Energy Market Scan April 2023

Thoughtspace: Energy

May 13, 2023

Prologue

A warm welcome to all our readers.

We have seen oil prices on the descent through the past month, and one of the major reasons, as described in our previous edition is the credit crunch impacting demand in the short term. This is coupled with weak economic data from China. We believe that the China reopening story was overdone. Oil prices have come down close the $70/b mark. The Fed rate hike, followed with further regional bank bankruptcies, and the US federal debt ceiling issue, will further hit demand thus holding oil at these modest levels.

Will there be a full meltdown of crude oil prices? We do not think so. The crude demand outlook looks poor but cuts in OPEC+ supplies and rising demand for aviation fuel, gasoline (miles driven) and diesel (infra projects) will keep prices afloat. Moreover, globally strategic crude oil reserves will be replenished as prices go down.

China continues in its new found role as mediator to drive consensus between Saudi Arabia and Iran to put an end to the Yemen war. The US does not seem too pleased with this (does anyone really want peace in the world?).

Meanwhile, US and Iran are caught in a battle of tit-for-tat seizures of each other’s oil tankers. The recent US softer corner for Iran has not been appreciated, perhaps these are token demonstrations to show that things are not all that hunky dory?

What have polar bears and oil have to do with each other, do you ask? Well, for one there is an intense game of land (and sea) grabbing going on as the Arctic Ice melts.

Natural Gas Prices have remained muted around the $2/MMBtu, and will do so for a short time due to demand depression, mild weather and high inventories. LNG exports and movement has also come down. In fact, natural gas production in some plants has been slowed down or even shut down. Future demand increase will come from power generation, and heating as temperatures turn colder.

From our Trading Desk

Russia is accumulating foreign currency reserves that are not dollars or euros. Limited convertibility of these alternate currencies will influence Russia’s efforts to market its commodity production to a wider spectrum of destinations and diversify its holdings. Russia will likely return production to capacity to support its income and diversify reserves.

The case for stagnant range-bound price: In past releases, we have discussed the confluence of US SPR releases with a slowdown in disappearance in China and a freight recession. US crude oil production has been gradually recovering and is close to pre-Covid levels. The recovery in production across the past year in some form offset the voluntary cuts announced by OPEC, which combined with the macro sentiment will keep prices range-bound until a demand shock happens. OPEC production cuts have effectively converted what would have been an otherwise inelastic supply to an elastic supply.

The US debt ceiling and broadly, the US debt will impact risk appetite and the US$ at different time intervals. The US debt ceiling negotiations will influence risk appetite and US Treasury bond pricing over the next 60 days. Changes to risk appetite will likely be visible in the market’s response to the composition of duration in the issuances following a resolution. Rates, deficits, and pace of GDP will influence the US$ for months to come.

The case for volatility: Macro stresses tend to absorb liquidity, both physical and financial, leaving a market vulnerable to high amplitude price moves.

From Sift, our Narratives Engine

Geopolitics and War

Sudan power struggle threatens East African crude oil flows

China mediating between Saudi Arabia and Iran to end the Yemen war

UN resolution acknowledges Russia as the aggressor in the ongoing war

Drone attack on Putin, origins being researched

China bypasses US tariffs by shipping solar products via South East Asia

The Arctic game is now in full swing

Global Macros

A few perspectives on recession, inflation and M2 money

Regulatory

EPA pushes new stringent emission limits

EU to charge a carbon tax on imports (CBAM) to mitigate carbon leakage

Ireland removes VAT on solar panels

California passes first-in-the-nation rules to cut rail pollution

Australia’s Northern Territory gives green light to fracking

Shipping and Freight

US, Iran have resorted to seizing each other’s oil tankers

Tanker rates decline while Container Rates rise

Crude Oil and Oil Products

Comparing Crude Oil Prices vs Gold Prices and vs Equity Indexes

Permian basin crude oil production is steadily increasing

Biden administration has approved $8-billion Willow oilfield in Alaska

Saudi Aramco projects 88 mmb/d world oil production by 2027

OPEC+ supply falls

Nigeria’s crude is on a fire sale

Iraq to auction exploration contracts

Iran oil production is on the rise

Decrease in gas drilling is reducing bids for fracking

A decrease in gas drilling is freeing up resources and reducing bids for fracking. This may come as some respite for the shale industry that has been burdened with cost inflation.