High Gasoline Prices Are Starting To Hurt Demand

1. OPEC Exports Underwhelm Despite High Prices

Source: Kpler.

- The Russia-Ukraine war has taken OPEC heavyweights out of the public limelight, somewhat concealing the fact that the 400,000 b/d monthly increments of OPEC+ routinely end up underproduced.

- Saudi Arabia is the only major OPEC producer to pull off a tangible export hike over the past months – in February outflows jumped to 7.15 million b/d – however with Iraq and Kuwait faltering, the net effect has been lower than assumed.

- Hence, OPEC producers could enjoy high prices with a limited effort to boost production, not risking their spare production capacity – arguably the reason why OPEC told the EU not to ban Russian oil from the markets.

- Iraq is a peculiar case in point, with its exports stagnating for four months already at 3.2 million b/d and production set to decline this month, coming on the back of a previous month-on-month drop in February.

2. COVID-19 Reappearance Puts Chinese Rebound into Question

- China’s daily COVID-19 count reached almost 5,000 cases on Friday as the rapid spread of the Omicron variant has triggered movement restrictions in cities across 20 provinces.

- Most of the cases have been reported in Shanghai, Shandong, and Guangdong, accounting for 27% of China’s oil consumption last year, meaning China should see weaker demand than expected in 2022.

- S&P Platts expects movement restrictions to ease in May, with coronavirus-triggered demand destruction reaching its peak in March standing at 650,000 b/d.

- Consequently, China will see a rather meager demand growth of 200,000 b/d this year, ceding the place of the world’s most rapidly growing market to India.

3. US Gasoline Trend Finally Reacts to High Prices

- As gasoline prices have settled comfortably above the $4 per gallon mark across the US, fuel demand might finally see behavior-driven changes, with 37% calling high prices a ‘very serious problem’.

- The four-week average of nationwide gasoline demand has been trending sideways at 8.82 million b/d in a period when driving activity should be seasonally ticking up.

- The halt in demand growth has coincided with a marked increase in gasoline production, with the latest IEA data indicating gasoline output levels of 9.5 million b/d.

- At the same time, gasoline stocks across the country have so far been declining for seven consecutive weeks, settling at 238 million barrels in the week ending 18 March.

4. Europe’s Gas Woes Take Confront Rouble Dilemma

- Russia’s President Vladimir Putin indicated long-term gas supply contracts will be converted into roubles, as the West declared economic war on Moscow, warning that the shift is only days away.

- Whilst it is still unclear whether Russia would force its contracts into force majeure to accommodate the currency change, Brussels has concurrently required EU member states to ensure their underground gas storages are filled to at least 80% of capacity by 1 November.

- With the new EU legislation stipulating that EU storage sites should be 63% full by 1 August already, the pull on Russian gas might be even stronger over the upcoming months.

- Meanwhile, the US Administration pledged to supply 15 billion cubic meters of liquefied natural gas to Europe, but that is equivalent to only 10% of Gazprom’s European sales.

5. Things Can Only Get Worse for Aluminium

- After Russia’s aluminum industry was cut off from Australian alumina flows, the second-largest source for the country’s plentiful smelters, Russia has been courting China to provide it with the required feedstock.

- The Australian sanctions are upending usual trade flows as Russia’s Rusal owned 20% of Queensland Aluminium and received 19% of its alumina from Down Under – rumor has it that Chinese firms will become mediators in the same transaction chain.

- Hypothetically, China could also sell its own alumina production, but the marginal benefit would be in re-trading third-party flows to Russia.

- Aluminium prices surged 10% over the past week, with the 3-month LME contract trading at 3,675 per metric ton, a situation aggravated by stocks hitting a 15-year low.

6. Europe Doubles Down on Green Hydrogen

- Soaring natural gas prices and consequently weaker profitability on gray hydrogen projects are improving the feasibility of green hydrogen plants across Europe, Rystad Energy reports.

- Even though green hydrogen still boasts a global capacity of less than 1 GW, the cost surge of green hydrogen from $8 per kg to $12-13 per kg, coming on the back of the Russia-Ukraine war, provided a much-needed boost.

- Even considering the ambitious green hydrogen targets of Germany and Spain, Europe would need about 54 million tons of hydrogen by 2030 to supplant gas and coal – as of today, it is likely to replace only 5% with hydrogen.

- Spain has so far emerged as the most commercially attractive outlet for green hydrogen projects, with production costs as low as $4 per kg.

7. Lithium Prices Cannot Stop Soaring

- Lithium prices are continuing their wild ride, having already risen fivefold last year, they have almost doubled already in 2022, with Chinese lithium carbonate pricing at 497,500 per metric tonne ($78,000/mt).

- This has prompted the Chinese government, traditionally seeking to add ‘scientific grounds’ to commodity trading, to tell electric battery producers that it expects lithium prices to return to sustainable levels.

- For the first time in many years, lithium demand surpassed supply in 2021 and the short-to-mid-term outlook for lithium production remains dubious, with many projects delayed or outright canceled (such as Rio Tinto’s Jadar license).

- Lithium prices were also boosted by the announcement of leading electric vehicle producer Tesla that they would switch to LFP battery (lithium iron phosphate) for all standard-range cars, not just those produced in China.