Oil slides under $70

Welcome to the latest edition of Oil Titans, a newsletter for people interested in the oil industry — written by me, Noha Mahmoud. Please send your feedback to [email protected] or via Twitter:?@nouha_mahmoud

Tebboune’s victory

Algerian President Abdelmadjid Tebboune is set for a second term after initial results indicated a sweeping victory in an election criticised for being held earlier than expected to marginalize potential challengers.

Tebboune, perceived as having strong ties with Algeria’s influential military, won 94.7% of the vote in the September 7 election, where he faced only two opponents, according to official figures released on Sunday evening. Voter turnout was reported at 48%.

With the outcome largely anticipated, high voter participation was crucial for maintaining the legitimacy of the 78-year-old leader, who initially rose to power in 2019 following mass protests that ousted his predecessor, Abdelaziz Bouteflika. In that tumultuous election, Tebboune secured the presidency with 58% of the vote on a 40% turnout.

Tebboune’s re-election may enable him to advance reforms aimed at opening Algeria’s protectionist economy to more foreign investment and reducing its dependence on oil and gas revenues. Algeria, which holds Africa’s second-largest gas reserves, has leveraged the energy windfall since 2022 to expand a costly social safety net, crucial in a nation where nearly two-thirds of the 47 million population are under 30.

However, this agenda could be threatened by a prolonged decline in oil prices. Last week, oil experienced its steepest weekly drop in 11 months, which could strain Algeria’s budget. In August, the country produced approximately 890,000 barrels per day, according to Bloomberg data.

The big picture: The overwhelming 94.7% win, while impressive, has sparked skepticism about the fairness and transparency of the electoral process. The high turnout was seen as crucial for maintaining legitimacy amidst claims of a politically motivated timing.

• Military Ties and Public Perception: Tebboune’s close ties with Algeria’s powerful military have fuelled concerns about the concentration of power and the influence of the military on political outcomes. His massive vote share reinforces perceptions of a controlled or manipulated political environment, raising questions about genuine democratic choice.
• Economic Reforms and International Influence: With Algeria’s growing significance as an energy supplier, particularly for Europe, Tebboune’s re-election may provide stability needed to push forward with economic reforms. These include opening up the economy to foreign investment and reducing dependence on oil and gas revenues, which are seen as critical steps for modernizing the economy.
• Energy Diplomacy and Strategic Position: The backdrop of the Russian invasion of Ukraine has amplified Algeria’s role as an alternative energy supplier. Tebboune’s victory is viewed as pivotal in reinforcing Algeria’s strategic position in global energy markets and capitalizing on the increased demand from Europe.
• Continuity Amidst Change: Tebboune’s re-election signals continuity in Algeria’s political landscape at a time of significant global and regional change. While his win may facilitate ongoing reforms, it also raises questions about the pace and depth of political and economic transformations in a country grappling with both internal and external pressures.

Aramco vs. ADNOC in South Africa

Saudi Aramco, Abu Dhabi National Oil Co., and commodities trader Trafigura are among the contenders vying to acquire Shell Plc’s service stations in South Africa, according to Bloomberg.

Initial interest has also been shown by South Africa’s Central Energy Fund, which owns PetroSA, as well as Sasol Ltd. and Oman’s OQ Trading. A decision on the successful bidder might be made by the end of the year, though it could potentially extend into 2025.

Shell is aiming to raise nearly $1 billion from the sale of its downstream assets in South Africa, which includes trading and fuel supply businesses. The company operates a network of 600 service stations across the country, as per its website.

Shell is collaborating with Rothschild & Co. on the sale. The list of bidders is expected to be narrowed down in the coming weeks, with binding offers anticipated by December.

Between the Lines: Shell’s sale of its service stations in South Africa is part of a broader strategy to divest from non-core assets and focus on more strategic areas. The sale indicates Shell’s commitment to reshaping its portfolio, possibly to invest in growth areas or manage debt.

• Competitive Bidding Landscape: The high level of interest from major players like Saudi Aramco, Abu Dhabi National Oil Co. (ADNOC), and Trafigura underscores the strategic value of Shell’s South African assets. These suitors see significant potential in Shell’s established network of 600 service stations, which could offer substantial returns or strategic advantages.
• Potential Deal Delays: The process of selecting a buyer might extend into 2025, reflecting the complexities involved in such high-stakes transactions. The possibility of combining offers or bidders pulling out suggests a dynamic and potentially volatile negotiation environment.
• Broader Market Dynamics: The interest from oil producers and trading companies highlights a trend where upstream and downstream sectors are increasingly interlinked. Oil producers like Aramco and ADNOC are seeking to capture more value by expanding into retail and trading, as margins in traditional trading become slimmer.
• Regional Expansion: Aramco and ADNOC’s recent international activities, including investments in refining and petrochemical sectors, illustrate their broader strategy to enhance global market presence. Their moves into new markets, such as Africa and Egypt, are part of their efforts to diversify and grow their global footprint.
• Investment Trends: The involvement of trading companies in downstream assets reflects a strategic shift to secure stable demand for their products. Trafigura and Sasol’s previous attempts to acquire other assets, like Engen, indicate a trend of increasing investments in retail fuel operations as a way to counteract thinning margins in the trading sector.
• Focus on Sustainability: The Central Energy Fund’s emphasis on stabilizing PetroSA for long-term sustainability indicates a broader concern with ensuring stable, ongoing operations amid a fluctuating energy market. This aligns with global trends toward more sustainable and resilient energy strategies.

OPEC+ supply delay

OPEC+ has delayed its planned oil supply increase by two months, but this adjustment failed to reverse the significant decline in crude prices amid concerns about weak demand.

The coalition members will not boost production by 180,000 barrels per day in October and November, according to an OPEC statement. However, their broader plan to gradually reintroduce 2.2 million barrels per day of idle supplies over a year remains, with the completion now extended to December 2025.

Despite the announcement, oil prices remained around $73 a barrel in London, showing little reaction. Julius Baer analyst Norbert Ruecker said that the delay does not alter the unfavorable market conditions for OPEC.

"Demand is relatively stagnant, and production continues to rise in the Americas, the oil market is likely to face a surplus next year," Ruecker said.

The decision to postpone came after disappointing economic data from China and the US—major oil consumers—pushed crude prices below $73 a barrel earlier this week, marking the lowest levels since late 2023. While this drop provides some relief to consumers who have faced high inflation, it leaves prices too low for Saudi Arabia and other OPEC members to meet their government spending needs.

Zoom in: Some OPEC+ members were inclined to increase oil supply, but the group’s decision to delay highlights the balancing act between different member interests and market conditions.

• Uncertainty and Flexibility: The repeated emphasis on the potential to "pause or reverse" the planned increases reflects the group's cautious approach in response to market volatility and uncertainties. This indicates a strategy of maintaining flexibility to adapt to changing circumstances.
• Libya's Impact: The output disruption in Libya was initially seen as an opportunity for OPEC+ to advance its plan. However, the group's choice to proceed with caution instead suggests concerns about potential market reactions or other underlying issues.
• Strategic Caution: The decision to delay the increase in supply despite the disruption in Libya shows a preference for a measured approach rather than aggressive market interventions. This caution reflects broader concerns about sustaining market stability amidst fluctuating demand and supply dynamics.

Oil plunge

Last week, US crude oil prices dropped to their lowest level since June 2023, marking what could be the benchmark’s worst week in nearly a year. This decline came as OPEC+ struggled to reassure the market regarding global supply and demand.

US crude reached a low of $67.17 and fell 8%, experiencing its worst weekly performance since October. The global Brent benchmark decreased by 9.8% over the week.

OPEC+ postponed its plan to increase production by 180,000 barrels per day until December, amid a significant sell-off in oil prices. This production boost is expected to add around 2.2 million barrels per day back into the market through the end of next year.

Behind the Scenes: OPEC+’s decision has left the market unsettled. This delay suggests that the cartel is struggling to manage the balance between supply and demand effectively. Despite the planned increase, oil prices have dropped significantly, indicating that market confidence is wavering.

• Weak Demand and Economic Indicators: US crude oil prices have fallen to their lowest since June 2023, reflecting broader concerns about global demand. A key factor is China’s slowing demand for oil, driven by its rapid transition towards electric vehicles. This shift is contributing to a decrease in global oil consumption, affecting prices.
• Forecast Revisions: Major financial institutions are revising their oil price forecasts downward. Bank of America has cut its 2025 Brent oil forecast from $80 to $75 and the US benchmark from $75 to $71. Citi anticipates Brent prices could average in the $60 range next year due to a projected market surplus. These revisions highlight growing concerns about oversupply and weakened demand.
• Price Declines Across Energy Markets: The significant declines in oil and gasoline prices, coupled with a drop in natural gas prices, reflect a broader trend of decreasing energy costs. This is compounded by a substantial pullback in gasoline and natural gas prices year to date, further illustrating market volatility and changing energy dynamics.
• Broader Market Impacts: The overall decline in energy prices and revised forecasts signal potential challenges for energy companies and investors. The market's struggle to adjust to new economic realities, such as lower demand from key markets and shifting energy consumption patterns, is contributing to uncertainty in the energy sector.

Tanker standoff

The European Union's naval mission in the Red Sea has reported that private companies have halted efforts to salvage a burning oil tanker due to safety concerns. The MV Sounion, a Greek-owned and flagged vessel carrying approximately one million barrels of crude oil, was abandoned by its crew after being struck by projectiles from Yemen's Houthi movement on August 21. Subsequent explosions on board caused several fires.

Last Wednesday, the Houthis indicated their agreement to allow the tanker to be towed away to prevent a major environmental catastrophe. However, the EU mission, which had been securing the tugs involved in the salvage attempt, said that "alternative solutions" are now being considered.

Why This Matters: The potential for a massive oil spill from the Sounion could have catastrophic environmental impacts, potentially surpassing the Exxon Valdez disaster, one of the worst oil spills in history. This risk remains high as fires continue to burn on the tanker, despite no visible signs of a spill yet.

• Regional Tensions: The tanker’s situation is tied to broader geopolitical tensions. The Iran-backed Houthis, who have targeted commercial shipping in the Red Sea and Gulf of Aden, claim their actions support Palestinians in the Gaza Strip conflict. This context adds to the complexity and urgency of the situation.
• Global Shipping Routes: The Red Sea is a crucial global shipping route. Any disruption or disaster here could have significant implications for international trade and shipping safety.
• Ongoing Conflict: The Houthis' continued targeting of commercial vessels, despite international interventions and retaliatory strikes by Israel, underscores the persistent instability in the region. This conflict affects not just regional security but also international maritime operations.

Russia's covert sourcing

Russia has been covertly sourcing sensitive materials in India and considering the establishment of facilities there to support its military operations, according to the Financial Times.

Moscow’s Ministry of Industry and Trade, responsible for managing defense production for Vladimir Putin’s ongoing invasion of Ukraine, drafted secret plans in October 2022 to invest approximately Rs82 billion (about $1 billion at the time) in procuring critical electronics through undisclosed channels.

The strategy, detailed in communications with a trade promotion organisation linked to Russian security services, aimed to utilize substantial reserves of rupees accumulated by Russian banks from increased oil exports to India. Russia viewed India as a viable alternative for obtaining essential goods previously sourced from countries deemed hostile.

The documents reveal that Russia and its Indian counterparts sought dual-use technologies—items with both civilian and military uses that are restricted by Western export controls. The plan even included potential investment in Russo-Indian electronics development and production facilities.

This correspondence illustrates Russia’s strategic pivot to India, despite Prime Minister Narendra Modi’s efforts to align India more closely with the United States. During a visit to Washington last year, Modi signed several cooperation agreements with the U.S., covering advanced jet engines and artificial intelligence.

Zoom out: Despite growing ties with the US, particularly through cooperation agreements in areas like advanced technology and defense, India has maintained a significant economic relationship with Russia. This includes substantial purchases of Russian oil, which have been crucial for Russia amid Western sanctions. The total trade between India and Russia reached a record $66 billion in the 2023-24 financial year, demonstrating deep economic links.

• Economic Imperatives: India has used its economic transactions with Russia, including trade in rupees, to navigate the sanctions imposed by Western countries. This has helped Russia mitigate some of the financial pressures caused by these sanctions. India’s strategy involves balancing its own economic interests with its geopolitical considerations.
• Diplomatic Tensions: The relationship has caused friction with the US, with Washington warning Indian businesses of potential sanctions risks associated with dealings involving Russia’s military industrial base. This underscores the delicate balance India must maintain between its economic interests and its diplomatic relationships with Western nations.
• India’s Dilemma: While India has condemned the invasion of Ukraine and called for peace, it continues to engage economically with Russia. This reflects a pragmatic approach to safeguarding its economic and strategic interests while managing international diplomatic pressures.

Halt in the North Sea

Neo Energy, a North Sea oil producer, has indicated that it will reduce investments in the UK due to “fiscal and regulatory uncertainty.” The company, owned by Norwegian private equity firm HitecVision, will delay its Buchan Horst oil project, located 115 km northeast of Aberdeenshire, while awaiting details on the UK’s tax policies in the upcoming October Budget. The ￡1bn project had aimed for its first oil by late 2027.

Several factors are at play. The new Labour government has announced a 3 percentage point increase to the UK’s energy profits levy (EPL), an additional tax introduced in 2022 following the surge in energy prices due to Russia’s invasion of Ukraine. This adjustment will raise the total tax rate to 78%.

Moreover, changes are being made to investment and capital allowances. These allowances, set by previous governments to encourage investment despite rising taxes, are now expected to revert to pre-2022 levels of 46% from the current rate of about 91% for every ￡100 invested in new projects. With the tax on profits at 40% in 2021, the reduction in tax relief is likely to lead to significant cuts in capital expenditure. The Offshore Energies UK lobby group estimates that nearly ￡12bn in capital investment could be jeopardised between 2025 and 2029.

The bottom line: Neo Energy is delaying its ￡1bn Buchan Horst oil project due to uncertainty over upcoming UK tax policy changes, including an increase in the energy profits levy and reductions in investment allowances. This situation, combined with broader concerns about the North Sea's future, has led to poor valuations for oil and gas companies operating in the region, with companies like Serica Energy and EnQuest trading at low multiples of their forward earnings. These factors are contributing to a challenging investment environment for North Sea oil and gas projects.

That is all for this dispatch from?Oil Titans. Thanks for reading! You can send your feedback by email: [email protected]. If you enjoy this newsletter please do share it with others.