Daily Energy Report
Russia’s crude oil exports, NOPEC legislation, EIA inventories, OPEC and global oil demand, the French labor strike and more
CHART OF THE DAY: Neutral for oil
Figure (1)
Russian Seaborne Crude Oil Exports by Destination
Source: Kpler, 2023 and EOA, 2023
Commentary
Russia’s invasion of Ukraine has caused a sea change in global energy markets, including a historic shift in oil trade. Analysts are still trying to understand the ramifications of this profound development and its concomitant and irreversible changes.
Figure (1) above shows the massive increases in China and India’s oil imports from Russia, as well as the end of Germany’s imports of Russian crude, and the rise of “unknown” destinations”.
EOA’s Main Takeaway:
We would like to caution that the data published above is for “direct” imports from Russia, and does not include imports of Russian crude via third countries, or from the black market. And this is the case with other data out there. In other words, Chinese imports could be higher than what is being reported, and many European countries may end up taking Russian crude although direct imports are null.
European countries are likely importing petroleum products produced from refined Russian crude oil, and this is legal despite the EU/G7 sanctions on Russia’s oil industry.
STORY OF THE DAY
REUTERS: BP says fuel efficiency has more impact on oil demand than EVs
Summary:
Reuters quoted BP Chief Executive Bernard Looney as saying at the CERAWeek energy conference yesterday that fuel efficiency in new light vehicles is “having a bigger impact on oil demand than electric vehicles."
EOA’s Main Takeaway:
Looking at various long-term outlooks, there are two main drivers to lower global oil demand: improvement in fuel economy in ICE vehicles, and electric vehicles. As we discussed in our Daily Energy Report on February 28, the impact of fuel efficiency is being exaggerated and the statement by BP CEO at the CERAWeek energy conference is no exception. Looney ignored the shift in consumer preferences.
Changes in consumer taste show that they are now preferring to purchase big cars (SUVs and light trucks) rather than small vehicles. So, we cannot argue that energy consumption is declining due to improvements in efficiency.
Based on this, we are bullish on oil demand in the medium and long term simply because most forecasts have been exaggerating the impact of future improvements in fuel economy.
The chart below was published in our report on February 28. It shows the shift from small cars to SUVs and light trucks.
Figure (2)
US Vehicles Sales (%)
Source: FED, 2023, and EOA, 2023
NEWS OF THE DAY
1- Senate: Senators Introduce Bipartisan Bill To Fight OPEC Price Fixing
This is a bill aimed at revising the Sherman Act of 1890 which removed the immunity of foreign governments in US courts. It allows the US Justice Department to sue governments for price fixing. This is an old bill that has been revised several times but former Presidents, George Bush and Barack Obama, refused to sign it. Former President Donald Trump, in his turn, supported the bill in his 2011 book but ignored it when he entered the White House.
EOA’s Main Takeaway:
If the US president authorizes the Justice Department to act on it after it is passed by Congress, then the Sherman Act will be disastrous for the energy markets. However, our view is that the Act is toothless because the president is unlikely to authorize the Justice Department to bring lawsuits against oil cartel members.
It will be interesting to watch how US politicians, especially Republicans, will view the G7-led price cap on Russian crude, and whether the price cap mechanism will replace NOPEC!
2- REUTERS: U.S. regulator orders lower pressure on Keystone pipeline system after spill
The Pipeline and Hazardous Materials Safety Administration (PHMSA) said yesterday it would require TC Energy to reduce operating pressure on more than 1,000 additional miles of its Keystone pipeline, Reuters reported.
EOA’s Main Takeaway:
This is exactly what we predicted will happen in our weekly newsletter on December 9. We wrote: “And even when they allow the resumption of oil flow, the relevant authorities may not allow the company to pump at normal rates and pressure.” This is bullish for oil in the US but could be bearish for Canada’s Western Canadian Select (WCS) blend. In other words, it could widen differentials.
3- EIA Oil Inventories: The Energy Information Administration (EIA) reported another decline in commercial crude oil inventories by 1.7 million barrels (mb) to 478.5 mb.
The EIA also reported a decrease in gasoline inventories by 1.1 mb to 238.1 mb. Distillate inventories, meanwhile, increased by 100,000 mb to 122.3 mb.
Figure (3)
US Crude Oil Inventories
Source: EIA, 2023 and EOA, 2023
4- REUTERS: German liquefied natural gas capacity may not be fully utilised-RWE CEO
In a joint interview with two German magazines, energy company RWE's CEO Markus Krebber responded to claims that Germany may have "overshot the mark with existing LNG capacity plans" by saying that the country's LNG infrastructure may not be fully utilized, Reuters reported.
EOA’s Main Takeaway:
There is confusion between “capacity” and the actual amount produced, consumed, or processed. The LNG terminals are intended to give Germany optionality and to be utilized during peak consumption. Over the next three years, we could see this policy replicated in several European countries. It will also be a backup for intermittent renewable energy. In short, it is bullish for LNG during peak consumption.
5- REUTERS: Turkey's ruling party presents gas reform in step towards trading hub
Today, Turkey’s ruling AK Party submitted a draft law to parliament regarding the issue of forming a competitive natural gas market as Turkey seeks to transform itself into a gas trading hub, Reuters wrote.
EOA’s Main Takeaway:
We believe it when we see it. Turkey might end up with a hub, but will it be operational? Will it be effective and influential? Given that reform is two parts, domestic and international, this could complicate the situation. It is unclear how such reforms will lower natural gas prices to Turkish consumers. We have seen how due to such reforms in Europe prices climbed to record highs— and that was before Russia’s invasion of Ukraine.
6- REUTERS: French strikes disrupt fuel deliveries, train and air traffic
ARGUS: Oil products markets brace as French refineries strike
Protests across France against a draft law that aims to delay the pension age have reached the energy sector. Reuters wrote today that TotalEnergies' refinery deliveries are currently “suspended”, while electricity production has been “reduced”, and “train services disrupted”.
EOA’s Main Takeaway:
Such strikes work both ways: they reduce supply and demand simultaneously. The net impact won’t be known until after the fact. However, the main lesson here is that energy security has many dimensions and is affected by several factors. In the case of France, we have a change in retirement age affecting energy security on one hand and regional energy markets on the other.
7- BLOOMBERG: OPEC Concerned About Demand Slowdown in US, Europe, Chief Says
“OPEC’s top official said slowing oil demand in Europe and the US are posing a concern for the global market, even as Asia experiences “phenomenal” growth Bloomberg wrote today.
EOA’s Main Takeaway:
Saudi Arabia and OPEC’s message to the world is loud and clear: the existing production cut they agreed on last year will continue until the end of 2023. OPEC’s secretary general is providing part of the backdrop for the decision to maintain the cut till the end of the year: demand is not that strong and the risk of lower growth in demand is high.
OPEC could end up revising down growth in global oil demand in its next two monthly reports.
8- REUTERS: Analysis: Dark summer nights: India faces high risks of power cuts after years of coal, hydro power neglect
According to Reuters, India is about to experience nighttime power outages this summer as well as in the next years. This is due to delays in “adding new coal-fired and hydropower capacity” which will make it difficult for the country to meet soaring electricity demand especially “when solar energy is not available.”
EOA’s Main Takeaway:
Power shortages in emerging economies are very common. In our view, the issue is how private generation will affect oil demand (mainly diesel and LPG) in India, China, or any other country. Historical data shows that major power outages for an extended period of time usually lead to an increase in private generation, which in turn leads to higher demand for certain petroleum products. In short, major power outages for an extended period are bullish for oil.
9- S&P GLOBAL: Indian refiners’ fondness for Russian ESPO blend crude oil growing
Seaborne Russian ESPO Blend crude oil is starting to attract buyers in India, S&P Global reported, saying that this could increase competition between China and India.
EOA’s Main Takeaway:
Aside from India’s increasing oil demand, low-sulfur crude oil, such as ESPO, attracts a larger number of refiners than high-sulfur crude oil. The high shipping rates are not a problem because this means a larger discount. So those who benefit the most from the Russian oil discount are not India and China, but the shippers.
10- REUTERS: India's oil deals with Russia dent decades-old dollar dominance
US-led western sanctions on Russia “have begun to erode the dollar's decades-old dominance of international oil trade as most deals with India…have been settled in other currencies,” Reuters wrote.
EOA’s Main Takeaway: We have discussed this topic in our weekly and daily reports. Even if the US Dollar may be losing ground, it is not losing dominance. On March 6, we said that there is a difference between pricing in USD and receiving revenues in other currencies. Some countries that have asked for oil revenues to be settled in non-USD currencies did so because of US sanctions. But this does not mean that the pricing of the global oil trade will change. For more on this, we encourage readers to read our latest weekly newsletter here.
11- REUTERS: CERAWEEK-Texas oil-export port to expand capacity by up to 600,000 bpd
Reuters cited Corpus Christi’s chief executive as saying that the port will complete a dredging project in April “that deepens the draft to an Ingleside, Texas, terminal, lifting overall export capacity by as much as 600,000 barrels per day (bpd).”
EOA’s Main Takeaway:
Some of these projects were canceled in the past because of the high risks involved. It seems that the recent surge in crude exports encouraged some companies to restart such projects. The fact is that US crude exports have increased in recent months because of SPR withdrawal and the rise in a super light and condensates production from the tight oil plays. If companies switch locations and reduce the production of liquids above 50 API, the risks associated with these projects will likely increase to the extent that companies could cancel again. Among these risks is the act of lifting sanctions on Iran’s oil industry, and the expansion of Libyan, Algerian, and Nigerian oil capacities.
12- BLOOMBERG: Spain Disappointed by Germany’s Last-Minute Challenge to Car Ban
Bloomberg cited a Spanish deputy prime minister as saying that Germany “may set a dangerous precedent by challenging a European Union agreement to phase out new combustion-engine cars starting in 2035.”
EOA’s Main Takeaway:
Our view is that the phase-out dates for new combustion-engine cars almost all over the world will be delayed, or they will be implemented with so many loopholes rendering them ineffective. This is one of the reasons why we remain bullish on oil demand in the medium and long term.