1. Summer Demand Finally Kicks In, Lifting Oil Prices Out of Contango
- The summer rally of the oil markets might finally materialize as ICE Brent crept up to $85 per barrel, even higher than it was before the OPEC+ meeting, and contango in the North Sea paper market disappeared.
- The unwinding of bearish bets on crude oil and robust physical trading have buoyed European sentiment, with Brent contracts for difference (CFDs) now swinging into backwardation with the W1-W6 spread now at almost $2 per barrel.
- Hurricanes have been the biggest bullish factor across the Americas as Tropical Storm Alberto swept across Mexico and prompted US refiners to stock up on crude, especially on barrels produced in the Gulf of Mexico.
- Because of the hurricane season and the risks arising from it, the arbitrage of US crude into Europe is much weaker than it used to be, potentially lifting European prices even higher.
2. Hedge Funds Turn Really Bullish on Europe's Natural Gas
- Investment funds are increasingly betting on European natural gas prices to rise on the back of future supply concerns, just as competition for available LNG cargoes intensifies with Asia.
- European TTF gas futures rose to €35 per MWh on the back of Norwegian supply disruptions earlier this month and even though the Nyhamna gas processing plant is back in operation, gas prices haven't really decreased since then.
- Additional concerns emerged this…
1. Summer Demand Finally Kicks In, Lifting Oil Prices Out of Contango
- The summer rally of the oil markets might finally materialize as ICE Brent crept up to $85 per barrel, even higher than it was before the OPEC+ meeting, and contango in the North Sea paper market disappeared.
- The unwinding of bearish bets on crude oil and robust physical trading have buoyed European sentiment, with Brent contracts for difference (CFDs) now swinging into backwardation with the W1-W6 spread now at almost $2 per barrel.
- Hurricanes have been the biggest bullish factor across the Americas as Tropical Storm Alberto swept across Mexico and prompted US refiners to stock up on crude, especially on barrels produced in the Gulf of Mexico.
- Because of the hurricane season and the risks arising from it, the arbitrage of US crude into Europe is much weaker than it used to be, potentially lifting European prices even higher.
2. Hedge Funds Turn Really Bullish on Europe's Natural Gas
- Investment funds are increasingly betting on European natural gas prices to rise on the back of future supply concerns, just as competition for available LNG cargoes intensifies with Asia.
- European TTF gas futures rose to €35 per MWh on the back of Norwegian supply disruptions earlier this month and even though the Nyhamna gas processing plant is back in operation, gas prices haven't really decreased since then.
- Additional concerns emerged this week after an international arbitration ruling awarded Germany's Uniper with $14 billion in damages from Gazprom, sparking fears that the remaining Ukraine transit volumes might be cut.
- Europe's gas inventories are currently 73% full, higher than the five-year average, however recurring heatwaves, tense geopolitics and supply woes keep prices elevated.
3. Brazil Could be The West's Answer to China's Rare Earth Dominance
- Brazil's mining industry might see a flurry of interest as the Latin American country starts to position itself as the West's response to China's increasingly tight control of rare earth markets.
- Even though Brazil's rare earth reserves are only half of China's, with the latter controlling 40% of all discovered deposits, the first Brazilian rare earth mine Serra Verde (containing all four magnetic rare earths) started producing recently.
- China's dominance is even more tangible when it comes to production with an output of more than 240,0000 metric tonnes of rare earths last year, five times more than the next biggest producer, the United States.
- Rare earth mines have a notoriously slow lead time with Serra Verde taking 15 years to get into production, and because current metal prices don't incentivize new investment, Brazil's mines will play a key role in satiating Western demand.
4. Tacitly Coveted by Mining Majors, Coking Coal Is Still In Vogue
- Investments into thermal coal, let alone major M&A deal, are becoming scarcer, however the mining industry is seeing a flare-up of interest towards coking coal, used in steelmaking.
- Glencore's acquiring 77% of Teck Resources' coal business, heavily tilted towards metallurgical coal, has paved the way for even bigger deals, with the market now expecting Anglo American to divest its Australian coal operations.
- Despite seeing notably more demand, coking coal is more toxic than thermal coal due to its higher methane content, with its total emissions being three times higher than steam coal.
- Miners focusing on coking coal boast much higher profitability figures as premium hard coking coal sells for around $250 per metric tonne with lifting costs of only $100-120/mt, double the profitability of thermal coal.
5. Chinese Energy Consumption Overtakes Europe
- China's energy use per person surpassed Europe's for the first time on record, boosted by higher manufacturing as well as the expansion of data centers, 5G infrastructure, and EV car charging.
- Simultaneously, power generation from renewables posted an 8.4% year-over-year increase in 2023, rising to 2894 TWh, with China adding more renewable capacity than the rest of the world combined.
- Whilst Europe and the United States have seen their fossil fuel exposure peak, China's carbon intensity might plateau very soon, with pace of renewable build-out exceeding fossil capacity increases in 2023.
- According to the Energy Institute, global carbon emissions have risen by 1.6% last year compared to 2022, with Vietnam seeing the highest emissions growth globally, posting a whopping 18.6% increase year-over-year.
6. Container Shipping Heats Up as Red Sea Dangers Disrupt Seasonality
- The ongoing shipping disruptions caused by the militarization of the Red Sea and the Suez Canal have been consistently pushing container freight rates higher, defying expectations of a weak 2024 for the container market.
- The rate for a 40-foot container from Shanghai to Genoa soared above $7,000 over the past week, the highest reading since September 2022, effectively doubling since April.
- Singapore has been particularly affected by the changes in global container flows, with congestion rates skyrocketing as carriers await their turn for long-haul bunkering around the Cape of Good Hope.
- Traditionally, May and June are off-peak seasons for container shippers, however the shortage of available containers at ports and longer voyages around the Cape of Good Hope that add 11,000 km to shipping routes (additional 12-14 days) have upended that seasonality.
7. Europe Doubles Down on Wind Infrastructure Investment
- Wind energy has been making great inroads in Europe's electricity generation, already accounting for 20% of all power generated last year, and the region's key wind producers are simultaneously boosting investments into wind infrastructure.
- Wind substations, collecting power generated by offshore wind turbines, increasing the operating voltage, and transmitting that power to shore, are set for a boom in the second half of the 2020s.
- Following four wind substations added in 2023, Rystad Energy believes this year will see the addition of eight substations, gradually increasing to 30-35 per year towards the end of this decade.
- In order to install the 137 substations that are to be commissioned this decade across Europe, some $20 billion was required in total investment, especially as substations get built farther away from shore.