The Hunt for White Hydrogen Has Begun

1. US Natural Gas Production Is Suffering but Hopes for a Swift Rebound in 2025

- Cash prices of Henry Hub plunged to their lowest since the early 1990s as mild weather and high gas inventory levels sent the US benchmark spiraling down, with next-day prices moving around $1.24-1.25 per mmBtu this week.

- With the prompt physical market also seeing deviations such as Waha spot prices trading negative again, futures prices saw only a minor downside and rebounded later in the week to $1.75 per mmBtu.

- A number of gas producers is increasing their stock of drilled but uncompleted (DUC) gas wells, with CNX announcing the deferral of 11 wells this year within the Marcellus Shale, following the lead of Chesapeake which expects deferred turn-in-lines to come in at around 30-40.

- Gas producers are pinning their hopes on a marked improvement in demand come 2025, buoyed by new LNG liquefaction capacity launching, with the December 2025 futures contract trading around $4.2 per mmBtu.

2. Teapots Are Struggling to Survive as Taxes and Demand Woes Hit

- Operating rates across private refineries in Shandong province – the so-called teapots – have fallen to the lowest since the COVID-19 lockdown period of early 2022, below 55%.

- China’s teapots have been geared to maximize diesel production, but Chinese manufacturing has been in contraction since September and weak housing activity has capped margins.

- China’s independents are now pinning their hopes on the US resuming sanctions on Venezuela, with Merey currently selling at -$8 per barrel to Brent compared to -$20 per barrel before the waiver, so cheaper crude could lift their profitability.

- Many refiners face additional financial constraints as Beijing has slapped fines on them for historical tax evasion cases, with China preferring to deal with more cooperative major independents rather than small teapots.

3. Bitcoin Is Back in Vogue, So Is Power-Intensive Mining

- Bitcoin prices surged in recent weeks, surpassing the $70,000 threshold for the first time in history last week, fuelled by newly launched spot ETFs and the upcoming supply-cutting event called halving, coming mid-April.

- Bitcoin miners have used an all-time high of 19.6 GW of electricity this February, up from 12.1 GW the same month a year ago, equivalent to the power needed to cover 3.8 million homes in Texas.

- Low-cost computing power is the most direct path to gain a competitive edge in the cryptocurrency market as crypto networks generally allocate rewards to the first to successfully process a unit of data.

- According to the EIA, cryptocurrency mining currently accounts for roughly 2% of US electricity consumption, consuming more than the entire country of Argentina, with the United States representing one-third of all mining-related power demand.

4. Brazil Changes Strategy as Climate Change Limits Hydro Options

- Brazil has been trying to diversify its renewables portfolio after decades of relying on a mammoth system of hydro dams, increasingly looking into new solar and wind projects.

- Despite robust hydro generation in 2022-2023, years of drought (such as 2021) have forced Brazil to panic-buy LNG to cover for the missing electricity generation, suggesting climate change would be adversely impacting future output.

- Hydropower still remains the backbone of Brazil’s generation capacity, accounting for 71% of all power produced in 2024 so far, keeping the share of fossil fuels under 15% of the total.

- As combined generation capacity from solar and wind farms expanded by 180% between 2018 and 2022, wind has been given priority with the country’s oil firm Petrobras seeking to build 23 GW of wind farms to power its offshore production platforms.

5. The Hunt Is on For White Hydrogen

- Mined natural hydrogen (also called white or gold hydrogen) might become the next big mining frontier, with more than 40 companies globally starting to drill for underground deposits in at least 8 countries.

- Grey hydrogen produced from natural gas retains a pricing advantage over green hydrogen, generated by using renewable electricity, costing less than $2 per kg as opposed to a $6-7/kg cost for the latter.

- For many years, accumulations of hydrogen underground were believed to be scarce due to the element’s ability to seep through rock layers, but some natural reactions such as serpentinization and water radiolysis could overcome that.

- The cost of extracting white hydrogen stands around $0.5-1.0 per kg, half of grey hydrogen’s, but the technology is yet to be tested at scale, with there being only one operational project globally, the Bourakebougou plant in Mali, producing 5 tonnes a year.

6. Air Conditioning Becomes China’s New Driver of Power Demand

- Warmer summers leading to higher air conditioner usage have been a bullish factor for oil demand in the Middle East where up 70% of all electricity generated is utilized by ACs, but China is increasingly taking center stage in rapidly expanding conditioner usage.

- Average temperatures in China have risen by 1.5° C from the 1971-2000 average in each of the past five years, with heat waves during the summer months prompting higher-than-usual air conditioner usage.

- Between 2015 and 2023, China’s stock of air conditioners increased from 531 million to 862 million, growing quicker than the global average of 41%, with power generators compelled to ramp up electricity generation from coal-fuelled plants.

- Electricity generation seasonally peaks in the summer months across China, with June-August last year seeing an average 557 TWh produced per month, 15% higher than the annual average of 488 TWh.

7. Copper Shoots Up as Smelters’ Production Cuts Lift Sentiment

- Copper prices have surged this week with the benchmark LME three-month contract closing in on the $9,000 per metric tonne threshold and reaching its highest since April 2023.

- China has been at the forefront of surging copper prices as executives from 19 copper smelting firms have agreed to production cuts by re-arranging maintenance and delaying 2024 startups of new projects.

- Smelters have been driven to such unprecedented measures by collapsing refining charges – the amount they are paid to convert copper concentrate into metal – as treatment charges plunged to single digits after trending at $70-80/mt for most of 2023.

- The collapse in processing fees was driven by the relentless expansion of Chinese smelting capacity which, when confronted with copper supply disruptions such as Panama’s shutting down of Cobre Panama, drove margins to unparalleled lows.