Venezuela Remains The Oil Market's Biggest Known Unknown

1. Despite Lower Gas Prices, Europe’s Industrial Gas Demand Just Not Enough

- Europe’s industry gas demand is set to remain 20% below 2021 levels this year despite much lower natural gas prices and relatively ample LNG imports, raising the risks of deindustrialization in the continent’s industrial heartland.

- An 8-10% decline in production for Europe’s chemicals industry is the largest decremental factor in absolute terms, with Germany struggling to kickstart its manufacturing performance – factory orders have recorded a whopping 12% year-on-year drop over the summer, the worst contraction since 2020.

- Even refining, a key industry that needs natural gas to desulphurize transportation fuels, remains 30% below 2021 levels in all-European demand, adding a mere 1 bcm compared to last year and expected to total 7.2 bcm.

- Natural gas prices in Europe are in steep contango, with the December 2023 TTF futures contract €15 per MWh above the prompt-month October contract, aggravated by Australia’s LNG strikes.

2. Freeport LNG Is In Trouble Again

- Following the June 2022 fire that debilitated Freeport LNG’s exports for almost a year, the U.S.’ second-largest liquefaction terminal has drastically lowered its feedgas intake since September 10.

- Feedgas deliveries to Freeport plunged from 1.6 BCf per day in September to 0.27 BCf per day currently, with the decline reportedly driven by Freeport’s unspecified failure to receive the confirmed quantities of gas.

- The last LNG tanker to depart from Freeport is Yiannis, sailing out from the terminal on September 8, whilst a build-up in unladen LNG carriers anchored around the area puts additional pressure on exports.

- Freeport LNG’s problems have put East Texas gas prices under a great deal of pressure, with cash prices at Houston Ship Channel shedding some 20 cents over this week to $2.30 per mmBtu, whilst Henry Hub prices were relatively unchanged around $2.70 per mmBtu.

3. Rosy Demand Outlook Lifts Uranium Prices

- Uranium has become one of the most bullish commodity markets of 2023, with prices of the radioactive metal soaring by 20% this year to date amidst an improving demand outlook and stagnant supply.

- Following a brief spike in April 2022, uranium prices have sustainably breached the $60 per pound level for the first time since 2011, buttressed by continued instability in the world’s largest producer, Niger.

- The World Nuclear Association expects global reactor demand for uranium to double over the next 15 years, edging higher from 65,000 metric tonnes currently to 130,000 mt in 2040, reflective of generation capacities increasing from 391 GW now to 686 GW by 2040.

- With Russia and China already launching small modular reactors, a new source of uranium demand, supply-side issues will come to the forefront as global reactor uranium inventory stands at a mere 3.7 years’ worth of requirements currently.

4. Chinese Solar Capacity to Surge to 1 TW by 2026

- China is strengthening its pole position as the world’s leading solar power, reaching 500 GW of installed capacity by the end of 2023. While it has taken Beijing 13 years to reach that mark, it will double capacity in a mere 3 years to 1 TW by end-2026.

- According to Rystad Energy, new photovoltaic capacity installed in China this year is set to top 150 GW, almost double last year’s 87 GW, with the provinces of Henan, Shandong, and Hubei becoming the Asian country’s leaders.

- China’s coal-mining regions such as Shaanxi, Inner Mongolia, and Gansu have been the main laggards when it comes to reaching their 5-year plan targets, but it is expected that they will see a surge in installed capacity over the next 1-2 years, adding up to 20 GW.

- As of today, China’s 5-year plan of installing 443 GW of solar capacity in the 2021-2025 period is 46.5% complete, but even with this slight underperformance the country's global market share is above 40%.

5. Low Strike Prices Endanger the Future of Europe’s Wind Build-out

- The international appeal of offshore wind auctions seems to be fading after the US Gulf Coast’s first-ever licensing round saw one single bid, whilst the United Kingdom’s September 08 auction triggered no interest whatsoever.

- The wind industry has long been warning of governments seeking to establish strike prices way below profitability rates, with the UK regulatory regime guaranteeing a £44 per MWh ($55/MWh) strike price in its latest failed auction.

- Stubbornly high inflation combined with rising interest rates should have prompted European governments to change track and offer higher strike prices, but the UK effectively replicated Spain’s failed auction of November 2022.

- Targeting 30 GW of offshore wind capacity by 2030, Britain needs to double its project pipeline over the next 6 years – Vattenfall’s halting of the Norfolk offshore project in July served as a timely reminder of the risks involved, having been promised one of the lowest strike prices in the game at £37.35 per MWh.

6. Persevering Through Sanctions, Venezuela Remains Oil Market’s Known Unknown

- As Venezuelan President Nicolas Maduro traveled to China last week to discuss oil deliveries and debt prepayments, Chinese buyers were discharging two VLCCs laden with the Latin American nation’s flagship grade Merey.

- China remains the largest buyer of Venezuelan crude, taking in slightly more than 300,000 b/d last year, mostly branded as Malaysian crude (location of transshipment en route to China) or as bitumen mix.

- With Venezuela still owing China some $10 billion under previously signed loan-for-oil deals, state-owned entities such as the China Aerospace Science and Industry Corp (CASIC) have become the largest lifter of the Latin American country’s heavy barrels.

- PDVSA is reportedly in talks with Chinese state-owned CNPC as it seeks to create a new conduit for oil trade, cutting out the middlemen and trading crude directly, though the Chinese major’s output in Venezuela has halved since 2015 to 80,000 b/d.

7. Absent an Oil Output Renaissance, Nigeria Risks Missing its Aggressive Targets

- Ever since Bola Tinubu became Nigeria’s president in May, West Africa’s oil heavyweight has been attempting to overcome years of underperformance, so far with no evident results.

- Nigeria produced a mere 1.18 million b/d of crude in August, more than 500,000 b/d below its OPEC+ quota of 1.7 million b/d which it has been unable to meet throughout 2023.

- In order to reach President Tinubu’s target of 6% economic growth from 2024 onwards, Nigeria should raise production to at least 1.6 million b/d according to economists, desperately needing to halt the collapse of the oil sector which has been contracting for 13 straight quarters.

- The collapse in gasoline consumption in Nigeria is also weighing on the oil sector, with petrol use slumping by a whopping 30% in less than two months after Tinubu scrapped the country’s $10 billion gasoline subsidy.