33rd Annual Asia Pacific Petroleum Conference (APPEC) 2017. We attended the APPEC 2017 at Raffles City Convention Centre, Singapore from 25th to 27th September organised by the S&P Global Platts. The event was well attended, with more than 400 participants from countries around the world. We returned with our NEUTRAL view unchanged on the sector and also concurred with most speakers’ view that oil prices will stay range bound between USD50-60/bbl in the near term. Healthy crude demand growth but OPEC production cut, in our view, is needed to keep supply in check as OPEC members, especially Iran and Iraq, have expressed intention to ramp-up exports.

Mixed views on oil supply demand dynamic next year. Several speakers held the view that oil market rebalancing has been substantially completed and the incremental US shale production growth shale production will be absorbed by demand growth in 2018. However, concerns were also raised that there might not be large inventory drawdown next year as the strong supply growth of additional 1.5m bbl/day from non-OPEC countries already outpaced the estimated demand growth of 1.4m bbl/day.

More from OPEC? Iran’s crude supply has almost reached its pre-sanction level with >3.8m bbl/day production in 3Q17 of which 65% of the crude is exported to the Eastern world. According to Saeid Khoshrou, Director of International Affairs, National Iranian Oil Company, the company is looking to increase the crude, natural gas, condensate and LPG drastically by 2020 and the New Iranian heavy crudes would be able to mitigate the shortage of heavy oil crudes faced by Asian refiners. On the other hand, Iraq’s crude production also sustained at 4.5m bbl/day as of June, higher than its required production level of 4.35m bbl/day. Despite facing ISIS threat, Iraq’s Minister Councillor for Energy Affairs, Ministry of Oil emphasised the importance of Iraq’s strength in the global oil market and is expecting the country’s export to reach 80% by 2020 from 52% in 2011. Meanwhile, Nigeria has shown gradual restoration of crude production to c.1.7m bbl/day as of August from a low of 1.3m bbl/day in February with on-going engagement to resolve the communal issues that disrupted the oil supply.

Resurgence of shale oil production. Suzanne Minter, Director Strategic Industry Analysis, S&P Global Platts believes that the US production should continue to grow in a low price environment due to high initial production rates and record high inventory of uncompleted wells which eventually lower the incremental breakeven cost at below USD40/bbl to produce. (Refer Figure 1).This is also evident by: (i) the strong rebound of rig count to 744 as of late September from a low of 318 in May last year when oil prices were hovering at USD45-USD58/bbl, and (ii) recovery of US production to 9.4m bbl/day from 8.7m bbl/day over the same period. As the Permian basin contributes 40% of the total US rigs, it will drive up US crude export to the rest of the world, mainly in China and Middle East which demonstrate the greatest capacity additions.

China is still the key demand market. Visible trade flow trends are apparent over the past five years where crude exports to North America has decreased by 20% and crude exports to Asia has increased by 30%. With the increasing crude supply to the global market where Asia Pacific is the primary market, one of the biggest supports to such demand is the >4m bbl/day new refinery capacity that are coming online in 2016-2020, of which more than 75% are attributable to China. China has surpassed US to become the world’s largest crude oil importer in 1H17 and it is expected to continue its uptrend as its crude production is likely to stay flat. Under such circumstances, it is forecasted that America will overtake Africa as the second largest crude supplier to Asia with US producers being the biggest beneficiaries.

Share of oil usage as an energy source to drop in a longer run. There is an unanimous agreement over the long-term positive prospect of the energy market, but most speakers concurred that the global energy mix will change in the future with a declining share of oil demand and coal coupled with increasing usage of renewables such as wind, solar, geothermal, biomass and biofuels. One of the widely discussed issues is the potential impact of electric vehicles as a disruptor to oil demand. While the impact of is unclear to the oil demand at this juncture, most industry experts believe that it is not impossible for electric vehicles to grow exponentially in the medium and long term, depending on various factors such as technology advancement to drive economic scalability and government policy direction towards carbon emission.

More guidance for IMO 2020. Another concern highlighted at the conference is the impact of IMO Sulphur Cap 2020. To recap, International Maritime Organisation (IMO) has set a global limit for sulphur in fuel oil used on board ships of 0.5% mass by mass (m/m) from 1 January 2020 in order to reduce the amount of sulphur oxide. It is seen as the most disruptive change to both shipping and oil industry. Given that there is not clear guidance on its implementation, most players are adopting a “wait and see” approach with the expectation that further extension could be given but at the risk of high non-compliant cost and losing competitive edge. As such, industry experts are calling for more communication between multiple stakeholders, including refiners and ship owners and regulators for gradual implementation to minimise the impact of transition.

Source: Kenanga Research - 4 Oct 2017