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CHART OF THE DAY: China’s inventories may not be that bullish for oil
Total Oil Inventories (Commercial + SPR) in the US and China
Source: Kpler, 2023, EIA, 2023, and EOA, 2023
The chart above shows that China has more oil in its commercial and strategic petroleum inventories than the US, based on the latest data , despite the fact that total inventories in China have declined by more than 57 million barrels since last July.
Unlike the US, China can use its Strategic Petroleum Reserve (SPR) to influence prices as policymakers see fit: either to make more oil available to Chinese refiners and others, lower oil imports, or reduce oil prices while making a significant profit in the process. If they play on seasonality, they can prevent oil prices from rising further, and once they are low, China would refill its SPR. With such behavior, we can say that OPEC determines the price floor while China determines the price ceiling.
EOA’s Main Takeaway
China will use its SPR to manipulate oil prices, as it did in 2021 when it prevented prices from reaching $100/b. Now, and as more tankers become available to ship Russian oil, Moscow is expected to reduce its discounts on oil prices. This means that Russian oil is not going to be as cheap as it was, which is just another incentive for China to use its SPR. For these reasons, the EOA sees that China’s re-opening is not that bullish for oil prices.
STORY OF THE DAY:
Russia’s Deputy Prime Minister Alexander Novak said today that Moscow will cut oil output by 500,000 barrels per day (b/d) amid western sanctions on Russian oil exports. The price of Brent crude oil increased to over $85 following the news.
“In this regard, Russia will voluntarily reduce production by 500,000 barrels per day in March. This will contribute to the restoration of market relations,” Novak said in a statement carried by Reuters.
EOA’s Main Takeaway:
The impact on oil prices will depend on the level of production compensation by other OPEC+ members, and whether Russia's output cut will reduce its price discounts. In our first issue of the Weekly Newsletter on Dec 3, 2022, we estimated that Russia may not be able to find a market for about 300,000 b/d-400,000 b/d.
NEWS OF THE DAY
EOA’s Main Takeaway: Probably this is the cut that Russia should have made when OPEC+ decided to reduce the production ceiling by 2 mb/d last October, and therefore, we should look at it as Russian “compliance” that does not require coordination with OPEC+. However, the decline fits our expectations. In the EOA’s 2023 Oil Market Outlook , we said that Russia may not be able to find a market for about 300,000 b/d-400,000 b/d and that its production would decline by an average of 600,000 b/d in 2023.
EOA’s Main Takeaway: This is bullish for US gas, and bearish for the international LNG market.
3- ENERGY INTELLIGENCE: Norway Steps Up as EU Supplier
EOA’s Main Takeaway: Norway is the biggest gas producer in Europe and currently the EU’s main gas supplier, accounting for more than one-third of its total gas imports. Our own calculations show that Norway shipped 8.96 bcm of gas to Germany, Belgium, France, and Denmark last month.
LNG and additional gas supplies from key producers like Norway have helped the EU reduce its reliance on Russian gas. We encourage you to read our Weekly Newsletter published on Feb 6 in which we discussed in detail the EU's gas supply mix.
4- ENERGY INTELLIGENCE: Russia, China Sign Intergovernmental Gas Deal
EOA’s Main Takeaway: While increased energy dependence is useful for China and Russia, for now, it may backfire in the long run. China’s energy security requires more diversification, while Russia’s dependence on the Chinese economy increases the economic and political risks for Moscow. We discussed this subject in our Weekly Newsletter published on Dec 3.
EOA’s Main Takeaway: Algeria has historically been one of the EU’s main suppliers of natural gas. With three existing trunk lines connected to European markets (Italy and Spain), Algeria in theory can increase its gas supplies to Europe. We discussed this in depth in our Weekly Newsletter published on Jan 30.
EOA’s Main Takeaway: While some media outlets and politicians focus on the “critical” range when it comes to the availability of energy supplies, they ignore the fact that the welfare of consumers has declined to critical levels too. Germany’s energy problems will remain in a critical stage for at least two more years. The situation could worsen in the future when hurricanes halt LNG shipments from the Gulf of Mexico.
EOA’s Main Takeaway: Oman is playing an increasing role in the LNG market. Oman LNG’s decision to strike long-term contracts shows that these types of contracts are here to stay as they reduce risks for exporters and importers. In our Weekly Newsletter published on Jan 23, we dedicated a section to Oman's LNG boom which we encourage our readers to read.
EOA’s Main Takeaway: As Europe suffers from its worst energy crisis in recent history, some investors are aggravating the situation. The fact is that those who care about climate change will have a significant influence if they join forces with the fossil fuel industry to navigate the current crisis while ensuring minimum impact on the environment. In other words, they need to be involved to reach their objectives, otherwise, they are defeating themselves by pressuring banks to stop financing new oil and gas projects.
9- IRAQ OIL REPORT: Talks advance for Exxon to exit West Qurna 1
EOA’s Main Takeaway: While China, and through its companies in Iraq including PetroChina, is interested in energy security and strategic partnership, US ExxonMobil is interested in a return on capital. We see Exxon's exit from West Qurna 1 as a good decision because for the same amount of money, the company can make a better return on Guyana's offshore projects and benefit from a more stable political environment.
Talks over Exxon's exit have no impact on Iraq's crude oil output or exports. According to the Iraq Oil Report, West Qurna 1 produced 483,000 b/d last month.