyrocket to $130.7 billion, a 30% increase from 2023.
James West, a senior managing director at Evercore, added: ‘The return of offshore and deepwater operations is going to be a big OTC discussion, and Namibia will be the discussion of OTC.’
A series of offshore oil discoveries, stretching along the west African coast and into the Gulf of Guinea, are altering the fundamentals of the oil trading price equation.
The payback period for their multi-billion-dollar deepwater projects is now estimated to be six years, versus the four or five years that’s common among onshore shale projects, according to Matt Hale, vice president of supply chain research at Rystad, the Norwegian energy data firm that held its annual Rystad Energy Forum in Houston earlier this month.
Besides longer lives, deepwater operations have lower carbon emissions intensity than even many land-based operations.
And as regulations surrounding energy companies’ greenhouse gas emissions tighten, that makes for a winning combination.
But the rush to take advantage of new technology and plentiful discoveries is also evident. The Portuguese oil company Galp Energia says that Namibia’s Mopane field might hold as much as 10 billion barrels of oil. The Anchor project in the Gulf of Mexico, which Chevron and TotalEnergies announced in September 2022, was the first in the world to operate at a depth of 20,000 pounds per square inch (psi).
The Anchor platform off the coast of Louisiana, due to start up soon, could yield as much as 75,000 barrels of oil per day at its peak – and is expected to last 30 years.
Meanwhile, the Stabroek block off the coast of Guyana has been found to have potentially low breakeven production costs – among the lowest in the deepwater world – with more than half of its reserves estimated to be extractable at a trading oil price below $30 per barrel.
Some drillers are now charging more than half a million dollars a day for an offshore vessel, while the duration of the contracts have been extended as fewer drilling rigs have been coming on to the market.
Leslie Cook of the oil analyst Wood Mackenzie says: ‘We are reaching this crescendo over the next 18 months or so where the (deepwater rig) market will level out.’
The market has been in flux for years, and will continue to be so. It affects the oil price that we buy.
