Commodities Update - Week Ending 21 May 2022
TLDR
An unanimous agreement on the Russian oil embargo has yet to be arrived with the EU at odds of funding the upgrading of refineries owned by Hungarian energy group MOL on the basis of unfair competition. The suggestion has been put forward that heavy tariffs could be levied onto Russian oil on top of embargoes to allow more Russian oil to flow in the market while reducing the revenues received by Russia.
China’s COVID situation appears to be improving for now, with Shanghai on the path to reopening and Chinese refiners reporting across the board that transportation fuel demand is slowly recovering according to Energy Aspects. However, outbreaks in the Tianjin and Sichuan threaten to derail the recovery.
Recession fears linger with equities failing to catch a bid over the week as the Federal Reserve maintained their hawkish stance in light of persistent inflation.
Macro Pivots
European Emergency
The war continues with Russian forces taking up defensive positions in preparation of Ukrainian counter-offensives. The Azovstal steel plant, also a significant contributor to the supply of semiconductor-grade Neon gas, is appears to be now in Russian hands.
After much delay, the U.S. Senate overwhelmingly approved $40 billion in aid to Ukraine to support their war efforts. They maintained their stance of not sending US troops. European Union leaders will also agree on May 30 to set up a fund for the reconstruction of Ukraine once the war with Russia ends, though details on how it will be financed remains vague. On financing, the European Commission President Ursula von der Leyen said on Thursday that the European Union is looking into ways of using the frozen assets of Russian oligarchs to fund the reconstruction. Economists' estimates of the cost of rebuilding Ukraine vary widely between 500 billion euros and 2 trillion euros ($524 billion to $2.1 trillion), depending on the assumptions on the length of the conflict and the scope of destruction.
Soon after Sweden announced its intentions to join NATO, Finland followed suit. Turkey is opposed to the membership over their history of hosting members of groups Ankara deems terrorists. Western leaders have expressed confidence that Ankara's objections will not be a roadblock for the NATO accession process of the Nordic countries without spelling out how Turkey's position could be changed.
Sanctions
On the European stage, Hungary’s Prime Minister Viktor Orban has become the last barrier to a sweeping embargo against Russian oil, holding up the European Union’s biggest attempt so far to starve the Kremlin’s war machine on the grounds that it would devastate his small nation’s economy. Poland has expressed its support, saying that Hungary needs European Union funds to be unlocked to diversify its energy supplies.
While negotiations between Hungary and the EU are ongoing regarding these funds, opinions are split over funds for refineries. The EU has repeatedly shown its backing to the expansion of the Croatian pipeline (750 million euros), but is dithering about offering Hungary full support to upgrade two refineries (up to 550 million euros) run by Hungarian energy group MOL (MOLB.BU) in Hungary and Slovakia, which can currently only process Russian oil, as that could be an unfair aid in breach of the bloc's competition rules.
U.S. Treasury Secretary Janet Yellen said on Tuesday that the European Union could combine import tariffs on Russian oil with the phased oil embargo it is trying to put in place to shrink Russia's energy revenues. The tariff plan, which will be presented at a G7 finance leaders meeting this week, would aim to keep more Russian oil in the global market, limiting price spikes spurred by a full embargo, while limiting the amount of money Russia can earn from exports.
Meanwhile, the Biden administration is poised to fully block Russian bond payments to US investors after a deadline expires next week, a move that could force Moscow into its first foreign default in a century.
Oil Flows
Russian crude oil continued to flow with loadings into China surging back to new seasonal highs of 1mmbd, a level last seen in 2020. Buying from India remain brisk with loadings maintaining at more than 6 times the seasonal average, now at 700 kbd. White House officials maintained that China's efforts to replenish its strategic reserves with Russian oil would not contravene U.S. sanctions.
Iran's crude exports to China have fallen sharply since the start of the Ukraine war as Beijing favoured heavily discounted Russian barrels, leaving almost 40 million barrels of Iranian oil stored on tankers at sea in Asia and seeking buyers. For the global oil market, the saving grace will be the ongoing JCPOA nuclear talks that could add another 1.3mn-1.4mn b/d of Iranian crude to global supply within 6-9 months of its implementation. Iran and the EU are waiting for a response from Washington to new proposals and initiatives aimed at restarting talks on this deal. For now, Sour crude cargoes from the US Strategic Petroleum Reserve (SPR) are traveling to Europe, helping supplement feedstocks for refiners seeking alternatives to Russian crude supply amid the conflict in Ukraine.
Gas Flows
More companies are following suit with Russia’s roubles-for-gas payment demands. Eni (ENI.MI), Uniper, and RWE (RWEG.DE) have opened the necessary bank accounts to transact with Russia as they prepare to meet Moscow's demands for a new payment scheme ahead of a closely-watched deadline later this month.
The European Commission confirmed on Friday that EU sanctions do not prevent companies from opening an account at a designated bank. Companies can pay for Russian gas - provided they do so in the currency agreed in their existing contracts and declare the transaction completed when that currency is paid.
So far, Bulgaria and Poland have had their Russian gas supplies cut for refusing to comply with Russia’s rouble payment demands. Finland is the latest addition to list. German big business is drafting a plan to use an auction system to help ration available supplies in the event Russia cuts off its gas, although some fear it could punish smaller firms.
Others
U.S. coal producers are seeking to boost exports to cash in on soaring prices since Russia's invasion of Ukraine but face big headwinds including shipping bottlenecks, labor shortages, and a dismal long-term outlook discouraging investments in new mines.
COVID
China
China appears to be approaching the beginning of the end of this wave.
Beijing and Shanghai continue to face their challenges. Shanghai announced its first new COVID-19 cases outside quarantined areas in five days on Friday and imposed stricter curbs in two districts, but did not signal any change to the planned end of a prolonged city-wide lockdown on June 1. Beijing on Sunday extended guidance to work from home in four districts of the Chinese capital, including the largest, Chaoyang, as the city tries to stop a COVID-19 outbreak.
Chinese refiners had had to heavily throttle their crude throughput as product inventories built heavily on weak demand. Throughput in April fell to its lowest levels since March 2020 to 12.61 mmbpd. Satellite data show port activity has dropped to the low levels seen during the 2020 lockdown, with the supply crunch intensifying in some industries with extensive delivery networks, such as auto and electronics manufacturing.
Stimulus to cope with the economic fallout has been plentiful, now topping $5.3 trillion. Chinese financial authorities last Sunday allowed a further cut in mortgage loan interest rates for some home buyers, in another push to prop up its property market.
Japan
Japan forged forward with its reopening plan and will double its limit on foreign arrivals to 20,000 a day from next month onwards.
Food Shortages
Just days after instating a ban on crude palm oil exports, Indonesia reversed its decision and will lift its ban on exports on 23 May.
Meanwhile, Mexico aims to as much as triple its fertilizer production, the government said on Sunday, to support its plan to boost local agriculture production and control consumer price inflation.
Super Narratives
Structural Fossil Fuel Shortage
Upstream
The willingness for producers to reinvest into exploration and production remains to be lackluster just as more output is needed to counter a global supply squeeze exacerbated by the impact of sanctions on Russia.
US lease sale cancellations leave offshore in limbo as offshore operators must now wait until at least 2023 to acquire new drilling rights in the US Gulf of Mexico. Surging inflation across the US shale sector is also putting pressure on producers' capital expenditure (capex) budgets. TotalEnergies may sell its stake in Nigerian onshore oil licences because of community disruptions, the firm's chief executive Patrick Pouyanne said.
However, not all is doom and gloom with the UK’s plans to allow some natural gas projects to be labeled as sustainable in its green investment rulebook due to be published later this year. This should provide some support for more gas exploration and production.
Midstream
Companies, however, don’t appear to be shying away from energy infrastructure-related investments. Kinder Morgan Inc (KMI.N) added another project to the list of proposed pipes seeking to move growing amounts of natural gas from the Permian shale in Texas with its announced open season for an expansion of the Gulf Coast Express pipe in Texas.
Downstream
Qatar Energy aims to have their U.S. Golden Pass liquefied natural gas plant in Texas ready to deliver gas to Germany as early as 2024.
Changing World Order
No noteworthy developments.
Green Wave
The U.S. Department of Energy said on Wednesday it has extended a deadline by 47 days, to July 5 for nuclear power plants to apply for federal funding to keep them running.
Notes: Nuclear power is the inevitable outcome in the race for a zero-carbon future.