China's Oil Demand Threatened by LNG Trucks

1. IEA Angers Oil Market With 2029 Demand Peak Call

- This week has seen a fierce standoff between OPEC and the IEA, with the latter predicting a peak to oil demand in 2029 at 105.6 million b/d, following which consumption would decline amidst higher penetration of EVs and improved fuel efficiency.

- From a total spare production capacity of 6.7 million b/d this year, the IEA sees the supply surplus ballooning to 8.2 million b/d, albeit 45% of this increase would come from natural gas liquids, not oil.

- OPEC has countered by stating it doesn’t even see a peak in crude oil demand in its long-term forecasts and expects global consumption to keep on growing to 116 million b/d by 2045, calling the IEA’s outlook calls dangerous for consumers.

- The IEA has previously called for all oil and gas investment to stop in order to comply with its stated target of reaching net zero carbon emissions by 2050.

2. China Pared Fuel Oil Buying As Costs Balloon

- Increasingly costly refinery feedstocks have prompted Asian refineries to lower their purchases of fuel oil, often used as a secondary refining feedstock in China’s independent refineries. 

- As fuel oil cracks neared parity readings with Dubai, Chinese teapots cut their fuel oil imports by 45% month-over-month to 1.1 million tonnes, following an all-time high 2 million tonnes in April.

- According to Platts, prices for Russian M100 fuel oil for July arrival were heard equal to a premium of $4 per barrel over ICE Brent futures, making them almost $10 per barrel more expensive than Iranian crude.

- Chinese and Asian refiners in general are expected to boost their crude imports instead of refining feedstocks, however, longer shipping routes on the back of Red Sea shipping disruptions would keep bunkering demand for fuel oil very strong.

3. When In Trouble, Coal Is Vietnam’s Saviour

- Vietnam has suffered great reputational damage last year after power blackouts hit industrial parks and inadvertently curbed manufacturing output of companies like Foxconn or Samsung, and is intent on not repeating that fate this year.

- However, it turns out Vietnam is relying mostly on coal to meet its electricity generation needs, with coal-fired plants accounting for 59% of electricity output in January-May, up from 30% in 2020.

- Vietnam’s energy conservation efforts have affected future manufacturing expansion plans, prompting Hanoi to enable direct power purchase agreements and expedite long-stalled renewable projects.

- Nevertheless, Vietnam’s long-term target of reducing coal generation to just 20% of total installed capacity might be a long shot, especially amidst intensifying heatwaves in Southeast Asia.

4. LNG-Fuelled Trucks Boost China’s Oil Replacement

- As prices of natural gas have edged lower after a tumultuous 2022 and 2023, the utilization of LNG-fueled heavy duty trucks in China has skyrocketed, tripling in outright terms year-over-year. 

- For years, Beijing has tried to promote LNG as an alternative to refined products for long-distance transport, concurrently to EVs substituting some of oil-based car consumption.

- CNPC’s research institute predicted earlier this year that electric vehicles and LNG-powered trucks would replace about 10% to 12% of China’s diesel and gasoline consumption this year.

- Currently, LNG-powered trucks make up 7% of the country’s heavy duty fleet and their sales have posted year-on-year increases for every month since the start of 2022, showing the trend has room to grow.

5. Manganese Is the Metal of the Year in 2024

- Manganese, a key component in aluminium alloys and dry cell batteries, has been the best-performing metal of 2024 to date, almost doubling on the heels of supply disruptions globally.

- After Tropical Cyclone Les damaged the Groote Eylandt mine in Australia this March, simultaneously wreaking havoc on its port and infrastructure, the world’s largest source of manganese seems to be shut out of markets until 2025.

- The surge in manganese prics didn’t happen overnight as relatively high inventories allowed to cushion the impact in the beginning, with 44% manganese ore currently trading at $10 per dry metric tonne.

- High manganese prices have prompted mining companies to sell lower grade material as despite the discounts involved it is profitable to flush out stocks to generate cash flow.

6. Offshore Drilling Takes Up the Baton of M&A Megadeals

- US offshore driller Noble Corporation has agreed to buy rival firm Diamond Offshore Drilling in a cash and stock deal valued at $1.6 billion, kickstarting a new wave of consolidation in the offshore drilling segment.

- By improving access to the UK and Australian offshore drilling markets, Noble is set to become the second largest drilling contractor, overtaking Valaris and catching up with Transocean.

- According to WoodMackenzie, more than 60% of total floater backlog is now with four drilling contractors and despite this deal, the market is ripe for further consolidation as day rates at 500,000/day provide a long-term lucrative investment.

- Following the acquisition which is expected to conclude by the first quarter of 2025, Noble is expected to operate 28 floaters (see chart) and 13 jack-ups.

7. Forecasters Slash EV Sales Forecasts as Hybrids Roar to Prominence

- Battery-electric vehicles have been experiencing a worldwide slowdown in penetration, prompting BNEF to slash its EV sales estimate by 6.7 million cars through 2026, believing only Nordic countries and California will be able to eliminate fossil fuel car emissions by 2050.

- In contrast, hybrid cars that still wield a fossil-powered engine have been on the rise, with Bloomberg lifting its peak for global PHEV sales to 9.2 million by 2030, 40% higher than the previous one.

- Carmakers have already metabolized the slower EV penetration with VW scrapping plans for a 2 billion EV factory in germany, Ford and GM cutting investment into the segment and Mercedes pushing out its all-electric target well into the mid-2030s.

- Germany sales statistics show EVs falling more than 30% year-over-year in May 2024 to just 29,708 cars, following the downslide after last year’s 7% year-over-year drop as hybrids come to the forefront.