- Oil prices have been greatly boosted by crude inventories in Cushing, the delivery point for US WTI futures, falling to 22 million barrels, the lowest level since June 2022, potentially jeopardizing future pipeline transportation.
- Accounting for roughly 12 MMbbls of pipeline fill and storage tank bottom stocks, Cushing is left with a mere 10 MMbbls of transportable crude, with 75% of the oil hub’s storage capacity staying empty.
- Cushing oil inventories have declined for 12 out of the last 13 weeks, with seven weeks of consecutive declines, triggering fears that any further declines would debilitate pipeline transportation.
- The steepest backwardation in 2023 so far disincentivizes storage, and refinery maintenance might be Cushing’s best hope to rebuild stocks as up to 1.8 million b/d of US capacity will be going offline by mid-October.
2. Europe’s Gas Inventories “Comfortable” Before Winter
- Unprecedentedly high levels of gas inventories across the European Union, currently 95% full, combined with higher renewable generation and lower demand make Europe’s gas outlook for the winter more comfortable than last year.
- Analysts don’t expect another spike in gas prices akin to the €343 per MWh seen last August, but gas markets remain tight on the physical side and could be easily disrupted by supply shocks.
- Oil prices have been greatly boosted by crude inventories in Cushing, the delivery point for US WTI futures, falling to 22 million barrels, the lowest level since June 2022, potentially jeopardizing future pipeline transportation.
- Accounting for roughly 12 MMbbls of pipeline fill and storage tank bottom stocks, Cushing is left with a mere 10 MMbbls of transportable crude, with 75% of the oil hub’s storage capacity staying empty.
- Cushing oil inventories have declined for 12 out of the last 13 weeks, with seven weeks of consecutive declines, triggering fears that any further declines would debilitate pipeline transportation.
- The steepest backwardation in 2023 so far disincentivizes storage, and refinery maintenance might be Cushing’s best hope to rebuild stocks as up to 1.8 million b/d of US capacity will be going offline by mid-October.
2. Europe’s Gas Inventories “Comfortable” Before Winter
- Unprecedentedly high levels of gas inventories across the European Union, currently 95% full, combined with higher renewable generation and lower demand make Europe’s gas outlook for the winter more comfortable than last year.
- Analysts don’t expect another spike in gas prices akin to the €343 per MWh seen last August, but gas markets remain tight on the physical side and could be easily disrupted by supply shocks.
- Europe is expected to install 56 GW of renewable capacity this year, equivalent to some 18 bcm of gas consumption, whilst demand for natural gas is expected to decline 8% vs. the 5-year average of 2017-2021.
- Russia’s pipeline exports to the EU plunged from 155 bcm in 2021 to an expected 20 bcm this year, with Norway replacing Russia as the continent’s largest gas supplier.
3. Capturing Carbon Not as Easy as It Seems
- As oil companies and the energy industry at large start to look at carbon capture and storage (CCS) as a viable alternative to mitigate their carbon emissions, hard-to-abate industries such as steel or even hydrogen production might be the next frontier for CCS.
- According to Bloomberg projections, global capacity for industrial CCS will rise to 123 million metric tonnes by 2030, although this would need to rise to 3.5 billion tonnes by 2050 if net zero targets are to be reached.
- Plant utilization rates, an operational issue that would be largely determined by the cost of fuel and electricity, will provide a much bigger downside than upside to project economics - a 10% utilization run rate drop would increase carbon capture costs by 10% - assuming normal run rates would come in at 85%.
- Bloomberg selects the steel, cement, and hydrogen production industries as the most susceptible to see lower appetite from commercial financing.
4. Marcellus Defies Gas Activity Drop Thanks to Lower Costs
- Low operating costs have shielded gas producers in the Marcellus Shale from a challenging 2023 pricing environment so far, with average well costs per foot some 8-10% below equivalent operations in the Permian or Anadarko basins.
- However, natural gas sold at Henry Hub has on average garnered a price 50% higher than an equivalent volume sold at the Eastern Gas South hub in Appalachia, with the latter currently trending at $1.25 per mmBtu.
- Despite Marcellus margins remaining positive, both Chesapeake Energy (NASDAQ:CHK) and Coterra (NYSE:CTRA) toy with the idea of cutting expenditures in the region and redirecting that capital to more profitable operations in the Permian.
- Gas production within the Marcellus basin has edged slightly lower from its 2023 peak of 29 BCf per day in July, with average September output to date coming in at 28.2 BCf per day.
5. UK Carbon Prices Fully Decouple from Europe
- The British government’s U-turn on some of its most ambitious decarbonization efforts has prompted further decreases in UK carbon permits, falling to a record low of £33 per mtCO2e ($xx/ mtCO2e).
- Rishi Sunak’s government scrapped proposals to ban gas boilers in new homes from 2025, dropped plans for mandated energy efficiency refits on properties, and also postponed the country’s 2030 ban on sales of fossil-fuel cars by another five years.
- With the UK seeing higher renewable generation coming from wind power as well as reduced gas-for-power burn, low ETS costs have opened an electricity arbitrage into Europe where carbon prices are double as high.
- Plunging carbon prices in the UK are increasing the likelihood of the EU slapping carbon dioxide levies on British steel or cement products as Europe’s carbon border levy is set to come into effect from 2026.
6. Ammonia to Steal the Show from Hydrogen
- Hydrogen has been making inroads as the fossil-free energy source of the future, however most of international trade will probably be carried out in the form of ammonia, a safer and much more cost-effective method of transporting hydrogen.
- According to Rystad Energy forecasts, the volume of global ammonia trade is set to quadruple to 76 million tonnes by 2035, subsequently soaring to 121 mtpa by 2050, with Africa and Australia emerging as key exporters, providing 40 and 36 mtpa, respectively.
- Australia will become the key supplier of Japan and South Korea, however for that to happen the country’s terminal capacity needs to increase tenfold as currently it only wields seven terminals with total storage capacity of 173,000 metric tonnes.
- Shipping might be another bottleneck as only 30% of the global LPG fleet can transport ammonia at the moment, necessitating at least 200 very large ammonia carriers (VLACs) and shipbuilding investment of at least $20 billion.
7. China Prioritizes Domestic Supply Safety over Export Expansion
- The Chinese government poured cold water on the optimism of oil companies, with the National Development Reform Commission (NDRC) announcing it would not issue new quotas for oil product exports and additional allowances for crude imports in 2023.
- Beijing seeks to control the supply of oil products whilst keeping the domestic market well-supplied amidst improving demand figures, quashing hopes that there might be a fourth batch of product export quotas of some 5 million tonnes.
- China awarded a total of 37.99 million tonnes (870,000 b/d) of clean product export quotas, suggesting that there will be only some 770,000 b/d of exports over the remaining months of 2023.
- The lack of additional crude import quotas is a blow to independent teapots that have used up 81% of their annual allowance by the end of August, prompting them to find alternative feedstocks such as fuel oil for refining.
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