1. Q3 Earnings Calls to Focus on Capex Direction and Cost Management
- The news of ExxonMobil being in advanced talks to purchase US shale producer Pioneer Natural Resources for some $60 billion has set the scene for a very interesting period of Q3 earnings calls in the second half of October.
- When it comes to drilling costs, widespread expectations for 2024 to see lower well costs have been moderated on the back of the recent oil price rally, ongoing labor shortages, and sticker-than-expected oil service costs.
- Drilling activity has subsided amidst flattish exploration budgets, with 110 rigs leaving US fields in Q2, followed by another 42 in Q3, with almost two-thirds of them being oil-directed.
- Drillers' cost management leads to slower production growth amidst plateauing well productivity metrics and depleting DUC inventories, with US shale production expected to decline in October to 9.39 million b/d, down 40,000 b/d month-on-month.
2. Middle East Hold Keys to New Gas Production
- As global gas production is expected to grow 12.5% between 2023 and 2030 to meet rising demand, the Middle East will become an ever-important source of new output.
- Saudi Arabia wants to eliminate crude burn from its power generation altogether and rely on a 50/50 split between renewable energy and natural gas, prompting it to double down on new gas projects.
- Beyond Saudi Arabia's quest to produce 125 bcm of natural gas by…
1. Q3 Earnings Calls to Focus on Capex Direction and Cost Management
- The news of ExxonMobil being in advanced talks to purchase US shale producer Pioneer Natural Resources for some $60 billion has set the scene for a very interesting period of Q3 earnings calls in the second half of October.
- When it comes to drilling costs, widespread expectations for 2024 to see lower well costs have been moderated on the back of the recent oil price rally, ongoing labor shortages, and sticker-than-expected oil service costs.
- Drilling activity has subsided amidst flattish exploration budgets, with 110 rigs leaving US fields in Q2, followed by another 42 in Q3, with almost two-thirds of them being oil-directed.
- Drillers' cost management leads to slower production growth amidst plateauing well productivity metrics and depleting DUC inventories, with US shale production expected to decline in October to 9.39 million b/d, down 40,000 b/d month-on-month.
2. Middle East Hold Keys to New Gas Production
- As global gas production is expected to grow 12.5% between 2023 and 2030 to meet rising demand, the Middle East will become an ever-important source of new output.
- Saudi Arabia wants to eliminate crude burn from its power generation altogether and rely on a 50/50 split between renewable energy and natural gas, prompting it to double down on new gas projects.
- Beyond Saudi Arabia's quest to produce 125 bcm of natural gas by the end of this decade, the Middle East will provide an additional 20 mtpa of LNG by 2040 driven by new Qatari and UAE capacity.
- Rystad Energy expects global gas demand to peak by the mid-2030s, with production increasingly tilted towards unconventional shale gas that is set to account for a third of global supply by 2030, also boosted by a decline in conventional exploration over the past decade.
3. India Doubles Down on Russian Crude, Cutting Saudi Purchases
- India's imports of Russian crude have rebounded strongly in September on the back of plentiful supply and price discounts, coming in at 1.78 million b/d after a summer slump triggered by OPEC+ export cuts.
- With Indian refiners mostly buying the Urals grade delivered at a discount of $4 per barrel to Brent, Russian barrels remain cheaper than regional competitors from Saudi Arabia or Iraq.
- Saudi Arabia has seen its market share in India decline precipitously so far this year, with September imports into India averaging only 491,000 b/d, a 41% decline week-on-week.
- India remains 85-87% reliant on crude imports for its domestic needs, so higher oil prices are taking a toll on the country, prompting the oil minister Hardeep Singh Puri to warn of the long-term consequences of high prices.
4. OPEC+ Supply Cuts, Robust Demand Shrink Hi-5 Spread to Narrowest in Years
- Hi-5 spreads across Europe fell to unprecedented lows last month as the difference between high sulfur fuel oil (HSFO) and very low sulfur fuel oil (VLSFO) narrowed to as little as 20 per metric tonne.
- OPEC+ production cuts from Saudi Arabia and Russia have limited the supply of crudes that yield sufficient amounts of residue and middle distillates, especially impacting the HSFO market as both countries produce sour grades mostly.
- Soaring VLSFO supply, aggravated by additional production from the Middle East and Kuwait in particular, has been putting a lot of pressure on low-sulfur fuel oil, alongside higher availability of blending components after the end of peak gasoline driving season.
- Expensive HSFO is limiting the pricing upside for shippers that have installed scrubbers on their tankers, as the current Hi-5 spread would lengthen the recouping of installation costs to 3-4 years.
5. China Becomes Swing Factor for Diesel Prices
- As diesel moves into peak demand season in September-October, the clout of China over the middle distillates market is increasing and the capability of Chinese companies to export is becoming a swing factor in diesel prices.
- China overtook the US as the world's largest refiner last year, but due to the government's product export quotas diesel exports out of China have been tame recently, with only 250,000 b/d moving out of the country.
- In case Beijing issues additional product export quotas, China's diesel exports could balloon to 750,000 b/d in November-December, but the NDRC has been so far reluctant to open the floodgates for Chinese product exports.
- Russia, one of the world's key suppliers of diesel alongside the US, has limited exports of diesel for two weeks until October 06, adding to the upward pressure on diesel prices as they near the $1,000/mt threshold again.
6. Legacy Carmakers Struggle to Keep Apace with Tesla Amidst Price Wars
- US electric carmaker Tesla has been maintaining its position as the world's biggest EV producer, with legacy automotive holdings failing to dethrone Tesla despite a massive ramp-up in Ford's or Volkswagen's ambition.
- Tesla's leading role is especially evident in the United States where the Austin-based firm accounts for 61% of all electric vehicles sold, greatly aided by price cuts that drove the price of a Tesla Model Y SUV on par with the average selling price of a new car in the US.
- Against such assertive pricing strategies, legacy carmakers are now pinning their hopes on new partnerships with battery producers such as GM's tie-up with LG Energy, expected to reduce costs.
- With global quarterly sales of 466,100 units in Q2 2023, Tesla is still only 5% of new car sales in the US and it is only California where it managed to surpass Toyota to become the most-sold automotive brand.
7. Voluntary Carbon Offsets Collapse into 2023
- Voluntary carbon credits eligible for the ICAO's Corsia rules of carbon offsetting have been in a freefall this year as many participants have shied away from them on the back of weak transparency and unregulated trading.
- Since 2018, there has been an increasing trend in the issuance of CORSIA-eligible credits, surging to 21 million credits in 2021 and declining slightly in the year after.
- The biggest decline came from industrial pollutant credits, shrinking to 5.2 million CEC credits in January-July 2023, down from 15 million credits issued over the same period last year.
- The decline in voluntary carbon credits happens concurrently with CORSIA membership being extended to 125 countries next year, covering 76% of projected global aviation emissions.