- Gasoline prices have been experiencing an unexpected surge lately, with New York futures soaring to a nine-month high of $2.9 per gallon, whilst prices in Asia gained 15% in July alone and are currently at $2.53 per US gallon.
- Asia’s gasoline tightness stems mostly from Chinese consumers ramping up demand amidst peak summer driving season, with commercial gasoline inventories in the country falling to the lowest since at least 2019.
- A string of force majeure events at Exxon’s Baton Rouge refinery in the US, Shell’s Pernis refinery in the Netherlands and ENEOS’s Mizushima plant in Japan have cut gasoline supply across all three key continents.
- The average price of gasoline in the US currently stands at $3.71 per gallon, with further growth potentially becoming a key liability for the Biden administration as it seeks to curb inflation, currently at 3%.
- The river Rhine, the commercial artery for 80% of Germany’s inland shipping of goods, is experiencing severely low water levels, with the key chokepoint of Kaub recording its lowest readings this year.
- Last year has seen very similar water levels at this time of the year, leading to the lowest volume of goods transported via Germany’s waterways since reunification, a total of 182 million metric tonnes, down 6.4% from 2021.
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1. Gasoline Becomes an Inflation Scare Again
- Gasoline prices have been experiencing an unexpected surge lately, with New York futures soaring to a nine-month high of $2.9 per gallon, whilst prices in Asia gained 15% in July alone and are currently at $2.53 per US gallon.
- Asia’s gasoline tightness stems mostly from Chinese consumers ramping up demand amidst peak summer driving season, with commercial gasoline inventories in the country falling to the lowest since at least 2019.
- A string of force majeure events at Exxon’s Baton Rouge refinery in the US, Shell’s Pernis refinery in the Netherlands and ENEOS’s Mizushima plant in Japan have cut gasoline supply across all three key continents.
- The average price of gasoline in the US currently stands at $3.71 per gallon, with further growth potentially becoming a key liability for the Biden administration as it seeks to curb inflation, currently at 3%.
- The river Rhine, the commercial artery for 80% of Germany’s inland shipping of goods, is experiencing severely low water levels, with the key chokepoint of Kaub recording its lowest readings this year.
- Last year has seen very similar water levels at this time of the year, leading to the lowest volume of goods transported via Germany’s waterways since reunification, a total of 182 million metric tonnes, down 6.4% from 2021.
- As several economic forecasters, ranging from the IMF to Deutsche Bank, expect Germany’s GDP to shrink by 0.3% in 2023, a prolonged period of low Rhine water levels could jeopardize further recovery.
- Germany’s industrial giants BASF or Covestro anticipate the shallowing of river Rhine to continue and have been chartering low-water barges that remain navigable in water levels as low as 40 cm.
3. Europe Is Sitting on Billions of Chinese Solar Panels
- Rystad Energy warns that the inventory of Chinese-produced solar panels is building up in European warehouses, worth some 40 gigawatts-direct current of capacity, equivalent to all capacity installed across the continent in 2022.
- The storage panels in storage are worth $7 billion and are set to double in volume by the end of this year, driven by an insatiable appetite for solar panels amidst fears that a US-China conflagration might cut the supply of panels.
- The pace of solar installations across the EU is so far lagging behind imports, with the gap between the two soaring to 47 GWc last year, with 2023 expected to see further widening between imports and Chinese supply to 57 GWdc.
- European production capacity of solar panels has been increasingly undercut by more price-competitive Chinese supplies – the share of China in European solar imports amounts to a whopping 91%, some $18.5 billion in absolute terms.
- Even though double-digit net income decreases were expected for Big Oil’s Q2 earnings calls as oil prices continue to hover around $80 per barrel, the weakness of the petrochemical markets aggravated the profit squeeze.
- Petchem margins linger at their lowest in three years as a massive Chinese polyethylene capacity build-up is expected to see global supply outstrip demand by 55% by 2024, just as demand is hindered by recessionary headwinds.
- Despite posting average year-in-year declines in adjusted net income of more than 50%, the combined earnings of Exxon, Shell, TotalEnergies, BP, and Chevron amount to $29.5 billion in Q2, still more than double the pre-pandemic average.
- The quarterly earnings of oil majors less dependent on the petrochemical sector, such as Chevron with its higher-than-expected $6 billion net profit, have been tangibly higher than those of petchem-heavy oil firms such as Shell.
5. Another Year to Wait Until Coal Demand Starts Falling
- In its recently published coal market outlook, the IEA stated it expects global coal demand to record a slight year-on-year increase of 0.4% to 8.4 billion tonnes, driven by robust growth in China, India, and Indonesia.
- China’s coal demand has been a key factor in demand not falling, expected to be up 3.5% year-on-year as draught-ridden weak hydropower generation triggered a country-wide boom in coal generation.
- On the other hand, IEA data indicates coal demand in the United States and the European Union recorded double-digit declines in H1 2023, plunging by 24% and 16%, respectively.
- Despite growing consumption, robust supply increments across the Asian continent are keeping coal prices depressed with ICE Newcastle trading around $130 per metric tonne and Europe’s API2 benchmark even lower at $110/mt.
6. Lack of Grand China Stimulus to Depress Iron Ore
- Expectations of infrastructure-heavy stimulus measures from China have been the main reason why iron ore futures have bounced back from their May lows, staying within the $110-120 per metric tonne range lately.
- However, the iron ore rally will most probably reverse course over the upcoming weeks as the much-anticipated Politburo meeting was surprisingly lull on monetary stimulus and only promised half-measures such as easing local government debt.
- Leading investment banks Morgan Stanley and Goldman Sachs reaffirmed their bearish views on iron ore after the Politburo meeting, with both expecting iron ore to drop into double-digit territory in the second half of 2023.
- Weighing on the bearish sentiment, the world’s leading iron ore miners Vale and Rio Tinto kept their full-year production estimates intact despite both cutting their dividends by almost 50%.
7. Despite Government Help, Pemex Outlook Marred by Debts
- The Mexican government provided a much-needed lifeline to its debt-ridden national oil company Pemex, with the Finance Ministry pledging to re-finance all near-term maturities.
- Despite the temporary respite, the spread between Pemex and Mexican sovereign 2028 bonds still stands at a sizable 5.5%, indicating that investors perceive the oil company to be a much riskier asset.
- Pemex remains the most indebted oil company in the world, with its financial arrears amounting to $107.4 billion at the end of March, double of what the company owed to creditors a decade ago.
- Credit rating agencies Fitch and Moody’s have recently downgraded Pemex’s rating and changed its outlook to negative, a trend aggravated by several deadly incidents impacting the company’s operations, most notably the Nohoch Alfa platform fire earlier this month.
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