After weeks of losses, oil markets appear to be set up for a rally as multiple bullish catalysts come together. The expected cut to OPEC+ production targets will then be followed by the end of the U.S. SPR release before new sanctions on Russian oil and then fuel come into effect.
- As Bloomberg has noted, the main tenet of European gas policy going into the winter season of 2022/2023 - lower consumption - is not yet happening.
- The last week of September has seen the first string of below-average temperatures in Europe and German consumers increased their gas consumption to 14% above the 5-year average.
- EU member states have agreed to reduce gas demand by 15% this winter, starting from August, meaning that despite high gas inventories the demand loss is lagging significantly.
- Peaking in late August, Europe’s benchmark TTF spot prices have been plummeting recently to €170 per MWh, some 30% lower month-on-month but still triple what they were a year ago.
- US oil major Chevron (NYSE:CVX) is reported to have bought into the PEL 90 license offshore Namibia, adjacent to what will probably become the largest oil discovery of 2022, the multi-billion-barrel Venus.
- German power producer RWE (RWE) agreed to buy US energy company ConEdison’s (NYSE:ED) Clean Energy Businesses for $6.8 billion, making it the fourth-largest renewables player in the US market.
- Brazil’s state oil company Petrobras (NYSE:PBR) soared 10% this Monday, as closer-than-expected presidential elections will most probably force Lula to edge closer to the center.
Tuesday, October 04, 2022
Following several weeks of macro-driven weakness, this week has finally brought something more tangible to oil markets. Namely, a substantial OPEC+ market intervention. Reports put the potential cut in OPEC+ production targets at around the 1 million bpd mark. This potential reduction in OPEC+ production will combine with Russian sanctions kicking in and the US SPR release running its course to add real upward pressure to oil prices.
OPEC+ Is Serious About a Huge Cut. Meeting in person for the first time since March 2020, the OPEC+ meeting in Vienna this week is expected to see the largest coordinated downward revision in years as the oil group is reportedly considering a 1 million b/d cut for November 2022.
Israel-Lebanon Maritime Deal Really Could Happen. Following several years of shuttle diplomacy, US envoy Amos Hochstein has presented Israel and Lebanon with a draft agreement on how to split a 330-square-mile disputed area in the Eastern Mediterranean, nearing a resolution to the longtime row.
White House Restarts the Fuel Price Blame Game. The Biden Administration has stirred up emotions in the oil industry again after Energy Secretary Jennifer Granholm blamed majors for their failure to maintain sufficient fuel inventories, increasing the odds of regulatory caps on fuel exports out of the US.
IEA Forecasts Huge Gas Demand Drop. The International Energy Agency has forecast a 10% decline in European gas demand, the largest year-on-year drop on record, followed by a further 4% decrease in 2023, with most of the losses coming from the continent’s embattled industry.
Nord Stream Rupture the Largest Methane Release Ever. The UN’s International Methane Emissions Observatory stated that the ruptures on the Nord Stream pipelines 1 and 2 are most likely the biggest single release of methane in history, leaking at a rate of 22,920 kg per hour.
California Mulls Windfall Profit Tax. Seeking to react to a sudden increase in gasoline prices, California Governor Gavin Newsom is planning to introduce a windfall profit tax on oil companies in the form of a higher tax rate on earnings for the given year, the first state to do so across the country.
Prepare for a Huge Chinese Export Spike. Beijing at last issued a massive 15-million-ton export quota for refiners, the largest single allocation in 2022, paving the way for a ramp-up in Chinese crude demand and refinery runs.
Things Turn Hot Again in Libya. The decision of Libya’s Tripoli government to sign a preliminary deal on energy exploration with Turkey was met with unprecedented fury as governments in Greece and Egypt, as well as Libya’s concurrent government in Benghazi, have protested against drilling in contested waters.
Prisoner Swap Eases US-Venezuela Tensions. A high-level exchange of prisoners that saw five Citgo employees released in return for two Venezuelans (nephews of Venezuela’s first lady Cilia Flores) has marked another step toward a normalization of relations between the US and Venezuela.
Iron Ore Remains Surprisingly Stable. Whilst other commodities have been caught up in the turmoil of recession fears, iron ore has been surprisingly stable over the past two months, with 62% iron ore trading slightly below $100/mt as the good and bad news coming out of China seem to offset one another.
Chinese Delisting Starts in London. A mere month after rumors of Chinese companies delisting from Western exchanges emerged, the Asian country’s largest refiner CNPC (SHA:600028) indicated it would delist its American Depositary Shares (ADSs) from the London Stock Exchange.
Australian Profits Soar on Fossil Boom. All the ramifications of the Russia-Ukraine war in 2022 so far have boosted the economic outlook of Australia as thermal coal revenue is set to jump 35% year-on-year (to A$62 billion) whilst the value of LNG exports is expected to increase by 30%.
Saudi Arabia Talks Spare Capacity Again. Reminding the oil industry of supply fundamentals, Saudi Aramco (TADAWUL:2222) CEO Amin Nasser argued that the remaining spare production capacity has shrunk to as little as 1.5% of global demand.
By Tom Kool for Oilprice.com
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The fundamentals, namely a global oil market at its most bullish state since 2014, a robust global oil demand and a shrinking global oil spare production capacity including OPEC+’s, have been the same all through.
However, two major developments did happen since then: the Ukraine conflict and approaching recession.
Whilst the Ukraine conflict initially added an estimated premium of $25-$30 to the price of a barrel of oil and also caused prices of gas and electricity to soar, the premium has fizzled out when it became clear that the conflict hasn’t disrupted global energy supplies. What it did, however, is causing a polarization of the global energy markets, a re-direction of the global energy flows from west to east. However, Western sanctions against Russia did cause some disruption of gas supplies whilst the proposed capping of the price of Russian crude oil could also lead to some disruption of oil supplies.
And despite fears of a recession, global oil demand is shrugging off these fears. The reason is a new form of recession.
Under normal circumstances, one would expect recession to cause a shrinking of the global economy with oil demand destruction. But we are facing a new form of recession where global oil demand will continue to be robust and prices will continue to trend upwards while the global economy will shrink but without with a demand destruction since there is nothing to destruct. The reasons are a very tight global oil market and a fast-shrinking global spare oil capacity.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert