The Geopolitical Risk Premium Is Here to Stay
While oil prices spiked due to a combination of OPEC+ underwhelming markets and wildfires in Canada, a rising geopolitical risk premium is lifting both Brent and WTI and is set to stick around for a while to come.
- US-China trade war and OPEC+’s flooding of oil markets with additional supply have lifted refinery margins across the world, with gasoline, jet fuel, and diesel cracks all staying in double digits since the beginning of May.
- Global refining margins, as calculated by consultancy Wood Mackenzie, rose to their highest since March 2024 last month, reaching $8.37 per barrel.
- Some refiners might be scratching their heads whether early 2025 shutdowns were the best possible outcome - Shell’s Wesseling and BP’s Gelsenkirchen refineries (Germany), as well as Petroineos’ Grangemouth plant (UK), all shut down for good in April-May.
- Whilst Europe and the United States shutter downstream capacity, upcoming giants such as Nigeria’s 650,000 b/d Dangote refinery or Mexico’s 340,000 b/d Dos Bocas continue to be plagued with operational disruptions.
Market Movers
- US shale driller EOG Resources (NYSE:EOG) agreed to buy Encino Acquisition Partners for 5.6 billion, greatly expanding into the Utica shale basin with the addition of 675,000 net core acres and some 235,000 boe/d of production.
- US oil major ExxonMobil (NYSE:XOM) entered exclusive negotiations with Canadian fuel retailer North Atlantic to divest its 82.89% stake in French retail company Esso for a reported sum of 300 million.
- Austrian oil company OMV (VIE:OMV) sold its 5% stake in the Ghasha concession of the UAE, developed alongside ADNOC and ENI, to Russia’s private major Lukoil for a total consideration of 594 million.
- US midstream giant Energy Transfer (NYSE:ET) signed a 20-year term deal with Japan’s Kyushu Electric (TYO:9508) to supply up to 1 million tonnes of LNG from Lake Charles LNG, after taking up a 5 mtpa position in the project.
Tuesday, June 03, 2025
The failure of Russia-Ukraine and US-Iran talks did not come as a surprise to oil markets, but both outcomes have confirmed that the geopolitical risk premium will be around for some time. Canadian wildfires could add even more upward momentum to oil prices, while OPEC+ production decisions will continue to be a driving force for prices.
The Great Eight Sticks to 411. Eight OPEC+ countries that have started unwinding their 2022 voluntary production cuts agreed to another 411,000 b/d increase for July, the third straight month of expedited output hikes, bringing back 62% of their erstwhile curbs.
Canadian Wildfires Scare Oil Sands Producers. With two oil sands operators shutting plants around Alberta’s Fort McMurray production hub, Canadian oil production is now some 350,000 b/d lower due to widespread wildfires, with Cenovus’ (TSO:CVE) Christina Lake site taking the biggest output hit so far.
Iran Talks Likely to End in Failure. Iran is poised to reject US President Trump’s proposal for a new nuclear deal with Iran, according to top Iranian diplomats, after Tehran bemoaned the lack of sanctions-lifting guarantees and refused to ship its entire portfolio of enriched uranium abroad.
Trump Wants to Scrap US Heating Oil Reserve. The Trump administration’s proposed 2026 budget seeks to eliminate the Northeast Home Heating Oil Reserve, containing 1 million barrels of diesel for force majeure events such as hurricanes, selling the products to boost budget revenues by 80-90 million.
Metal Tariffs Come to the Forefront Again. US President Trump announced that he is planning to double tariffs on imported steel and aluminium from the current 25% rate to 50%, reportedly taking effect on June 4, adding pressure on prices in the world’s largest steel importer.
Petronas Mulls Full Canada Exit. Petronas, Malaysia’s national oil company, is reportedly considering selling its Canadian business, mostly focused on Montney gas production holding 800,000 gross acres, for a consideration of $6-7 billion, having bought Progress Energy for $5.3 billion in 2012.
Iron Ore Falls on Weak Chinese Manufacturing. Asian iron ore futures slumped to their lowest in two months after Trump signaled new US steel tariffs and China's manufacturing activity contracted for the first time in eight months, sending the July Singapore contract to $94 per metric tonne.
Gabon Roils Manganese Export Flows. The government of Gabon announced an export ban on unrefined manganese ore to be imposed from 2029 onwards, mirroring Guinea’s bauxite and Mali’s gold policy moves, forcing mining firms such as France’s Eramet (EPA:ERA) to refine the ore domestically.
US Cancels Biden-Era Green Projects. The US Energy Department cancelled 24 green energy project awards approved by the previous Biden administration, worthsome $3.7 billion, including a 332 million subsidy to Exxon’s Baytown refinery CCS pilot and 500 million to Heidelberg Materials.
Azerbaijan Lures Oil Majors. Azerbaijan’s state oil company SOCAR signed new exploration agreements with BP (NYSE:BP) and ExxonMobil (NYSE:XOM), with the former eyeing a farm-in to the Karabakh and ADUA fields whilst the latter will explore the Ganja-Yevlakh-Aghjabadi prospects.
IATA Remains Hopeful on SAF. The International Air Transport Association expectssales of sustainable aviation fuel (SAF) to double year-over-year to 2 million tonnes in 2025, equivalent to 0.7% of airlines’ consumption, acknowledging that this would cost consumers some $4.4 billion.
Brazil Launches New Licensing Round. Brazil’s hydrocarbons regulator ANP will be offering 13 blocks in its upcoming open acreage licensing round for pre-salt blocks, 7 in the Santos Basin and 6 in the Campos Basin, seeking to boost exploration drilling in the country’s most proven oil play.
Venezuela’s Oil Exports Remain Steady. Venezuelan crude exports were unchanged in May at 780,000 b/d after state oil firm PDVSA managed to maintain output levels despite Chevron’s departure from the country, boosting oil sales to China and curbing exports to Indian refiners.
By Michael Kern for Oilprice.com