U.S. Oil Production Flatlines

1. US Oil Production Flatlines as Shale Drilling Falters

- US unconventional crude supply is expected to remain flat in February for the third straight month, declining by a mere 2,000 b/d to 9.68 million b/d as the country’s rig count is still yet to see a rebound.

- The EIA expected bigger month-on-month declines in 2024, but productivity gains in the Permian, Appalachia, and Haynesville have surprised to the upside.

- The Permian Basin remains the only major play to see its production increase, improving marginally to 5.974 million b/d next month, though oil producers are still yet to assess the damage wreaked by the cold snap on US upstream sites.

- North Dakota oil production dropped by as much as 700,000 b/d this week, whilst the US Gulf Coast’s refining capacity took a 15% drop with some 1.5 million b/d going offline.

2. Does the EU have too much LNG import capacity?

- Following Russia’s invasion of Ukraine two years ago, European countries have set out to boost their LNG import capacity, however soon they might be facing the risk of redundant infrastructure.

- EU members have swiftly constructed six LNG terminals in addition to the 20 regasification facilities already in place, boosting the continent’s import capacity by 36.5 bcm, with another 19 LNG terminals planned by 2030.

- Should these plans materialize, the EU’s import capacity would balloon to 350 bcm by the end of the decade, all the while European gas demand is set to fall to 340 bcm, of which at least 100 bcm will be covered by piped Norwegian gas.

- As up to half of future European regasification facilities might become redundant, investors are considering other options such as selling FSRUs to Asia, refurbishing terminals to ammonia or use them for carbon capture.

3. BP Lags Oil Majors as Auchincloss Takes Over As New CEO

- The UK-based energy major BP has appointed Murray Auchincloss, the former CFO and interim CEO for the past four months, as its new chief executive officer replacing Bernard Looney.

- The former chief filed his resignation in September 2023 after admitting he had failed to disclose past relationships with colleagues, forfeiting $40 million in pay according to BP’s own statement.

- Despite Auchincloss’ insistence that BP will not change course, the UK major has been lagging behind its arch-rival Shell and US peers ExxonMobil and Chevron in the post-pandemic period, prompting speculation that it might be a potential takeover target rather than a buyer.

- According to BP’s Q3 2023 results, the oil major is producing some 1 million b/d of oil with the US accounting for 40% of its output, half of what ExxonMobil produces, whilst natural gas stands at 2.15 Bcf per day.

4. Red Sea Delays Worsen Economics of Middle Eastern Diesel

- Europe’s imports of Middle Eastern diesel tumbled in January after most of the continent’s oil majors halted transit flows through the Red Sea and started buying middle distillates from the Atlantic Basin.

- Whilst the past weeks have seen a notable uptick in US diesel cargoes en route to Europe, to the extent of 416,000 b/d, refinery outages prompted by the cold snap and February maintenance pose an upside risk for the continent’s diesel stocks.

- Middle Eastern diesel flows to Europe peaked in April 2023, although January numbers have been a mere third of those record levels, coming in below 200,000 b/d as European buyers avoid purchases due to the prolonged 40-45 days of delivery.

- Long positions held by money managers in the ICE gasoil futures contract rose to the highest since September, but the concurrent increase in short positions has been offsetting diesel’s potentially bullish momentum.

5. Iron Ore Stocks Become Litmus Tests of China’s Recovery

- The world’s largest iron ore miners have enjoyed a surprisingly strong stock performance over Q4, with Australia’s Rio Tinto and Fortescue hitting all-time highs on ASX and BHP trading at their best since early 2022.

- Iron ore, however, is still more than a third below its 2021 peak, currently trading at $140 per metric tonne, largely due to China’s strong steel production that relied on record volumes of iron ore imports.

- The bullish sentiment for iron ore producers might dissipate soon as most analysts expect iron ore prices to decrease in 2024, with Goldman Sachs expecting an annual average of $117 per metric tonne.

- Reuters anticipates Australia’s iron ore majors to see this year’s EBITDA drop by 30-40%, sending their stock value lower, in line with the Chinese market where stock indices show no signs of an upswing.

6. Red Sea Transit Collapses Amidst Incessant Houthi Attacks

- Flows through the Red Sea and Suez Canal, a waterway that normally handles 12% of global seaborne trade, have plummeted amidst Houthi attacks and the ongoing Operation Prosperity Guardian.

- Up until US airstrikes on Houthi targets, the Houthis had been mostly sticking to targets that were connected to Israel as Yemen’s militias kept on demanding an end to Israel’s blockade of the Gaza Strip.

- However, since January 12 the targets of Houthi militias are becoming increasingly random, prompting even Qatar’s LNG supplies to divert from the Bab el Mandeb strait, along with Iraqi or Saudi Arabian oil tankers.

- Container shipping has been the most impacted, although oil products, chemicals, and LNG supplies have all declined, too, leading to a 60% decline month-on-month in Red Sea transit, with only 114 vessels risking the route in the first half of January (vs 272 in the same period of December).

7. Another European Smelter Closure Provides Temporary Respite for Zinc

- Europe’s energy woes are staving off a larger collapse in zinc prices, with this week seeing a rare rebound following Nyrstar’s announcement that it would place the Budel smelter on care and maintenance.

- The Trafigura-owned smelter has suspended production for this month until further notice, citing high energy costs and weakening market conditions as the two main reasons for the closure.

- Zinc prices rallied to $2,615 per metric tonne on the news, erasing most of the losses seen in 2024 so far, although ongoing oversupply that stems from weakening galvanized steel prospects will cap the pricing upside.

- Europe has lost half of its zinc and aluminum smelting capacity in 2022-2023 on the heels of high electricity prices and lack of financing, happening amidst a wider regional reconfiguration towards renewable energy projects.