Collective SPR Release Eases Energy Crisis Fears

Numbers Report – April 08, 2022

In the latest edition of the Numbers Report, we will take a look at some of the most interesting figures put out this week in the energy and metals sectors. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. SPR Release Cools Down Historic Backwardation

- The collective release of 180 million barrels from the United States and IEA member countries has flattened oil futures’ forwards curve, easing fears of unprecedented tightness in the markets.

- The Biden Administration’s pledge to release 180 million barrels over the next six months exceeds the scope of IEA releases, however oddly enough one-third of the US SPR drawdown will be made under the aegis of the international organization.

- The prospect of a sizeable SPR volume hitting the markets also brought Middle East benchmarks Dubai, Oman and Murban some 70% down compared to their early-March peak.

- Backwardation in the Brent complex has eased to its lowest in three months, with the ICE Brent six-month spread now trending at $5 per barrel.

2. Ukraine War Exacerbates Risks of LNG Tightness

- Russia’s invasion of Ukraine will render gas market volatility much worse than it used to be, making gas shortages a much more immediate and realistic scenario, absent any demand shocks such as coronavirus lockdowns.

- Endowed with very little gas production capacity of its own, the European Union has been pricing out East Asian LNG spot markets for most of 2022 and should Brussels ban Russian coal, the EU would be in effect compelled to buy liquefied gas whatever the price.

- This being said, Credit Suisse believes the global gas market could be short almost 100 million tons LNG by mid-2020s, especially if current and future Russian production is taken out.

- Key Asian buyers such as China and India have drastically reduced LNG purchases in the hope of a milder-than-average summer, with outflows to the former some 25% lower year-on-year last month, coming in at 4.6 million tons LNG.

3. Russian Gas Sanctions Shelved as Last-Straw Option

- The fifth round of EU sanctions against Russia once again goes silent on natural gas as European buyers remain wary of including their crucial source of power generation amid unprecedentedly tight inventories.

- Consequently, European spot gas prices have been stagnant over the past week, trending around €105 per MWh (the equivalent of $37-38 per mmBtu).

- Every single day customers in the European Union are paying some €400-500 million to Russia’s Gazprom, with the Russian firm exporting 38.5 billion cubic metres to Europe in Q1.

- All throughout the past 45 days, Gazprom has been transiting gas via Ukraine in line with its contractual obligations, at 108.4 million cubic metres per day.

4. US Coal Prices Soar on Strong Demand

- Coal prices in the United States have surpassed the $100 per metric ton mark for the first time since 2008, driven up by increasing coal demand and concurrently shrinking global availability.

- As the European Union seeks to ban Russian coal deliveries to Europe, buyers have been trying to ramp up US volumes even though powergen coal demand remained stable in the States around 41.5 million short tons per month.

- US coal exports reached a 3-year high last month, totalling 6.7 million tons, with approximately 45% going towards Europe, a shift compared to last year when the Asian pull was much stronger.

- With coal accounting for roughly 21% of US electricity generated, soaring prices might contribute to a further acceleration of nationwide inflation, despite it already being the fastest since 1981.

5. Lower Chinese Iron Ore Imports to Tame Price Surge

- China’s economic cooling, coming from a string of COVID lockdowns and the gradual fizzling out of policy pledges that are still yet to materialize, will cool down iron ore prices as they have been on the rise through most of Q1 2022.

- With Brazilian ore supply coming in lower this quarter due to wetter-than-usual monsoon season and Russia’s invasion of Ukraine kept Black Sea deliveries frozen, 62% Fe iron ore rose more than 30% to trend around $160 per metric ton.

- At the same time, the discrepancy between lower Chinese domestic prices and high global markets quotes sapped buying interest in the country, lowering spot liquidity.

- Concurrently, the still-muted recovery of Chinese steel demand is keeping margins subdued, even though globally steel producers have greatly benefited from the sanctioning of Russia.

6. Coal Ban Will Only Make Things Worse for EU Power Prices

- Europe's mulled banning of Russian coal imports will have a lasting effect on the continent's power prices, writes Rystad Energy, with supply shortages likely in many countries.

- European coal markets have been unprecedentedly high anyway, with the benchmark API2 contract trading above $300 per metric ton recently and are expected to spike even higher should an embargo be implemented.

- An exact 40% of Europe's thermal coal imports last month have come from Russia, slightly lower than the past years' average but still an elevated number considering that EU buyers ramped up purchases lately.

- For Russia, too, the loss of European markets will result in significant damage as an annual average of 90 million tons (a little less than 40% of its exports) went to European countries and reallocating those volumes to Asia would be hindered by lack of rail capacity.

7. Russia-Ukraine War Squeezes Agricultural Commodity World

- Ukraine's silos are overflowing with autumn harvest agricultural commodities, with Bloomberg estimating that at least 15 million tons of corn are stuck in the country.

- Before the war, Black Sea flows from Russia and Ukraine accounted for one quarter of global grain trade, however for the latter now they are reduced to some 10-15% of erstwhile capacity.

- With the ports of Odessa and Nikolaev shuttered, Ukrainian producers are forced to move their corn and wheat by rail to Romania, a logistically more complex and more expensive way of shipping and even thus it must cope with soaring freight costs.

- The Black Sea supply disruption has reshaped global flows, with India stepping in with increased wheat exports towards Asian and Middle Eastern buyers, whilst African countries are looking towards Latin American powerhouses such as Argentina.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.