A team from Ursa traveled to Geneva this week for a global oil conference hosted by Argus. The event draws from the large pool of Geneva-based oil traders, as well as folks from around the world.

There was plenty to discuss. The topics included:

• The September 14th attacks on Saudi Arabia oil infrastructure

• Shipping fuel regulations going into effect next year

• The US-China trade war

• The recent jump in global freight rates for large tankers

• Continued growth in US production and export infrastructure.

Here are the key takeaways:

Oil prices fail to hold higher after Middle East attacks

In the last few months, we’ve had two “Grey Swan” events – the attacks in the Strait of Hormuz and the attack on the Abqaiq processing facility – which traditionally would’ve led to oil prices in the high-two digits, low-three digits and justified the release of strategic oil stocks.

Yet a few weeks later, we’re struggling to hold onto a flat price of $60 a barrel.

The futures market structure is hinting at contango. The backwardation has become shallower than a year ago.

Geopolitical risk shifts to trade policy.

There are signs of an economic slowdown and then you have the US-China trade war where macroeconomics and geopolitics cross.

There are supply risks from Venezuela and Iran, but one contention is that geopolitical risk has shifted to demand side and has added bearish aspects to the market.

One spin-off of US sanctions on Iran and Venezuela, a portion of global fleet isn’t available when tankers are preparing for IMO 2020.

Four Seasons Geneva, October 2019

There was speculation that the UK was considering reducing strategic stocks

. In addition to its

commitments, there are European Union commitments. It may be that the UK will reduce stocks when/if it leaves the EU.

There has been a flight to safety with investors buying the US dollar and gold. Yet if you look at the Chinese energy space, it’s up year-to-date because of demand. The wheels aren’t falling off. This speaks to some of the fundamental dislocations in the market.

Possible revisions to Dated Brent assessment 

Since the early 2000s, the number of crudes in the Brent basket has increased, while the number of trades has declined.

Future benchmarking options look to add more liquidity resulting in a more robust benchmark.

The start of the Johan Sverdrup field as been touted as a potential benchmark, but first there needs to be a liquid market and an adjustment made because it’s a very heavy crude.

US imports to Europe have overtaken by volume the production of crudes in the Brent basket.

There are times when US imports to Europe have been more than 1 million barrels per day which is more than the BFOET

compliant fuels, supporting diesel demand.

New refineries boost throughput

Refinery run rates have been rising and this will underpin import requirements. Shandong refiners are expected to receive import quotas soon, likely in late October or early November.

We expect China’s refinery runs in 2019 will average 600,000 bpd more than in 2018 and peak this quarter

.

One reason is the huge expansion of refining capacity. Two new refineries came online adding roughly 1 million bpd in CDU capacity.

One of those refineries – Rongsheng – is still ramping up and its full impact will be felt in 2020.

Large private refineries coming online are squeezing margins. High crude differentials and freight rates are killing

refinery margins in 2019.

Teapot refineries with low capacity will be shut down by the Shandong government.

China’s imports up

China’s crude imports will average around 1 million bpd more this year than last year.

The main changes in imports year-to-date versus 2018 have come from increases in supply from Saudi Arabia, Brazil and Russia. Declines have come from Venezuela, Iran and the US.

Argus Global Crude, Geneva, October 2019

Unconventional production from the Americas will likely be the source of supply in the 2020s to meet growing Chinese oil demand. This includes US shale, heavy crude from Canada, extra heavy from Venezuela and offshore Brazil.

Latin America debts to China

Commodities in Latin America are mortgaged to China. Countries in Latin America borrowed more than $60 billion in oil-backed loans from China over a 13-year period.

PDVSA shifted focus of production from Syncrude to Merey Blend and export markets from the US to Asia, mostly China and India. This helps Venezuela pay down its oil-backed debt.

Venezuela instability 

The epicenter of risk in the region is Venezuela. The region has broken ties with Venezuela in terms of oil. But there is a tendency by Latin America governments to blame Venezuela for domestic ills. And it’s true, there is meddling by Venezuela in other countries.

Colombia was on the verge of getting its peace process on track, then Venezuela provided oxygen to non-state actors. The main threat to Colombia is security. There is a 2,200 km border shared with Venezuela that is porous and lawless.

Opportunities & challenges

Brazil’s production has exploded thanks to pre-salt discoveries offshore. In the next month there will be two offshore auctions. Massive reserves are at stake. This is for the big players.

Argentina is a huge shale play with huge political constraints. Argentina is back in crisis mode. Things are worse now at the end of Mauricio Macri’s term than at the beginning. All eyes are on the election October 27. The left is scheduled to come back to power.

There’s always a pie-in-the-sky refinery plan. That plan is now in Mexico. The government is determined to build a 300,000 bpd refinery. It doesn’t make sense. Mexico is right next to the most efficient refining hub in the world on the US Gulf.

One source of optimism in the region is Guyana given the country’s strong production trends.