Escalating Middle East conflicts set crude oil prices on fire, but supply fears limit the gains

Crude oil prices made substantial gains last week due to widening conflicts in the Middle East. The geopolitical tensions that began a year ago between Hamas in Palestine and Israel have now expanded into a full-fledged regional war, involving Iran, Lebanon, and Syria, and others, said Polymerupdate.

The United Nations-designated terrorist organisation Hezbollah has taken a center stage in the conflict with antipathy reaching new heights. However, the gains were limited by weak demand projections from the International Energy Agency (IEA) in China, the world’s second-largest economy, due to a nationwide economic downturn.

Data compiled by Polymerupdate Research showed, the benchmark Brent crude futures for near-month delivery on the InterContinental Exchange (ICE) jumped 8.43 percent last week due to supply fears from the Middle East. Brent crude futures began its journey from USD71.98 a barrel and ended the week at US$ 78.05 a barrel, the highest level since August 31, 2024. Similarly, the Western Texas Intermediate (WTI) futures for near month delivery gained over 9 percent to last week at USD 74.38 a barrel, a weekly gain of USD 6.20 a barrel, from US$ 68.18 a barrel on previous Friday. The current level of WTI futures was not seen after August 29, 2024.

According to reports, the United States President Joe Biden was considering attacking the energy production and storage facilities in Iran, in a retaliatory action over Tehran’s missile attacks on Tel Aviv. While addressing the United Nations General Assembly gathering, Israel’s Prime Minister Benjamin Netanyahu vowed to respond to Iran's attack. Experts believe that the Iron Dome, an Israeli mobile all-weather air defense system, has kept Iran’s crude oil facilities on the top of the hit list.

The American multinational investment bank and financial services company, Goldman Sachs, has estimated crude oil prices to shoot up by USD20 a barrel from the current level, in case the supply from Iranian oil facilities see a halt due to a possible strike from the United States and Israel, as threatened by them. “If you were to see a sustained 1 million bpd drop in Iranian production, then you would see a peak boost to oil prices next year of around USD 20 a barrel,” said Daan Struyven, Co-head of Global Commodities Research at Goldman Sachs.

The Goldman Sachs’ commodities analyst forecasted this while assuming that oil cartel OPEC+ refraining from responding by increasing production. “Should key OPEC+ members such as Saudi Arabia and the United Arab Emirates (UAE) could see a smaller boost of slightly less than USD 10 a barrel,” he added.

It is worth noting that the oil market has seen limited disruptions since the Israel-Hamas armed conflict began on October 7, 2023. Crude oil prices remained under pressure due to frequent interventions with production increase from non-OPEC+ countries including the United States, and allied nations, followed by sluggish demand from China on economic worries. With around 4 percent of market share in the world crude oil supply, Iran accounts for over 4 million bpd of global output.

Both Brent crude and WTI Cushing posted losses for three consecutive months until September 2024 as the U.S. and Chinese demand concerns outweigh recent disruptions in Libyan oil supply amid a dispute between government factions there and the tensions in the key Middle East producing region related to the Israel-Gaza conflict. Oil exports from Libya were temporarily suspended. By contrast, the Arabian Gulf Oil Company has resumed output at up to 120,000 bpd to meet domestic needs, after the standoff between the factions shut most of the country’s oilfields.

Meanwhile, pessimism about Chinese demand growth re-surfaced after an official survey showed manufacturing activity in the world’s second biggest economy sinking to a six-month low in August, and this trend is expected to continue in September. Factory gate prices tumbled in China and owners struggled for orders, although another survey tracking export-oriented companies showed signs of a tentative recovery in August. China’s central bank recently cut its key interest rate by 50 basis points (bps) and announced a large stimulus package to boost the economy.

International Energy Agency (IEA) in its July 2024 Oil Market Report forecasts world oil demand continues to decelerate, with 2Q24 growth easing to 710,000 bpd year-on-year – the slowest quarterly increase since the October-December 2022 quarter. Chinese consumption contracted, as the country's post-pandemic rebound has run its course. Global gains are forecast to average just below 1 million bpd in 2024 and 2025, as subpar economic growth, greater efficiencies and vehicle electrification act as headwinds.

Also, global crude oil supply rose by 150,000 bpd to 102.9 million bpd in June as field maintenance eased and biofuels rose, offsetting a significant drop in Saudi flows. Solid monthly gains pushed April-June 2024 quarter output 910,000 bpd higher q-o-q. Growth of 770,000 bpd is seen for July-September 2024 with non-OPEC+ providing 600,000 bpd of the gains. Annual increases of 770,000 bpd are forecast in 2024 with gains of 1.8 million bpd next year.

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Ineos Group PLC said its purified terephthalic acid (PTA) plant at Geel, Belgium is being threatened with closure by “overzealous regulation” related to the level of cobalt discharges in the facility’s wastewater, said Chemweek.

Ineos said in a statement issued Oct. 8 that it is being asked to meet regulations by reducing cobalt levels to a limit that is “20 times lower than expert studies have shown to be required and 100 times lower than those set in Poland.”

The plant faces potential closure “as regulators aim to impose unattainable environmental targets on a factory that has already committed to an 80% reduction in cobalt levels,” it said. The facility has operated within all environmental standards and been fully compliant over the previous 20 years, it said.

The company’s comments follow a decision in August by the Council for Permit Disputes, an administrative jurisdictional body in the Flanders region of Belgium, which announced the suspension of the Flemish regional government’s environmental permit for Ineos Aromatics Belgium, an Ineos Group Ltd. subsidiary, at the company’s Geel and Laakdal sites. Two nature-conservation groups had appealed the permit, the council said in its August decision.

The Flemish government has not sufficiently investigated whether cobalt discharges from the Ineos sites have “a harmful effect” on the water quality of the Grote Nete River, the council said at that time, and it said the government should “reconsider” its environmental permit for Ineos Aromatics Belgium.

Ineos said today that the judicial review and imposition of a new regulatory limit on cobalt threaten almost 600 jobs at the PTA plant. “If the plant’s permit is not renewed and closure is enforced, then almost 600 jobs will be at risk,” it said.

Ineos chairman Jim Ratcliffe said in the company statement that the EU “cannot, on the one hand, claim to be supportive of industry whilst at the same time yielding to inexpert NGOs who will not be happy until we have deindustrialized the entire continent.” Ratcliffe said the judicial decision was “typical of what we are seeing across Europe. Regulators are bending over backwards to meet the demands of NGOs who are determined to use regulation to strangle the European chemical industry.” The demands being made by NGOs are “deliberately unreachable” and will lead to “large-scale deindustrialization,” he said.

Ineos said the PTA plant at Geel, near Antwerp, is one of the few remaining in Europe and the most efficient in the region with the lowest carbon footprint. PTA is a key feedstock for the global polyester industry, it said.

The plant’s production process utilizes a cobalt catalyst that results in microscopic amounts of cobalt in the wastewater, according to Ineos. Historically, the plant’s permit permitted the level of cobalt in the water to be up to 1,000 micrograms per liter, with typical emission levels almost a quarter of that, it said.

“The site had agreed to reduce that maximum level to 500 [micrograms per liter] and then to 120 [micrograms per liter] by 2027, requiring over €20 million of expenditure, and this was agreed by the local government,” Ineos said. That decision was then challenged by the two NGOs, which prompted the judicial review and the resulting imposition of the new regulatory limit on cobalt, it said.

Ineos added that the European Water Framework Directive “does not even identify cobalt as a priority substance, and neither France nor Germany has imposed any limitations.”

The plant at Geel can currently continue to operate under its current permit, with the Flemish government required to provide a new permit within three months of the council’s ruling in August.

In August, Ineos Aromatics issued a statement to the local press saying the company was “shocked” by the council’s decision and reviewing it with legal advisers to consider next steps. “We are happy to point out that in the event of the revocation of a new licence without replacement, the applicant has the right to continue operations under the previous operating licence, which is reactivated, until the [Flemish] environment minister makes a new decision,” it said at that time. “So, there is no question of closing down operations.”

In 2023, Ineos secured a new environmental permit for the two sites from the Flemish government after the previous permit expired in May 2022. However, the two conservation groups — BBL and Natuurpunt — appealed the renewed permit to the Council for Permit Disputes because of the cobalt discharges in the Grote Nete. Under the renewed permit, the Flemish government allowed Ineos to discharge its treated wastewater into the river. The conservation groups argued that the permitted discharge levels have caused the river’s water quality to deteriorate.

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The Kazakh NPP referendum turnout reached 63.66%, according to the preliminary information, Kazakh Central Elections Commission (CEC) Chairman Nurlan Abdirov said, as per Interfax.

"Based on the current information from commissions in regions and the cities of Astana, Almaty and Shymkent, the Central Elections Commission has summed up preliminary results of voting in the republic's referendum. A total of 7,820,204, or 63.66% of voters who qualified to take part in the referendum cast their ballots," Abdirov said at a CEC briefing on Monday.

"The total number of citizens who had the right to take part in the referendum was 12,284,487," he said.

We remind, the Atyrau Oil Refinery halted operations on October 1 for scheduled maintenance. The refinery reported a reserve of petroleum products at the start of maintenance, including 30,000 tonnes of gasoline, 15,000 tonnes of diesel fuel, 6,500 tonnes of aviation fuel and 500 tonnes of liquefied gas. Maintenance at the refinery is expected to last until October 25. The Atyrau Oil Refinery is one of three major oil refineries in Kazakhstan, located in the western part of the country. It is owned by KazMunayGas National Company with 99% and has a processing capacity of 5.5 million tonnes per year, with refining depth of up to 86.4%.

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Uzbekistan has pumped over 5.1 billion cubic meters of gas into underground storage facilities in preparation for the autumn-winter period, up 1 bcm from last year, Energy Minister Jurabek Mirzamakhmudov told local media, as per Interfax.

"So far more than 5.1 bcm of gas has been pumped into underground storage facilities, which is over a billion cubic meters more than last year. A lot has been done to build a sufficient fuel reserve to get us smoothly through the winter period," Mirzamakhmudov said.

He said the country's president had given instructions to prepare the systems, given past shortcomings and lessons learned. "We paid special attention to all aspects, from production, transportation and distribution to generation," Mirzamakhmudov said.

Uzbekistan can produce around 70 bcm of natural gas and 8 million tonnes of liquid hydrocarbons a year. However, production has dropped considerably in the past few years because of depleted deposits, process losses and a lack of an effective control system. According to official statistics, Uzbekistan produced 46.71 bcm of gas in 2023, down 9.6% from 2022. Oil production fell 2.3% to 770,100 tonnes.

Uzbekistan became a net importer of natural gas in 2023. Uzbekistan signed a two-year gas purchase agreement with Russia's Gazprom in June last year, with daily supplies amounting to 9 million cubic meters and annual supplies amounting to almost 2.8 bcm. Supplies under this agreement began on October 7, 2023. In February 2024, it was reported that the government of Uzbekistan intends to modernize the republic's trunk pipeline system in order to increase gas imports from Russia 3.5-fold, from 9 million to 32 mcm per day.

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Rosneft's Black Sea oil refinery in Tuapse has suspended processing since Oct. 1 due to low margins on refined fuels, said Hydrocarbonprocessing.

The plant, one of Russia's biggest Black Sea refineries, is technically able to operate, but will remain idle in October amid low profitability for exports of refined fuels compared to crude, traders added.

The shutdown of the Tuapse refinery means Russian oil product exports from the Black Sea port of Tuapse are set to fall in October by 69% month-on-month to 0.312 million metric tons, traders said.

Margins on refined fuels have fallen due to high prices, huge production volumes and a seasonal fall in demand.

The export-oriented Tuapse plant, which has processing capacity of 240,000 barrels per day (bpd) of oil, produces naphtha, fuel oil, vacuum gasoil and high-sulfur diesel, mainly supplying Turkey, China, Malaysia and Singapore. It supplies almost no gasoline and low-sulphur diesel to Russia's domestic market.

In 2023 the plant processed 9.322 million metric tons of crude oil, producing 3.306 million tons of gasoil and 3.123 million tons of fuel oil.

The plant has also been disrupted this year by damage from Ukrainian drone attacks. Ukraine has been systematically targeting Russian energy infrastructure in an attempt to disrupt Russia's economy and its ability to fund Russia's war in Ukraine, something the Kremlin calls a special military operation.

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