Russia Sees Natural Gas Revenues Collapse

1. Defying Weakness in WTI and Brent, Dubai Soars to Prominence

- The Brent/Dubai exchange of futures for swaps spread, a key indicator of arbitrage from Europe to Asia, narrowed to a 2-year low recently and slightly even dipped below zero this week.

- A strong Middle Eastern benchmark is largely coming from Saudi Arabia’s 1 million b/d production cut pledge as well as higher availability of US crude in Europe pushing down the NW European market.

- Chinese refiners have resumed purchases of North Sea crudes as several VLCCs have loaded in past weeks, with a whopping 54 million barrels of West African oil having been fixed to Asia in June.

- At the same time, China’s state-owned companies have traded over 1300 Dubai partials in the Platts Dubai/Oman window, the second highest on record, with Unipec rising to become a primary seller and PetroChina heading the list of buyers.

2. Russian Government Sees Gas Revenue Collapse on Lower Exports

- Having pumped some 150 billion cubic meters of pipeline gas to Europe, Russia’s invasion of Ukraine has sealed off most of the European markets from Gazprom, painfully denting government revenue.

- Whilst oil revenues continue to flow in relatively unchanged despite the price caps, Russia’s gas revenues plunged 45% year-on-year and amounted to only 8.3 billion in the first five months of this year.

- Despite the hurried infrastructure build-out towards China, Russia still has no customers for about 90 bcm, prompting a further 13% year-on-year drop in gas production in January-May 2023.

- Faced with limited export outlets, Moscow is now seeking to increase domestic consumption of gas, supplying the fuel to Central Asian neighboring countries and building out a gas trading hub in Turkey to circumvent EU bans.

3. As Oil Industry Continues to Hoard Oil Reserves, Not Every Barrel Will Be Produced

- Total global recoverable reserves now stand at 1,624 billion barrels, up 52 billion barrels compared to last year, according to Rystad Energy’s recent note.

- Assuming 20% of any additional warming will come from incremental oil utilization, it is believed that 0.2 °C of additional warming by 2100 would be coming from the production of this crude.

- Most of the world’s recoverable oil is in low-emission producers such as Saudi Arabia (271 Bbbls), the US (192 Bbbls), or Russia (143 Bbbls), but Canada’s 127 Bbbls might be difficult to unlock, considering its upstream emission intensity is 6 times higher than Saudi Arabia’s.

- Incidentally, Canada is also the country with by far the largest proven reserves vs production ratio, at 20.5 years of current output readings which is twice the global average.

4. Slackening Domestic Market Sets the Stage for Chinese Diesel Export Spree

- Following several months of meager product exports, Chinese refiners are expected to ramp up diesel exports over the upcoming weeks as margins and cash premiums have been improving.

- According to Chinese sources, diesel exports will soar above 800,000 metric tonnes in July, a 70% increase compared to this past month, despite refiners having already used up 75% of their allocated export quotas.

- After a protracted maintenance season in May-June, Chinese refiners are now back to producing as much diesel as they can, fervently expecting the next batch of product export quotas.

- According to Kpler data, the main destinations for China’s diesel exports are the Philippines, Malaysia, and Hong Kong, with state-owned PetroChina being the key supplier.

5. Global Exchange-Registered Copper Stocks Drop to 15-Year Lows

- Copper inventories held in London Metal Exchange (LME) warehouses dropped to 77,050 metric tonnes, with available tonnage less than half of that, enough for to supply the global market for 11 hours.

- In total, combined stocks registered with the London, Shanghai, and Chicago exchanges totaled just 165,000 metric tonnes at the end of last week, the lowest since 2008 and down 22% since the beginning of this year.

- Drained inventories have briefly pushed the LME three-month copper futures to a two-month high of $8,868/mt last week but have since retreated to $8,400/mt, driven by a belief that a lot of copper is sitting in private stocks.

- Countering the narrative of weak copper demand, cash premiums are still the highest they’ve been this year, with the LME cash-to-three-months spread showing a backwardation of $31/mt.

6. Canadian Energy Stocks See Record Payouts Before Taxes Kick In

- High commodity prices are spurring a record surge in Canadian buybacks and dividends, with the country’s S&P/TSX Composite Index showing the biggest-ever payout ratio relative to the S&P 500 Index.

- S&P/TSX Composite-listed stocks are currently offering a 5.4% payout yield thanks to the double effect of high dividends and frenzied buybacks, more than 100 basis points above US stocks.

- Canada’s four largest oil producers – CNR, Cenovus, Suncor, and Imperial Oil – have spent $16 billion on buybacks in 2022, speeding up the purchases due to an incoming 2% federal tax on them.

- Even though higher taxes and lower commodity prices amidst flagging Chinese demand should lower the overall tally of payouts to $140 billion next year, the yield is still to remain above 4% for the foreseeable future.

7. China Becomes World’s Renewable Powerhouse

- China is on track to reach its renewable energy targets five years early, with its wind and solar capacity set to reach 1,371 GW by 2025 amidst an easing of supply chain bottlenecks.

- This year alone China will add 154 GW of solar, 55.7 GW of onshore wind and 8.3 GW of offshore wind capacity, accounting for almost half of global renewable additions.

- Simultaneously, Chinese coal production is expected to hit its 2025 target of 4.6 billion tonnes this year, with January-May output coming in at 1.91 billion tonnes, up 5% year-on-year.

- With the world’s largest wind turbine producer Siemens expecting another $1 billion loss this year, losing 30% of its market value over the past 5 years, China’s wind companies might be gaining the upper hand.