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S&P Global Platts editors’ pick of unfolding commodities trends. This week, bunker values at Fujairah plunge, mine overcapacity puts pressure on key battery metal lithium, and US LNG exporters face tight margins over the summer. Plus Chinese refiners’ growing taste for Saudi crude, EU CO2 prices and gas and coal profitability.

1. Fujairah bunker values plunge as Middle East risk rises

What’s happening?  Marine fuel sales in the Port of Fujairah are estimated to have dropped about 16% in the second quarter versus the first quarter, on continued tensions in the Middle East. Recent alleged tanker attacks in the region have weighed on market sentiment, industry sources have told S&P Global Platts. Fujairah is among the world’s top bunkering hubs and lies outside the Strait of Hormuz, which handles about 30% of the world’s seaborne crude.

What’s next?  Singapore has witnessed an increase in demand due to a slight switch in volumes from Fujairah against a backdrop of tight supply-side fundamentals in the world’s largest bunkering port. War risk premiums in the Middle East have also risen after recent tanker attacks, contributing to weaker bunker sales in Fujairah, and the spotlight will remain on the region as geopolitical risk and Iran sanctions keep the oil market on tenterhooks.

 2. Lithium prices continue down on mine overcapacity

What’s happening? Lithium demand is expected to continue to grow between 14% and 16% annually. However, prices are falling from a 2018 peak after miners piled into the market, looking to capitalize on the growing need for battery metals for the electric vehicle sector. Lithium hydroxide has been under pressure because of an oversupply of spodumene. The lithium ore is more frequently converted into hydroxide.

What’s next? Market participants say there is an excess of spodumene production capacity and too little conversion capacity. But more processing capacity is expected to come online outside China, which could ease refining bottlenecks.

3. US LNG exporters’ margins squeezed this summer

What’s happening? The weighted-average netback for US LNG exports is at its lowest in over three years this month at an estimated 14 cent/MMBtu, data from S&P Global Platts Analytics shows. The netback for US exporters has been on a steady decline since September when the Platts JKM benchmark reached a multiyear high at over $12/MMBtu. Tepid demand growth in Asia, and limited capacity in Europe to absorb both strong Russian pipeline volumes and incremental LNG, have left much of the new supply from the US and Australia searching for buyers. Platts Analytics’ netback calculation factors in the cost of feedstock gas, onshore transport, shipping and related fees, but excludes sunk costs associated with liquefaction.

What’s next? The Stronger demand for early-winter cargoes should help to lift the netback on US LNG exports by later this year. JKM swaps for November are currently priced at over $6/MMBtu and first-quarter 2020 in the mid-$7s/MMBtu. At those prices, the netback on US exports would rise to about $2/MMBtu.

4. Gas more profitable than coal in European power generation

What’s happening? The TTF Winter gas price is trading below the European coal switching price index (CSPI) and is expected to continue to trade at a discount in the near future. The CSPI is the theoretical threshold for a 50%-efficient, higher heating value gas-fired power plant to be more profitable than a 35%-efficient coal-fired power plant including emissions. The TTF discount means that gas for use in the power generation sector will theoretically be cheaper than the use of coal through the winter, having already proven to be cheaper in the summer months.

What’s next? Gas prices are at historically low levels despite having rallied in the past week, but how those prices evolve in the coming months will define how profitable gas-fired power generation will continue to be. The movement of the coal price and the trend for CO2 allowance prices are also indicators to watch – both are key to the CSPI.

5. Saudi crude makes inroads with Chinese independent refiners

What’s happening? Saudi Arabia’s crude oil exports to major Northeast Asian customers have suffered so far this year amid stiff competition from light sweet US crude cargoes flooding the Asian market and OPEC’s ongoing production cut commitment. But Saudi Aramco maintained a solid market share in China during the first half of 2019, with demand from China’s independent refining sector playing a crucial role. Aramco’s recent shift in strategy to diversify its customers has paid off, as the supply increments to China in H1 were mostly attributed to new customers in the independent refining sector – Zhejiang Petrochemical Co. and Hengli Petrochemical (Dalian).

What’s next? Saudi Arabia will likely continue to compete against Russian barrels to protect its market share in China. China’s state-run and independent sectors continue to favor Far East Russian ESPO blend crude for the grade’s attractive price tag and close supply proximity.

6. EU CO2 prices soar on gas price, Germany’s threatened allowance cuts

What’s happening? EU carbon dioxide allowance prices hit an 11-year high July 10, driven by a combination of factors including fresh signs that Germany could cancel allowances linked to planned coal-fired power plant closures, and scope for more ambition at the wider EU level for stronger emissions reduction targets. Carbon prices appeared to react to fresh comments by Germany’s environment minister Svenja Schulze last week who said she supports cancelling EUAs linked to coal plant closures. Adding further support, the proposed new European Commission president Ursula von de Leyen pitched more aggressive EU decarbonization policies.

What’s next? Carbon market participants will be watching closely for signs the latest gains can hold. Any fall back in gas prices could remove a supportive element for carbon. However, supply side factors continue to look bullish, with the Market Stability Reserve set to remove 397 million mt from auction supply this year, and an estimated 375 million mt from 2020 supply.

Reporting by Paul Hickin, Stuart Elliott, Frank Watson, Ben Kilbey, Diana Kinch, Philip Vahn and J. Robinson. Edited by Emma Slawinski

The post Commodity tracker: 6 charts to watch this week appeared first on Platts Insight.

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As Tropical Storm Barry approaches the US Gulf Coast, offshore oil and gas producers, refineries and ports have been shuttering facilities in preparation. Utilities are also on alert.

As of July 11, US offshore drillers have shut 1 million b/d (53%) of Gulf of Mexico oil production and 1.2 Bcf/d (45%) of natural gas output.

The US National Hurricane Center expects Barry to reach hurricane strength late July 12, or early the next day, and make landfall in Louisiana. The storm could slow US oil and LNG exports if terminals and shipping operations are interrupted.

Oil markets have responded by sending Brent crude prices higher, with sentiment also bolstered by rising tensions between the UK and Iran.

The UK government said July 11 that Iranian vessels attempted to impede the passage of a BP-owned tanker in the Persian Gulf. The Iranian ships turned back after a British navy frigate accompanying the tanker intervened.

Elsewhere, agricultural markets are monitoring progress in crop cycles, with mixed news from southern hemisphere harvests.

The soybean harvest in Argentina for the 2018-19 crop year that started in September was 100% complete as of July 3. Total soy production reached 56 million mt, up 48% year on year, according to the Buenos Aires Grain Exchange. Argentina’s corn crop is also expected to break records at 49 million mt – the harvest is now nearly 50% complete.

Australian wheat faces a tougher scenario, after a third straight year of below-average production. The smaller crop is likely to drive higher domestic prices and leave Australia vulnerable to competition from the Black Sea.

GRAPHIC OF THE WEEK

Click for full-size infographic

VIDEO: ASIAN LNG

After weak LNG demand in the first half of the year, support could be coming in the second half,  as both Japan and South Korean nuclear output is expected to follow year-ago levels moving forward. S&P Global Platts LNG Analytics Manager Jeffrey Moore looks at supply and demand fundamentals affecting shipments to northeast Asia.
PETROCHEMICALS

Outlook: Global polyethylene market seen bearish on weak demand

The outlook for the polyethylene market globally is bearish for the remainder of the year due to a combination of weak feedstock costs, weak global demand and anticipated plant startups, according to market participants.

METALS

AM Italia workers strike, two blast furnaces on hot idle after mishap

Workers at ArcelorMittal Italia started full strike action in the early hours of July 11 for an indefinite period, on grounds of safety, and are taking action to bank the Taranto works’ blast furnaces Nos. 2 and 4.

OIL

Feature: Saudi Arabia struggles to push GDP growth amid output cuts

Saudi Arabia’s balancing act of extending the OPEC/non-OPEC output cuts into the first quarter of 2020 and maintaining economic growth is being tested by weaker oil prices, with concerns of a potential economic contraction.

LNG

Analysis: US LNG feedgas demand hits record highs in July

US LNG feedgas demand is trending near record-high levels this month as newly minted liquefaction facilities along the Gulf Coast continue to ramp up, despite narrow margins for export profit. In July, gas demand from the six operational US export facilities has averaged nearly 6.2 Bcf/d.

THE LAST WORD

“The government sees the attack on a ship operated by our country’s shipping company near the Strait of Hormuz as a grave incident that threatens our country’s peace and prosperity.”

Kotaro Nogami, deputy chief cabinet secretary in the Japanese government, addressing press on the recent incidents in the Persian Gulf. Japan appears to be keeping its options open as the US calls on other states to join a coalition to defend the Strait of Hormuz.

The post Energy and commodity highlights: Tropical storm Barry, UK-Iran tanker spat, Asian LNG demand appeared first on Platts Insight.

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Values for heavier, sour crude oil grades available on the US Gulf Coast have dropped as the outlook for global demand deteriorates, production remains strong and the deadline to implement low sulfur standards for marine fuel approaches.

The front-month differential for benchmark medium sour crude Mars plunged to WTI plus $2.40/b on June 27, which was its lowest assessed level since August 28, 2018.

The Mars differential has recovered slightly in recent days, and was last assessed July 10 at WTI plus $3.65/b. However, Mars and other Gulf Coast sour crudes have been on a downward trajectory since May. The 30-day rolling average for the Mars differential is about $4.70/b. The previous 30-day average was about $5.65/b. Mars hit a four-year high in February, when it was assessed at WTI plus $7.90/b.

Several factors could be weighing on sour crudes in the US Gulf Coast, including a lack of demand and an overflow of output. The majority of US sour crude production comes from the Gulf of Mexico, which is producing around 2 million b/d of oil – and that output is growing.

Shell announced in May that production started at its Appomattox floating production system, months ahead of schedule. The deepwater Gulf of Mexico facility has an expected production of 175,000 b/d. The Mattox Pipeline, a 90-mile system with a 300,000 b/d capacity, will move Appomattox’s output westward to the Proteus pipeline system, which moves Thunder Horse crude.

Price differentials for all crudes available on the US Gulf Coast have dropped as OPEC and its allies (OPEC+) recently struck a deal to extend oil production cuts, a move reinforced by concerns over a weak global demand outlook. As a result of faltering global demand, physical Brent and WTI crude also have decreased.

Go deeper: WTI midland trades in S&P Global Platts London MOC

Brent’s premium over WTI last week shrunk to its narrowest point in several months. The Brent/WTI swaps spread narrowed to $5.67/b, before widening out again slightly to over $6/b.

A narrower Brent-WTI spread puts downward pressure on US Gulf Coast crude prices and could slow US crude exports as they become less competitive in the global markets.

Western Canadian crude weakens

Values for Western Canadian crude in the US Gulf Coast have also plunged. The differential for Western Canadian Select at Nederland, Texas, has fallen more than $6/b since reaching an all-time high of WTI CMA plus $3.75/b March 13 as demand for heavy crude in the US Gulf Coast spiked on the collapse of Venezuelan imports. Western Canadian Select at Nederland was assessed at a discount of $2.50/b on July 2, the low for the year, before rising to minus $2.35/b July 3.

Weekly US imports from Venezuela hit zero for the first time in the week ending March 15, according US Energy Information Administration data going back to 2010. That was down from about 587,000 b/d at the end of January, the data showed, before US sanctions took effect.

The weakening of WCS on the US Gulf Coast is partly due to more crude making it out of Canada via rail. Crude-by-rail exports out of Canada rose to 236,152 b/d in April from 168,483 b/d in March, according to the country’s National Energy Board.

S&P Global Platts Analytics expects crude-by-rail exports out of Canada to rise to around 400,000 b/d by the end of year, barring an unforeseen increase in government production curtailments.

At the same time, the total amount of crude imported into PADD 3, which includes the US Gulf Coast, reached a four-week average of 893,000 b/d in the week ended June 7, the highest in a year.

Canadian crudes have gained interest from international buyers, particularly those in Asia, as the global market for heavy sour crudes remains relatively tight amid a series of supply-side events, including OPEC+ production cuts and Venezuelan political upheaval.

While differentials for crudes on the US Gulf Coast have been pulled down by the need to stay competitive internationally, the loss of heavier barrels from Venezuela and other OPEC countries has led some refiners to use Western Canadian heavy crudes as a substitute. “The value it’s at right now makes it an attractive export even though the Brent/WTI arbitrage isn’t great,” one trader said of West Canadian heavies.

Sporadic flows of Western Canadian Select (WCS) and Cold Lake Blend (CL) have been observed going to China since 2018, according to market sources. The two Canadian heavy grades are viewed by refiners as a suitable substitute for Venezuelan Merey crude, as the grades yield high levels of asphalt.

Western Canadian Select generally has an API gravity around 21, with a sulfur content of around 3.59%, while Cold Lake Blend generally has an API gravity around 19 with a sulfur content around 4%, according to S&P Global Platts data. Merey crude has an API gravity around 15.9% and a sulfur content of 2.53%, while Venezuela’s Boscan crude has an API gravity of 10.6 and a sulfur content of 5.38%, according to Platts data.

The post Heavier, sour US crude prices fall on high supply, global demand concerns appeared first on Platts Insight.

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OPEC would be wise to avoid picking a fight with Greta Thunberg. The 16-year-old poster child of the Extinction Rebellion movement wants to bring the fossil fuel era to an abrupt end, regardless of the economic risks. Branding her populist methods an enemy could make big oil an easier target for protesters to aim at.

That is exactly the mistake OPEC’s Secretary General Mohammed Barkindo has made. The head of the oil cartel – which pumps just under a third of the world’s crude – was quoted last week saying that attacks leveled at producers by a “growing mass mobilization of world opinion” had become “perhaps the greatest threat to our industry going forward.”

Unabashed, Barkindo doubled down by arguing “civil society is being misled to believe oil is the cause of climate change.” All music to the young ears of Thunberg. The Swedish teenager described the comments as “our biggest compliment yet” in a brief tweet to her army of 723,000 followers on the social media platform.

The pithy response simultaneously drew attention to Barkindo’s imprudent choice of words, made to a pack of energy reporters at last week’s OPEC meeting in Vienna, and turned the sights of the Extinction Rebellion firmly onto the cartel, which otherwise might have gone largely unnoticed.

But, Barkindo may have a point. Thunberg’s compelling message and ability to mobilize public opinion have made her a magnet for virtue-seeking politicians eager to buff up their climate change credentials, without considering all the economic arguments at hand.

Featured on the cover of the esteemed Time magazine, Thunberg has been invited to lecture at legislatures including the Houses of Parliament and their European equivalents on the dangers of climate change despite her tender years. Invited to the UN in New York this September, she plans to get there without air travel to minimise her carbon footprint.

Politicians, corporates under pressure

Visionary, or a populist figurehead, Thunberg managed to inspire an estimated 1.6 million children to walk out of school classrooms around the world in March to demand action on climate change. Her influence has grown impossible for most democratic governments to ignore. A few months after demonstrations closed down Westminster, under fire British Prime Minister Theresa May announced a hastily drafted policy to reach net zero emissions by 2050 despite the unanswered practical challenges of abandoning fossil fuels.

Clumsily making his case for oil as a vital part of the global economy, Barkindo can’t compete with Thunberg’s star power.

“We have spent this spring and summer across European capitals where children have been mobilized to demonstrate, campaigning against our industry and oil,” he grumbled in Vienna. “They are beginning to infiltrate boardrooms and parliaments.”

Doors will get harder to open for Barkindo and an oil-producing industry that is increasingly being branded as toxic by investors and politicians alike. Access to capital is very slowly being choked off by investors who have to at least be seen complying with environmental, social and governance (ESG) principles to help limit average global temperature increases to less than 2 degrees Celsius above pre-industrial levels. Meanwhile, governments are encouraging energy transition away from fossil fuels with every tool at their disposal.

For example, Norway’s $1 trillion sovereign wealth fund is actively ditching most of its oil-producing investments. Although it draws the line so far at completely divesting, Japan’s gigantic $1.4 trillion Government Pension Investment Fund has placed an emphasis on applying ESG principles to its portfolio and is actively involved in the Group of Twenty Taskforce on Climate-related Financial Disclosures. In the UK, companies may have to publish by 2022 what risks their businesses face from climate change.

All of which makes it harder for the oil industry as a whole to attract investment, which is its life blood. The International Energy Agency estimates that global upstream spending in 2019 will total $505 billion, a 4% increase in real terms from the previous year. This may be $300 billion below the peak reached in 2014 but it illustrates the mountain of cash oil producers have to spend to help meet world demand.

How long until peak oil?

And despite Thunberg’s best efforts, most forecasters agree the world will still need more oil for the foreseeable future. World demand for crude, which is currently ticking along at around 100 million barrels per day, is unlikely to plateau before 2030 in any energy transition scenario.

“The speed of the transition away from carbon-based fuels is uncertain, but is beginning to accelerate and will be influenced by external factors such as government environmental policies and regulations on greenhouse gases, plastics, and vehicle electrification,” said S&P Global Ratings in a research note in June.

However, the stakes for OPEC’s 14 members and its oil producing allies such as Russia couldn’t be higher. The majority of their economies and entire political systems depend on income from oil exports. Thunberg’s worthy cause to prevent climate change turning to catastrophe is in all our interests, but it is also threatening to their survival.

Barkindo isn’t a climate change denier. In Vienna, he said the “industry is part of the solution to the scourge of climate change”. If that is indeed the case, instead of bolting the doors shut to climate activists, OPEC and the oil industry need to open up, and come up with a coherent plan to make their case before it’s too late.

This article was previously published as a column in The Telegraph

The post OPEC is playing into Thunberg’s hands on climate change appeared first on Platts Insight.

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President Donald Trump’s administration has worked tirelessly to rebrand domestic energy policy in the two and a half years since he came to office.

As this White House markets it, US energy is “dominant”. Fossil fuels are not produced or exported, they’re “unleashed”. And, of course, US LNG exports have been called “molecules of US freedom”.

“The golden era of American energy is now underway,” Trump has said.

By the numbers, Trump’s time in office has been a momentous success for oil producers: since his inauguration, US crude output has surged from 9.14 million b/d to a forecasted record 12.34 million b/d in July, a 35% increase, according to the US Energy Information Administration.

By the end of next year, EIA forecasts US oil output to average 13.5 million b/d, accounting for more than 13% of total global oil supply and nearly all growth.

“American energy production is soaring to new heights thanks to President Trump’s policies,” the White House said in an official statement in May.

But how much credit can Trump claim, really, for record US oil production? Is output shattering monthly records because of Trump administration policies, or because of market fundamentals that would have boosted US oil supply no matter who occupied the White House?

Three years ago, I attempted to quantify the supply impact of the 2016 presidential election. Just how much difference would a President Clinton or President Trump make in terms of barrels per day?

Analysts I spoke with cautioned that the entire premise of the exercise was flawed. There are too many unknowns; oil prices often have little to do with who is US president; geopolitics are inherently unpredictable; and so on.

We eventually settled on a 1 million b/d net difference: If Hillary Clinton were elected, her arguably less fossil fuel-friendly policies could curb about 500,000 b/d of domestic output, while Trump’s more industry-friendly policies could cause an increase of 500,000 b/d. All things being equal, which, of course, they were not.

That possibly over-simplistic forecast was ultimately proven correct. Or wildly incorrect. It’s an unknown and will remain so.

In reality, US crude production has jumped by 3.2 million b/d since Trump became president. So, how much did he have to do with that?

Steady oil prices

Trump’s presidency may have benefited from good timing with respect to the oil market cycle. In the months leading up to the 2016 presidential election, US output had fallen to about 8.5 million b/d, down about 1.1 million b/d from April 2015 after Brent spot prices cratered at just above $26/b.

Trump’s first two and a half years in office also took place amid comparatively stable oil prices, with Brent prices remaining between about $44/b and $86/b, a $42/b range. During Obama’s first two and a half years, prices fell nearly to $39/b and climbed to almost $127/b, an $88/b range. US oil output was also relatively flat during that time, and remained globally insignificant, increasing from about 5.14 million b/d in January 2009 to 5.43 million b/d in July 2012.

In addition, the policy the industry lobbied the most for, and which is often pointed to as a clear factor behind record production, was the end of US restrictions on crude oil exports, which Obama signed into law in December 2015. The US set a monthly record in February when it shipped out 2.99 million b/d of crude, according to EIA. Weekly data shows that US exports have since crossed the 3 million b/d mark, climbing as high as 3.7 million b/d in mid-June.

Industry lobbyists say other Trump administration policies, such as repeals of Obama-era environmental and safety regulations, have not had any significant impact on supply. Some of these repeals have been tied up in litigation and are likely to remain so for years.

Trump’s approval of the Dakota Access oil pipeline may have been a factor in helping North Dakota break production records, climbing above 1.4 million b/d in December, but that is a somewhat modest jump of about 173,250 b/d from the highs reached when Obama was in office. In addition, Trump’s approval of Keystone XL remains in litigation and a federal court decision caused his Interior Department to indefinitely shelve plans to drill in nearly all federal waters, from the Atlantic Coast to the Arctic. The administration’s plans to offer oil and gas leases in the Arctic National Wildlife Refuge also face a likely legal challenge.

Go deeper: Podcast – US oil industry’s upstream push in eastern Gulf

Part of the reason neither Trump, nor any US president, can claim much credit for oil output, at least in recent history, is that so much of production takes place on private and state lands. The number of federal oil and gas leases in effect has fallen steadily over the past decade: from about 53,400 leases in fiscal 2009 to about 38,150 in fiscal 2018, according to the US Bureau of Land Management. The number of producing leases, however, has grown slightly: from about 22,600 producing leases in fiscal 2009 to over 24,000 in fiscal 2018, according to BLM.

Foreign policy and oil supply

While the Trump administration typically touts a deregulatory agenda as bolstering US energy production, analysts see Trump’s foreign policy as having the most direct impact, mainly through sanctions that have caused a loss of barrels on the world market, a gap US producers are eager to fill.

Venezuela, which was producing 2 million b/d when Trump took office, produced about 730,000 b/d in May, according to EIA. While US sanctions have certainly contributed to that decline, the Trump administration has repeatedly tried to distance the role that sanctions have played in the collapse.

As tensions have flared, Iran output has fallen from 3.8 million b/d to about 2.3 million b/d over the same time period, and analysts believe Iran’s oil exports may have fallen as low as 800,000 in May, from about 1.7 million b/d in March. The US reimposed sanctions on Iranian oil exports in November and allowed waivers to some of Iran’s biggest crude and condensate buyers to expire in May.

US producers have also benefited from the agreement between OPEC and other producers to cut about 1.2 million b/d. Trump is unlikely to be able to take credit for that after pressing the Saudi to boost output, in order to prevent his sanctions actions from causing a spike in gasoline prices.

So, is the “golden era” of American energy underway, as Trump claims? Maybe, but it may remain unclear how much he had to do with it.

The post Can President Trump take credit for record US oil production? appeared first on Platts Insight.

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S&P Global Platts editors’ pick of unfolding commodities trends. This week, oil markets await updates on OPEC supply in the second half of the year, while LNG flows could shift on diverging regional prices. Gold is in the spotlight following a spike in late June, and European carbon prices are nearing winter fuel-switching levels.

1. Will OPEC and allies extend supply cut agreement?

What’s happening? OPEC and its allies are gearing up to extend their 1.2 million b/d in production cuts beyond the first half of the year. The oil market has been caught between global economic growth concerns and likely increased US supply on one hand, and sharp falls in Iranian and Venezuelan production and continued Saudi supply restraint on the other. Heightened geopolitical risks around trade disputes, sanctions, and tensions around the key chokepoint of Strait of Hormuz have complicated the matter as OPEC and Russia look for clarity in their market rebalancing efforts.

What’s next? The oil market – with Brent crude hovering between $60 and $70 a barrel – will be looking for clear signals on how OPEC and its allies plan to manage the market in the second half of the year, when the producer coalition meets July 1-2 in Vienna.

2. Asia could pull in more LNG as JKM-TTF spread widens

What’s happening? The JKM-TTF spread is widening, as Asia prices firm while those in Europe plunge. The spread is an indicator of the margin traders can achieve by arbitraging LNG cargoes between regions. At the moment the spread is $0.5/MMBtu above what is required to make Asia a better destination than Europe for Atlantic spot LNG cargoes.

What’s next? If the JKM-TTF spread widens by another $0.4/MMBtu to $1.7 it could re-open the arbitrage for re-load of LNG cargoes from Northwest Europe to Asia. This would mean an even bigger drop in LNG imports into Europe and could put a brake to the slide of European prices.

3. Gold takes a breather but market keeps eyes on Fed

What’s happening? The gold price has leveled out around $1,400/oz following a strong run higher. Tension in the Middle East, a gloomy outlook for the global economy and the possibility of a US Federal Reserve rate cut later in 2019 have all supported gold’s role as a safe haven for investors. Now the market is taking a breather as global equities regain steam on renewed fiscal stimulus hopes, but the price remains well supported.

What’s next? US interest rate cuts would support gold, as they could indicate higher inflation in the US, weakening confidence in the US dollar. And when the dollar weakens, gold rises.

4. EU carbon price edges nearer winter fuel switch level

What’s happening? In Q2 2019, EU carbon prices have moved higher towards the implied winter fuel switching price. This is the price of carbon at which coal and gas become equally profitable. Natural gas prices fell so far this year that the capacity for coal-to-gas fuel switching may be exhausted for this summer, according to S&P Global Platts Analytics.

What’s next? There may be little room for power sector EUA demand to fall over the next few months, even with lower gas prices. Instead, EUA prices have maintained a relationship with implied carbon prices this winter, supported by relatively higher winter gas prices. This is helping to make coal-fired electricity competitive against gas, boosting utility hedging demand for EUAs. However, this could change if winter gas prices start to fall as a clearer picture of winter gas storage levels develops.

Reporting by Herman Wang, Paul Hickin, Frank Watson, Fabio Reale, Diana Kinch and Ben Kilbey. Edited by Emma Slawinski.

The post Commodity tracker: 4 charts to watch this week appeared first on Platts Insight.

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Proved oil reserves, historically a proxy for geopolitical clout and energy security, may be losing their currency in a world set on ushering in the end of the fossil fuel era.

The growing acceptance of the climate threat from carbon-rich energy is focusing minds on producing cleaner fuels rather than stockpiling sources of old, dirty ones.

But despite growing industry qualms over peak demand and the potential for stranded assets, the issue of who controls the bulk of the world’s recoverable oil continues to pique interest.

Two reports this month gave diverging assessments of who rules the global oil reserves roost and highlights the disconnect between reported oil wealth and the ability to pump the barrels.

BP’s latest Statistical Review of World Energy, the touchstone energy data compendium in its 68th year, continues to support a view that there is no shortage of oil supplies to feed demand.

The world’s remaining proved reserves of 1.73 trillion barrels can cover 50 years of current production rates, BP estimates. That’s little changed from a decade ago and is 35% higher than in 1980, when the oil major began counting. Over the same period, oil production has surged by 50%.

Likewise, the rankings for the top resource holders have shifted little in recent years. Venezuela continues to hold on to the top spot, thanks to its questionable reserve estimates for its super-heavy Orinoco crude, with Saudi Arabia close behind and Iran a distant third.

Resource accounting

But not all reserves are created equal. The data masks large disparity in production costs for the economic recovery of the oil, and a divergence in reserve accounting standards.

According to BP’s review, Saudi Arabia’s proved oil reserves are now 11% higher than previously thought, at close to 300 billion barrels, after the world’s top oil exporter reclassified some of its gas reserves as oil.

BP’s estimate comes five months after state-oil giant Saudi Aramco opened up about its estimated reserves for the first time as part of a reserves audit ahead of a planned future listing of its shares.

A separate report by Norwegian consultancy Rystad Energy, however, takes a more rigorous approach to reserves by applying Society of Petroleum Engineers (SPE) standards.

“We don’t see increases in activity that would justify such a large upgrade [in Saudi Arabia], so this revision could be due to changes in reporting methodology,” said Rystad’s head of analysis Per Magnus Nysveen.

On a strictly SPE proven reserves basis, Saudi oil reserves stood at just 95 billion barrels last year, still well ahead of the US’ 32 billion barrels, Rystad believes. Canada’s massive but costly oil sands deposits suffer a similar fate under the tougher rules, shrinking to 24 billion barrels.

Click to enlarge

Overall, Rystad estimates the world’s proven oil reserves on an SPE basis total only 386 billion barrels, about one-quarter of the officially reported figures in BP’s review.

Using a more a generous measure of recoverable oil based on contingent and prospective resources, however, yields widely different results. On that basis, Rystad pegs the US as holding 293 billion barrels of recoverable oil, 20 billion barrels more than Saudi Arabia and almost 100 billion barrels more than Russia.

Venezuela upended

On the flip side, running SPE proved reserves rules over Venezuela’s mostly hard-to-extract bituminous oil shrinks the country’s top ranking reserves to just 6 billion barrels, according to Rystad, a fraction of the claimed total 303-billion-barrel total.

That’s significant as Venezuela’s self-declared reserves in its giant Orinoco heavy oil belt have been the biggest single contributor to global reserves growth by far over the last decade.

From a complete absence in 2005, Venezuela’s heavy oil currently accounts for more than 260 billion barrels, or 15%, of BP’s global reserves total. By contrast, the US’ shale-led doubling of its oil reserves over the same period has added just 31 billion barrels to the global tally.

The discrepancy over the world’s economically recoverable oil also points to the growing realization by producers that the cost curve for resource development, rather than outright volumes, is now the battleground for growth.

Saudi Arabia has long claimed production costs of just $4/b at its easily accessible conventional oil fields mean Aramco is the most profitable oil producer in the world.

As the future oil demand growth window shrinks, it is the quality, not the quantity, of proved reserves that has become the new mantra for oil company executives.

The question of how much recoverable oil is left in the world and who controls it is increasingly being eclipsed by the transition from fossil fuels to renewable sources of energy. That still leaves major doubts over how much the remaining reserves will be worth in the future and how much may end up left in the ground.

The post Global oil reserves data is muddled, but does it really matter? Fuel for Thought appeared first on Platts Insight.

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The UK wants to be a world leader in the fight against climate change.

Committing to reduce greenhouse gas emissions to almost zero by 2050 is an admirable but expensive and difficult goal to achieve.

Counter-intuitively, cutting taxes on fossil fuels now may be a better place to start than continuing to milk dry the majority of road users until they are forced into electric cars.

One idea could be to abolish fuel duty all together and instead levy a single charge for vehicle road use, which would treat all motorists equally based on their type of transport. This could be structured as an annual payment that would replace the existing system of road tax and fuel duty. It would also limit the government’s exposure to a catastrophic loss of revenue if consumers switch to electric vehicles quicker than expected.

Addicted to fuel tax

The problem is motorists have become a cash cow for successive governments. Fuel duties, excluding value added tax alone raked in just over £28 billion ($35.7 billion) last year, which is equal to £1,000 for each household, according to the Office of Budget Responsibility. Combined with road tax, the figure rises to almost £35 billion.

Fuel sales were enough to pay for almost the entire budget for social care and the Policy Exchange think-tank forecasts the government will net £170 billion by 2030 from motorists filling up.

Despite a freeze on these taxes since 2011, the UK remains one of the most expensive countries in Europe’s big four economies to fill up a car.

According to OPEC, in 2017 taxes accounted for almost 65% of every litre of fuel sold at the pumps to consumers in Britain, compared with 58% in Germany and 22% in the US. On average, the price of crude only accounts for just over a quarter of the total cost of fuel sold in the Group of Seven most advanced industrialized economies.

By any measure, Britain’s motorists and road transport businesses are getting a raw deal. Fuel duties are now considered to a sin tax like those aimed at smokers, or beer drinkers. The problem with such taxes is that they are economically inefficient mainly because they tend to hit hardest those who are least able to pay.

Nor have high UK fuel taxes so far been a particularly effective tool in getting motorists to switch to low-emission alternatives powered by electricity. Electric vehicle penetration in Britain is about the same as China, according to the International Energy Agency.

Norway, with its small population of just over 5 million people, is the exception. The Scandinavian hydrocarbon-dependent nation has doled out big subsidies while taxing conventional vehicle fuel to oblivion so it can now boast of leading the world in electric transport. At the same time, Norway’s exports of oil account for about 2% of the world’s consumption, which helps pay for its greenwashing.

Britain is not so fortunate, and must look to other ways to balance climate change policies with the harsh realities of public finances.

The entirely unsatisfactory situation in the UK is unlikely to change with the selection of a new prime minister. All the candidates participating recent televised debates were keen to buff up their green credentials for fear of aggravating the braying hordes of Extinction Rebellion activists on the streets.

Postponing the inevitable

If the cost of Brexit rises and economic growth slows it is more likely that the eventual winner will be forced to raise fuel duties to help pay for their climate change pledges.

However, these fossil-fuel derived revenues will eventually have to be replaced as the internal combustion engine is gradually superseded by the battery-powered electric motor and ultra-low emission alternatives, which currently receive generous subsidies.

National Grid expects the number of EVs in the UK could rise to 36 million by 2040, up from 50,000 sold in 2017.

What is required is root and branch reform of how all road-based transport including electric vehicles and fuel will be taxed. However, policymakers would rather avoid the politically toxic subject. A 70-page report on EV transition published late last year by the Business, Energy and Industrial Strategy Committee made just one reference to the loss of fuel duty revenue to the public purse – and that was limited to saying a review would be needed.

Introduced alongside a more comprehensive scrappage scheme for old vehicles, putting more cash into the pockets of average consumers could accelerate the transition to zero emissions transport.

Transferring fuel taxes and duties onto a single levy for road usage and transport emissions with no exceptions could be a fairer new green deal for all motorists.

The post UK needs fuel tax reform to pave way for mass EV adoption appeared first on Platts Insight.

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For the second time in as many weeks, oil markets were jolted by events in the Middle East, with prices jumping on reports that Iran had shot down a US drone over the Strait of Hormuz on June 20.

Crude prices continued to rise on June 21, on fears that the US and Iran could be headed towards a military confrontation.

The latest incidents could affect flows of oil and products from the Persian Gulf, with traders and shipowners saying they were assessing risk premiums and freight rates. Japanese refiners have started considering alternative crude supply sources in order to avoid transit through the Strait of Hormuz.

The situation is also of great concern for Iraq, which is heavily dependent on shipping through the Persian Gulf to export its oil to Asia, Europe and the US. A rocket strike on June 19, on a compound near Basrah that houses several international oil companies, has added to the tension.

Earlier in the week, OPEC and its allies finally confirmed the dates for their next Vienna meeting as July 1-2, after a long period of uncertainty that unsettled markets.

In Europe, gas market stakeholders were set for the start of two-way flows on the BBL pipeline that links the Netherlands and the UK, on July 1. Enabling UK exports via the BBL will add to existing export capacity on the IUK pipeline. This could change gas flow and pricing dynamics in northwest Europe at a time when the Netherlands’ gas output is declining.

Meanwhile, Russian gas exporter Gazprom tried to reassure the sector that gas supply to Europe via Ukraine was not in peril, offering to extend current transit arrangements past the scheduled expiry at the end of 2019. Disagreements over transit contracts, as well as the expected startup of Nord Stream 2, have led to concerns about the future of the transport route.

For Ukraine’s part, the halt of direct purchases of Russian gas from November 2015 has driven the need to boost domestic production. The country is seeing a resurgence in upstream activity and recent tenders attracted interest from several international companies.

GRAPHIC OF THE WEEK

Mozambique’s nascent LNG sector received a boost this week after a final investment decision was made on the Area 1 Mozambique LNG project. S&P Global Platts explored the country’s projects and the LNG and gas infrastructure landscape across Africa.

Click for full-size infographic

LISTEN: Angola’s challenges as crude production and differentials slide

Production is at fresh lows and prices are following suit, but there are signs Angola is taking steps to stem the decline. S&P Global Platts editors Joel Hanley, Eklavya Gupte and Kristi Rotlaender discuss an expected upturn in demand for Angola’s heavy sweet crude, and China’s role as a major buyer.

SHIPPING

Major banks set new lending standards for shipping to aid GHG cuts target

Eleven major shipping banks, representing a bank loan portfolio to global shipping of about $100 billion, will for the first time integrate climate considerations into lending decisions to incentivize maritime shipping’s decarbonization.

LNG

US LNG feedgas nears record levels on commissioning activity

US LNG feedgas demand edged up toward record levels on June 17, as commissioning activity at recently completed export facilities along the Texas and Louisiana Gulf Coast continues to ramp up.

EVs

Hybrid vehicles likely better at reducing CO2 emissions: expert

The car industry should prioritize hybrids over fully electric vehicles to bring about a more immediate and meaningful reduction in CO2 emissions, independent emissions testing company Emissions Analytics said June 17.

THE LAST WORD

“The United States is prepared to do its part, but every nation that has a deep interest in protecting that shipping lane so that energy can move around the world and support their economies needs to make sure they understand the real threat…”

US secretary of state Mike Pompeo called on other states to step up efforts to protect navigation through the Strait of Hormuz.

The post Energy and commodities highlights: Oil market tensions, European gas flows, Mozambique’s LNG plans appeared first on Platts Insight.

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Oil tankers ablaze in the Gulf of Oman and the US pointing the finger at Iran should be enough to send the price of the world’s most vital commodity skyrocketing.

Instead, oil prices have barely budged. Traders are not buying into the theory that Tehran wants a war, but they are worried about demand.

Dated Brent assessed by S&P Global Platts – the world’s most important oil benchmark – spiked by over 4% following the attacks on June 13 and traded briefly just above $62/b. On the face of it, this modest rise doesn’t reflect the risk to almost a fifth of the world’s oil shipped through the Strait of Hormuz, a narrow 21-mile-wide channel separating Iran from the Arabian Peninsula.

“I see the limited reaction in the crude oil market as an indication of traders saying ‘hang on a minute’,” said Ole Hansen, head of commodity strategy at Saxo Bank. “If Iran did this it would be an open invitation to the US to step up its involvement and that should have sent the price much higher.”

Supporting Hansen’s point, crude had futures tumbled earlier in the week, with Brent falling below $60/b for the first time since late January, after data showed a larger-than-expected increase in US crude oil inventories.

Demand-side worries

The combination of rising stockpiles, tepid demand growth and fears of a slowing global economy has been enough to wipe $13 off the value of a barrel of Brent crude since May, despite the recent attacks on oil shipping and infrastructure in the Middle East.

Last week’s attacks were described by US Secretary of State Mike Pompeo as “an unacceptable campaign of escalating tension by Iran”.

Click for full-size infographic

The Islamic Republic has already been blamed for orchestrating clandestine attacks last month on tankers moored off the coast of Fujairah in the UAE. Tehran denies responsibility despite Iranian officials threatening to close down Hormuz, in response to US sanctions preventing the regime from exporting oil.

“The situation on the ground presents an intensely significant risk to oil markets that could unfold this summer,” warned RBC Capital Markets global head of commodities, Helima Croft in a research note following the attacks.

“While many market participants see the recent security incidents as business as usual for the region, we see an abundance of escalation risks in large part because the US sanctions are subjecting Iran to almost unprecedented economic pain.”

Instead of fretting about what could happen, traders have continued to focus their minds on the fundamentals of supply and demand. US crude inventories climbed 2.21 million barrels at the beginning of June to 485.47 million barrels. America’s stockpiles of crude – excluding its strategic reserves – have added almost 50 million barrels to their tanks since the end of the first quarter.

Meanwhile, crude production has increased by 1.4 million b/d from a year ago, solidifying America’s positions as the world’s biggest producer ahead of Russia and Saudi Arabia, according to official data.

Forecasters are also toning down their oil market predictions. The International Energy Agency on June 14 reduced its estimate for daily demand growth this year by 100,000 barrels to 1.2 million b/d, signaling more bearish sentiment for crude. OPEC itself has also warned of the impact a trade war between China and the US could have on oil markets. The cartel has revised down its own demand growth projections for the second half of the year.

“The pressure from lower demand growth, confirmed by all three major forecasters this week and the counter seasonal rise in US crude stocks continues to weigh,” warned Saxo’s Hansen.

OPEC has few options

Given the facts, OPEC has little choice but to extend its 1.2 million b/d of production cuts and do everything necessary to hold its alliance together with Russia if it wants to boost prices.

There is also an argument for even deeper cuts, but this would risk losing more market share to the US. However, the group is struggling to even agree a final date for its next policy setting meeting after Russia requested a timing change.

Of course, Iran’s leaders oppose any rescheduling of OPEC meetings in the current environment. The Islamic Republic’s vital oil industry is already feeling the full impact of sanctions and has received little support from its partners in the Vienna-based group, which is dominated by Saudi Arabia. Output last month plunged by almost 230,000 b/d to just under 2.2 million b/d after waivers allowing eight countries to buy Iranian crude expired.

Traders may believe Tehran’s denials that it is trying to provoke a war with the US by sticking limpet mines on tankers, but they cannot ignore it is playing with fire by mixing politics with oil.

“The risk of miscalculation in the Middle East is clearly rising,” warns Paul Sheldon, chief geopolitical adviser at S&P Global Platts Analytics.

This article was previously published as a column in The Telegraph

The post Oil traders have bigger worries than a new Hormuz tanker war appeared first on Platts Insight.

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