Soaring Costs Set To Hurt U.S. Shale Production

1. Soaring Production Costs Stoke Fears of US Shale Slowdown

- Just as US shale producers were poised to capitalize on high crude prices and bring new production to the markets, Texas drillers have been confronted with soaring production costs.

- According to Continental and Coterra, drilling and production costs in average shale plays were up by some 20%. It isn't only that rigs and workers are in short supply, the doubling of fracking sand and diesel prices have also added to the inflationary pressure.

- The lead time between order and delivery of steel pipes (used to line the interior of oil wells), drilling equipment, and compressors can now be as long as two years, coming on the back of global supply chain disruptions.

- Market watchers have been caught by surprise by the EIA’s February crude production data, indicating a decline despite expectations to the contrary, with drillers continuing to deplete drilled-but-uncompleted wells (DUCs).

2. China Spends a Record-Breaking Amount on Russian Commodities

- China’s monthly imports of commodities from Russia reached a new all-time high in April, rising to $8.9 billion, up 56% year-on-year as soaring crude prices and robust buying created a perfect storm.

- Whilst one-sixth of China’s crude buying comes from Russia, oil prices averaging some $110 per barrel last month led to the record numbers, with little additional interest for Russian distressed oil cargoes.

- Coking coal deliveries from Russia to China reached a new record last month, increasing by almost 50% month-on-month to total 1.4 million tons.

- Moscow and Beijing promised to take bilateral trade to $200 billion by 2024, but this year has seen increases only in Russian exports – Chinese exports dropped 25% month-on-month in April, to $3.8 billion.

3. US Power Grid Might Not Cope with Renewables Surge

- In a report published this week, Reuters estimates that at least $2 trillion of investment is needed to adapt the dilapidated US power grid to the challenges of higher power demand.

- Power outages have more than doubled over the past six years, with power systems experiencing full-scale collapses following hurricanes, wildfires, heat waves, and cold snaps.

- With no major inter regional transmission project being planned or built over the 2010s, the US might be generating more green power however a substantial part of it remains wasted.

- In addition to weather getting wilder and natural disasters more damaging, the intermittent nature of solar and wind would most probably aggravate the wearing away of old transmission networks.

4. US Gasoline Prices Hit Record Amidst Continuing Tightness

- US gasoline prices have reached unprecedented territory this week, moving beyond $4.40 a gallon despite oil prices largely stagnating over the past weeks, indicating transportation fuel scarcity.

- Gasoline inventories continue to decline across the United States, falling for seven consecutive weeks already and hitting 225 million barrels in the week ended May 06.

- Refinery closures in the US, coupled with unexpected setbacks in several operating refineries lately, have created a situation when products’ supply is lagging behind robust demand.

- Concurrently, Senate Democrats are pushing for a law that would bar excessive fuel prices, blaming rising road fuel prices on oil companies that have reported record profits for Q1.

5. Solar Leads Renewable Energy Additions Despite Cost Hikes

- Global additions of renewable energy will increase by over 8% this year, surpassing the 300 GW incremental capacity mark for the first time ever despite rising feedstocks costs and supply chain bottlenecks, writes S&P Platts.

- The IEA expects 320 GW of new added capacity in 2022, driven primarily by solar PV installations in China and Europe, moving full steam ahead despite rising polysilicon costs.

- Production costs for solar had been decreasing for a decade until last year, yet even with the uptick in feedstock prices, large-scale solar projects are expected to push solar additions to 200GW by next year, more than double wind’s growth.

- At the same time, the IEA warns that without stronger policies, the growth in renewable capacity will plateau next year as a further rise in solar is offset by slowing down hydro and wind additions.

6. Winter 2022 Expected to See Another LNG Supply Squeeze

- European LNG buyers are set for another supply crunch this winter, writes Rystad Energy, as demand is expected to overtake supply by the end of this year and keep the market under pressure for at least two years.

- Global LNG demand is expected to reach 436 million tons LNG this year, surpassing supply by more than 25 million tons – creating a headache for the European Union which has promised to reduce dependence on Russian gas by 66% this year.

- With Russia supplying 155 bcm of natural gas to Europe in 2021, replacing some 100 bcm might trigger a boom of LNG projects destined to satiate the continent’s nascent appetite, probably lifting the markets from undersupply to oversupply after 2024/25.

- There are more than 20 LNG projects currently being developed with a combined capacity of 180 million tons, more than 80% of them must be realized if stable supply is to be ensured over the next decade.

7. Despite Ebbing Prices, Zinc Prospects Set Firmly Towards Upside

- Zinc has been one of the star performers of the commodity markets this year, having pulled off a 50% increase in January-March and hitting a record level of $4,900 per metric ton. Just are prices were soaring, China’s covid lockdowns caused demand and prices to plummet.

- Despite weakening prices, zinc remains one of the most fragile metals out there, with LME inventories being at two-year lows and almost 60% of stocks seeing canceled warrants, meaning they will be delivered soon.

- In addition to low stocks, zinc production has been impacted by Europe’s electricity woes as smelters have been cutting output across the continent – the continent used to produce 15% of global production.

- Zinc mining seems shaky, too, as COVID lockdowns in China and community protests in Peru, the world’s two largest miners, jeopardize ore supply.