U.S. Oil Production Is Bouncing Back

1. Higher Oil Prices Revitalize US Crude Production

- As oil prices moved to the mid-80s due to Saudi Arabia’s production cuts and robust summer demand, US oil producers see additional incentives to ramp up supply, setting new all-time production figures along the way.

- According to the EIA’s recently issued Short-Term Energy Outlook, US crude production is expected to surpass 12.9 million b/d for the first time ever in late 2023, a 200,000 b/d upward revision compared to previous forecasts.

- Buoyed by the high-price environment which should lead to increased oil drilling activity next year, the EIA sees end-2024 production rates at 13.4 million b/d.

- Production curtailments from OPEC+ countries have also prompted the EIA to hike its pricing forecasts, upping the 2023 average Brent price to $82.62 per barrel and 2024 to $86.48 per barrel.

2. Egypt’s Natural Gas Mojo Runs Out as Zohr Spells Trouble

- Once touted as the Eastern Mediterranean’s new gas-producing frontier, Egypt has witnessed a surprise decline in natural gas production in the first half of 2023, raising questions about the long-term prospects of the supergiant Zohr field.

- Gas production in the North African country decreased by 9% year-on-year, driven by technical problems at Zohr, a 30 TCf field that was only discovered in 2015 but seems to be already declining due to water infiltration issues.

- As Zohr accounts for some 40% of the country’s production right now, producing 2.3 bcf per day, increasing the likelihood of Egypt seeking more natural gas from Israel’s nearby offshore fields.

- Egypt’s electricity grid has been collapsing under the scorching heat witnessed this summer with the country’s prime minister admitting that power cuts (currently lasting several hours a day) may last into September.

3. Heatwaves Weigh on Wheat Yields, Worsening 2024 Outlook

- Global wheat prices have shed some 15% over the past two weeks, with European wheat prices falling to $250 per metric tonne, even though the maritime escalation of the Russia-Ukraine war continues to hinder Ukraine’s agricultural exports.

- European customers, however, are likely to see further upside in wheat prices as continued heatwaves across the continent combined with poor rainfall aggravate the outlook for bumper yields.

- The EU has already reduced its soft wheat yield estimated for 2023-2024 from 5.92 mt/ha to 5.8 mt/ha, leading to a 2% decrease in overall output to 127.4 million tonnes, which should be bullish for prices.

- Meanwhile, Indian wheat prices soared to the highest since February at $308/mt, as supplies start to shrink and the government is considering scrapping the 40% import tax on wheat altogether to replenish wheat stocks.

4. Betting on Hurricane Disruption, Hedge Funds Go Long on Gasoline

- The usual narrative behind the surge in US gasoline prices focuses on widespread refinery outages along the East and Gulf Coasts combined with strong demand, money managers have been increasingly consulting their weather forecasts for Q3.

- CSU meteorologists upped their 2023 forecast for tropical storms, expecting four major hurricanes during hurricane season (officially ends November 30) amidst a warmer-than-normal Atlantic Basin.

- Should a hurricane hit the US Gulf Coast where nearly half of US oil refining capacity is located, gasoline supply across the country might be disrupted as the East Coast imports almost 2 million b/d of the fuel by pipeline, tanker and barge.

- The net length in NYMEX RBOB gasoline futures reached 77,663 in the most recent CFTC readings, a three-year high on a seasonal basis and a sign that gasoline’s 14% rise in 2023 so far might see further upside.

5. Russian Products Start Trading Above the Price Cap

- Soaring diesel and gasoline cracks globally have pushed the price of Russian transportation fuels above the $100 per barrel threshold set by G7 countries and the European Union.

- As the European Union bars EU-domiciled tankers from carrying Russian fuel and currently every sanctionable product barring gasoline is above its limit (gasoline trades around $90 per barrel), shipping might become a huge challenge for Russian exporters.

- The Biden administration has opted for soft enforcement of sanctions lately, reminding Western trading houses, insurers, and shipping companies to abide by the G7 price cap instead of harsh measures.

- Russia is exporting some 2.7 million b/d by seaborne trade, hiking its exports by 5% compared to last year, with approximately 40% of Russia’s product exports coming from diesel supplies.

6. Myanmar Tin Ban Fails to Spark Price Rally

- The best-performing metal of 2023 so far, tin, has seen a very muted reaction to a mining ban announced by Myanmar’s Wa militia, drastically cutting output in the world’s third-largest tin miner.

- The three-month LME tin contract edged lower to $27,325 per metric tonne by the end of this week, down from $29,450/mt in late July, as metal inventories in LME and SHFE warehouses soared 50% since the beginning of July.

- Net length held by investment funds in the tin contract of the London Metal Exchange doubled since mid-June and continues to rise, even though most analysts expect the Myanmar ban to last only a couple of months.

- Rising 12% since the beginning of 2023, tin is nevertheless expected to ease by the end of this year to $25,000/mt amidst improving production in the world’s top producer Indonesia as well as Peru and Bolivia.

7. Australia’s Coal Exports Set the Stage for Russia Face-off

- The Asian coal market has become a grand battlefield between Australian and Russian exporters as Russian coal no longer trades at discounts to market benchmarks, with regional prices dropping below $100 per metric tonne.

- Japan remains the top buyer of Australian coal, accounting for 27% of its imports, a share that has increased thanks to lower Russian imports of Japanese buyers, becoming the only big Asian buyer to see a year-on-year decline from Russia.

- At the same time, Russian exporters have been making inroads into China, a country that by now has risen to 40% of all seaborne supplies for Russia, while Australian exports are still only half of what they were before late 2020 when the unofficial ban was put in place.

- Australia’s low-ash 5,500 kcal/kg NAR Newcastle coal is already trading at $97-98/mt, whilst Russia’s 6,000 kcal/kg NAR coal from Pacific ports is some $5-6/mt costlier due to its higher calorific value, making Australia the preferred option for cash-strapped Asian buyers.