1. There's No Good Way to Solve US Fuel Shortage
- When Valero (NYSE:VLO) kicked off US refiners' Q3 earnings call with a $2.82 billion net income, it said margins were boosted by gasoline and diesel demand levels being higher than pre-pandemic levels.
- Despite all the talk of demand destruction taking place amidst still-elevated gasoline prices, stocks continue to falter as the US finally confronts its lack of refining capacity.
- Even though average refinery utilization has been trending at 94-95%, the US supply of petroleum products has been a solid 1 million b/d lower than October 2019 levels, primarily a consequence of lacking capacity.
- All this is increasing the likelihood of a US product exports ban - a measure that could save US consumers some $5 billion and erase $30 billion in earnings from US refiners, according to Wood Mackenzie forecasts.
2. Europe May Drop Natural Gas as Bridge Fuel
- As Europe's TTF spot natural gas prices have tripled this year from an average of 46 per MWh in 2021 to 134/MWh this year so far, the long-term sustainability of gas demand is called into question.
- According to Rystad, with recent gas prices it would be 10 times more expensive to operate gas-fired power plants in the long term than to build new solar PV capacity in Europe.
- For gas-fired plants to become competitive against renewables by 2030, spot prices would need to fall to at least 17/MWh and carbon prices should…
1. There's No Good Way to Solve US Fuel Shortage
- When Valero (NYSE:VLO) kicked off US refiners' Q3 earnings call with a $2.82 billion net income, it said margins were boosted by gasoline and diesel demand levels being higher than pre-pandemic levels.
- Despite all the talk of demand destruction taking place amidst still-elevated gasoline prices, stocks continue to falter as the US finally confronts its lack of refining capacity.
- Even though average refinery utilization has been trending at 94-95%, the US supply of petroleum products has been a solid 1 million b/d lower than October 2019 levels, primarily a consequence of lacking capacity.
- All this is increasing the likelihood of a US product exports ban - a measure that could save US consumers some $5 billion and erase $30 billion in earnings from US refiners, according to Wood Mackenzie forecasts.
2. Europe May Drop Natural Gas as Bridge Fuel
- As Europe's TTF spot natural gas prices have tripled this year from an average of 46 per MWh in 2021 to 134/MWh this year so far, the long-term sustainability of gas demand is called into question.
- According to Rystad, with recent gas prices it would be 10 times more expensive to operate gas-fired power plants in the long term than to build new solar PV capacity in Europe.
- For gas-fired plants to become competitive against renewables by 2030, spot prices would need to fall to at least 17/MWh and carbon prices should plummet to 10/mtCO2, a highly unrealistic outlook.
- Consequently, Rystad expects that the share of natural gas in Europe's power generation will decline to 3% by 2045, down from the 19% it accounts for currently.
3. Russian Diesel Still Flowing to Europe
- Even though the European Union's ban on Russian products is set to kick in on February 5, diesel deliveries from Russia have actually started to rise this month again, at some 500,000 b/d.
- With European production of diesel fuel curbed by strikes in France and Germany's takeover of the Schwedt refinery, cutting the import dependence on Russia will not be easy.
- According to Euroilstock figures, distillate inventories in the 16 major European countries are 11% lower than last year this time around, with storage builds impossible with this level of backwardation.
- The EU was widely expected to replace Russian diesel with deliveries from the Middle East, although delays in refinery commissioning in both Saudi Arabia and Kuwait might complicate those plans.
4. As Banks Pull Away from Oil, Industry Finds New Ways of Funding
- As leading banks are increasingly reticent to fund fossil fuel extraction, the industry is turning towards more creative and innovative ways of funding, offering their reserves as security.
- So-called "proved developing producing" (PDP) securitizations have seen swift growth this year, with some $4 billion in funds already raised, mostly from small-to-mid-sized corporations.
- These bonds are backed by the companies' oil and gas reserves, meaning producers pledge a part of their future income in return for up-front cash, at a smaller cost than banks.
- PDP securitizations have an additional benefit - collateral doesn't get re-valued in times when prices are rising, as could be seen this year when borrowing bases remained stagnant.
5. When Will the Lithium Bull Run End?
- Lithium prices continue to soar to unprecedented heights, with battery-grade lithium carbonate and hydroxide increasing by 180% this year alone, with Chinese DDP prices around ¥550,000/mt ($76,000 /mt).
- Lithium mines have project lead times of at least 5 years and with lithium demand expected to increase sixfold by 2030, the market has been caught in a supply trap.
- Lithium mining from salt lake producers is expected to slow down when winter arrives, but production of battery-grade metal will continue firing on all cylinders.
- This creates another loop of inadequate supply, implying that lithium prices could move even higher than they are now, potentially reaching the 600,000/mt threshold by the end of 2022.
6. Base Metals Suffer Even As Stocks Run Down
- With Europe's manufacturing sector contracting and facing deindustrialization, the US expected to follow soon, things do not look very rosy for industrial metals right now.
- Industry groups unleashed a wave of demand cuts, with zinc usage in 2022 set to see a 2% drop year-on-year instead of previously assumed growth, whilst growth in nickel demand will be only 4%, half of what was forecast back in May 2022.
- The future of Russian metals supply might tilt the market balance even further out - aluminum producers such as Alcoa (NYSE:AA) openly advocate a ban, whilst Europe's consumers warn of destruction if that happens.
- The current pricing downturn is all the more peculiar as it combines a low-price environment, aggravated by 2023 recession risks, with extremely low inventories that would become even more acute were the LME to ban the delivery of Russian metal.
7. Extremely Warm October Eases Coal Utilization, Lifting Gas
- Europe's power generators have returned to burning natural gas as its spot prices continue to plummet amidst a continent-wide gas glut, a product of steady LNG deliveries and warm weather.
- Gas-powered generation in the Netherlands this week was up by 45% compared to the monthly average, seeing coal utilization drop, whilst in Germany, the same metric stood at 33%.
- At the same time, gas futures in Europe are in steep contango, with February futures trading at a 45% premium to November at almost 150/MWh, meaning the market still expects a tough winter.
- Throughout October, European coal prices have been stable and traded around $250/mt, incentivizing a return to gas-fired generation.