The Record Breaking Natural Gas Rally In Europe

1. China Power Crunch Indicate Underlying Weakness

- Whilst power curbs are not a novelty to China, the fact that they are taking place right now and not during winter indicates that China’s readiness for the winter heating season amid low coal stocks and strong demand might be questionable.

- At least two thirds of China’s steel production has already experienced power curbs this year as 11 provinces mandated production controls for H2 2021.

- As output is constrained primarily in industry-heavy regions, the power cuts are pushing commodity prices even higher – aluminum’s ongoing surge is a case in point.

- According to Morgan Stanley estimates, some 35% of China’s cement production and 30-40% of its petrochemical industry have been impacted by power constraints.

2. Angola Production Falls to Lowest in 30 Years

- Along with fellow African producer Nigeria, Angola has been one of the key underperformers of the OPEC+ production targets as it has continuously produced less than expected since September 2020.

- Angola is set to record its lowest export rate in at least 15 years, with only 31 cargoes scheduled to load over November, i.e. slightly below 1 million b/d.

- Angola’s largest fields are well past their plateau production and exploration efforts, primarily led by ENI and TotalEnergies, have been insufficient to replenish reserves.

- The coronavirus pandemic has added another layer of complexity to Angola’s oil dearth as this May marked the first time in 40 years that the African country saw no well drilling.

3. India’s Coal Shortage Sparks Fears of Power Cuts

- Whilst coal prices keep on rising amidst a sector-wide supply crunch, India’s coal stocks have fallen to the equivalent of 5 days’ burning, at a mere 8 million tons.

- India’s power demand surged over the past months, adding 23 GW compared to the same period last year, half of which is coal-powered.

- Indian crude imports have been declining for five consecutive months already, with monthly arrivals falling to 12 million tons in September, some 20% lower year-on-year.

- Market analysts indicate that India had waited for coal prices to drop before it starts buying yet now it is forced to buy expensive, moreover, its prime supplier Indonesia is struggling with output disruptions and has no available stocks to sell.

4. Chinese Restraint Fails to Contain Aluminum Prices

- Aluminium’s market performance has outstripped that of other industrial metals throughout 2021, Bloomberg writes, with its futures hitting $3,000 per metric ton as it surpassed a 13-year high recently.

- Yet the price surge is far from surprising as roughly one-third of the cost of aluminum comes from energy prices as a substantial amount of energy is required to melt bauxite.

- Aluminium’s surge primarily revolves around China as the Asian powerhouse consumes some 65% of the world’s aluminium and close to 90% of its smelters are powered by coal, whose prices have almost doubled on the domestic Chinese market.

- Whilst some Chinese smelters are seeking a move within China to tap into cheaper and cleaner hydropower resources, further appreciation of aluminium is fairly likely.

5. UK Fuel Shortages Trigger Panic Buying

- Britain’s shortage of truck drivers has triggered a nationwide crisis as nearly of third of British petrol stations had run out of transportation fuels.

- The panic buying of both diesel and gasoline – the UK is predominantly dieselized with a roughly 40% car fleet share – had made life even harder for refiners as they needed to ramp up refinery runs, still recovering after COVID-19.

- The driver shortage is primarily caused by the combination of Brexit (most of them were non-UK citizens) and coronavirus restrictions, with the shortfall of truckers estimated to be around 100,000 people.

- The government hastily announced a plan to issue temporary visas for 5,000 foreign truck drivers to alleviate the pressure on the domestic system.

6. Iraq Boosts Basrah Medium Capacity

- SOMO converted almost half of its export capacity at the Basrah Oil Terminal (ABOT) to be able to load more of its Basrah Medium crude which has gradually grown to become its main export stream following this year’s quality reshuffle.

- From now on, the throughput capacity of ABOT for Basrah Medium will be around 1.8 million b/d, whilst Basrah Light will be moved to single point moorings along with Basrah Heavy.

- With much of Iraq’s returning production being heavy and sulphurous, SOMO could not realistically maintain Basrah Light (nominally a 33° API grade) at its previous export levels and opted to boost Basrah Medium flows instead.

- Basrah Medium exports averaged 1.2 million b/d in September, with China being the main buyer of the grade (more than 650kbpd last month), followed by India.

7. European Gas Prices Surge To Incredible Highs

- European gas prices have continued to break all-time highs day after day this week, with gas inventories remaining depressed and Asia still outbidding European buyers for the available swing cargoes.

- Whilst the European pricing benchmark TTF has followed Asia’s price marker JKM throughout this year and currently trades around €87/MWh, it still lags behind it in a sign of really tight winter supplies.

- With nuclear outages continuing according to plan in Germany and the UK, as well as gas-to-coal switching already nearing its physical limits, gas prices might still be some way off their peaks.

- Weather forecasts for the 2021/2022 winter season have started to emerge this week, with most indicating this year might see the harshest winter since 2012/2013.