Energy and Materials Weekly 12/19/21

Dec 19, 2021

BIG NEWS

The European power crisis and natural gas problems continue to dominate the headlines.

The Rollercoaster Energy Market Is Now at The Mercy of Weather

Prices soared to new records this week because of the impact of unexpected nuclear outages in France and worryingly low stockpiles across the continent. On Friday, natural gas prices plunged as Russia decided to supply the market at the 11th hour, yet they are still at dizzyingly high levels.

Buyers and sellers are now on high alert for signs of cold that would send prices into total meltdown. “Only a mild winter seems capable of alleviating the stress on the energy market,” said Jean-Paul Harreman, an analyst at research firm Enappsys Ltd.

It all adds up to a precarious outlook for European economies and consumers as the pandemic roars back and countries become increasingly concerned about Russia and geopolitics.

The rest of December is set to be colder than usual and this will persist into January with widespread below-average temperatures for the first two weeks, according to forecaster Maxar Technologies Inc. 

NOW, HERE IS THE KICKER SENTENCE:

Widespread Covid-19 restrictions where businesses and industries shut could help alleviate the energy crunch by reducing power use. At the height of the 2020 lockdowns, power demand fell by as much as 20% in parts of Europe. -BBG

FOLKS, WE ARE ONE STEP AWAY FROM CLIMATE LOCKDOWNS

SNAPSHOT OF EUROPE CRISIS IN CHARTS

With the exception of Poland and Scandinavia, all Europe is above €300 per MWh (France and Switzerland near €400)

After a brief reprieve on Friday, Russian natural gas flows via the Yamal-Europe pipeline have dropped even further early on Sunday to just a trickle (a huge drop compared to December 2020). At the current pace, European nat gas inventories may drop below 50% of total capacity around New Year Day (they are currently just above 60%).

TTF (Dutch nat gas) and UK Nat gas will likely skyrocket tonight/tomorrow on this news. US nat gas may get a sympathy bid.

Source: Bloomberg. Javier Blas

Spain Power Prices

Source: Bloomberg, Javier Blas

France Power Prices

Europe Natural Gas Inventory Levels

Source: Bloomberg, Stephan Stapcynski

TTF Dutch Nat Gas

UK Nat Gas

AS A TOPPER: Germany plans to shut down 11 coal-fired power plants, and the last 3 remaining and most modern nuclear power plants by the end of 2022

NOTABLE: US nat gas may get a sympathy bid with the UK and Dutch nat gas, as well, cooler temperatures expected in the US. You could get some later dated OTM UNG calls if you have not already. (I would look at March or April). Also note that with European gas prices this high (over $200 a barrel equivalent), we should see some gas to oil and gas to coal switching.

Source: Weather-forecast.com

CHARTS OF INTEREST THIS WEEK

Portfolio managers last week cut their combined position across the six contracts to just 558 million barrels (in the 40th percentile for all weeks since 2013) down from 871 million (79th percentile) on Oct. 5.

But the reduced rate of selling suggests the most severe phase of liquidation associated with the new Omicron variant of coronavirus has now passed its peak

OECD inventories are now at a 208MM Bbl deficit to the ’15-’19 average (lowest levels since September 2014) and perhaps more importantly…only a 25MM Bbl surplus to the 2010-2014 average…a 4 year time period when the oil price averaged ~$95WTI. -Eric Nutell

Saudi crude inventories were at 136.806mb in October vs 136.542mb in September according to Jodi

Source: UBS

Britain’s gas and electricity systems are headed for a period of maximum seasonal stress next week. The forecast is for the intense cold by mid-week, which will boost heating demand. Wind speeds will be low, minimizing wind farm output. The solar output will be low.

TECHNICALS

We continue to consolidate …as I expected. This looks to be a bull flag however, next year should be interesting

OIL AND PRODUCTS

OPEC MONTHLY REPORT

Opec revises higher call on its own crude in 2021-22

Opec has revised higher the 2021 and 2022 forecast call on its own members crude as it increased oil demand expectations for both years, saying it expects the Covid-19 Omicron variant to have mild and short-lived effects.

In its latest Monthly Oil Market Report (MOMR), published today, Opec pegs world oil demand at 96.63mn b/d this year and 100.79mn b/d next year, both around 200,000 b/d higher than its previous estimates. Growth levels are unchanged at 5.65mn b/d and 4.15mn b/d respectively because of past adjustments.

Opec adjusted oil demand higher for the first half of this year on better-than-anticipated fuel consumption in OECD countries, and it reduced third-quarter estimates because of higher Covid-19 cases, softer industrial production in China, and easing transport fuel recovery in India. It adjusted fourth-quarter oil demand lower as a result of lockdown measures in Europe and the potential effects of the new Omicron variant. This shifts some of the expected recoveries in October-December to January-March, Opec said. It has revised first-quarter demand higher by 1.11mn b/d compared with the previous estimate, to 99.13mn b/d. -ARGUS

NOTABLE: This is great news as I expect oil prices to start picking up after the new year and when European lockdowns are lifted

SAUDI ARABIA

Saudi Arabia Warns Traders Against Shorting Oil Prices

Saudi Arabia’s energy minister warned traders against shorting oil, saying OPEC+ could react quickly to any fall in prices.

OPEC+, a 23-nation group led by Saudi Arabia and Russia, decided on Dec. 2 to raise daily crude output by 400,000 barrels in January. But it kept the meeting open and said it would be able to reconvene at short notice to change course.

“I call my friends every day, we chat and share notes,” Prince Abdulaziz bin Salman said in Riyadh, referring to fellow OPEC+ ministers. “So the meeting is truly not suspended. It continues to be in session.” -BBG

NOTABLE: The Saudi oil minister went on the say: “Thanksgiving was a Thanksgiving day for the speculators. But let them dare to do another Thanksgiving. They will be ouching like hell.”

This is reminiscent of what he said in September of 2020: “I want the guys in the trading floors to be as jumpy as possible.” “I’m going to make sure whoever gambles on this market will be ouching like hell.

This is when I started adding furiously to my long oil thesis.

Saudi Oil Minister Says Global Production Could Plunge 30% This Decade

Saudi Arabia said global oil production could drop 30% by the end of the decade due to falling investment in fossil fuels.

“We’re heading toward a phase that could be dangerous if there’s not enough spending on energy,” Oil Minister Abdulaziz bin Salman said in Riyadh. The result could be an “energy crisis,” he said.

The minister said daily oil output may fall by 30 million barrels by 2030. -BBG

NOTABLE: I have been pointing this out since last year. This industry is severely underfunded. after all the bankruptcies and M&A’s over the last few years, the remaining companies will reap the benefits. I literally do not know how you can not be bullish on this sector.

BRAZIL

TotalEnergies and Shell Stand Out in Brazilian Oil Auction

European supermajors TotalEnergies SE and Royal Dutch Shell Plc will join Brazil’s state-controlled oil giant at two key fields, marking the latest expansion in Latin America’s largest crude producer and an important victory for President Jair Bolsonaro. 

TotalEnergies won stakes in both of the deepwater fields on offer Friday, and Shell was awarded a piece of the Atapu field. Both bids surpassed minimum requirements and market expectations. The French energy titan bid with Malaysia’s Petronas and Qatar Petroleum for the rights to Sepia by offering 37.43% of oil output that’s leftover after accounting for extraction costs and taxes. Shell’s partners in the successful Atapu bid were TotalEnergies and Petrobras. 

The auction marks a turnaround from just two years ago when international oil explorers shunned the sale, and a second failure would have been an embarrassment for the business-friendly Bolsonaro administration. Sweeter terms and higher oil prices enhanced the appeal of Brazil’s offshore oil trove which includes some of the world’s largest oil discoveries this century. -BBG

NOTABLE: It seems all of the new projects are in offshore. I’m warming up to RIG again. That said, I will address this in the new year. I do not want to start many new positions here.

RUSSIA

Russia plans lower oil exports for Q1 2022 despite OPEC+ plan to raise output

 Exports and transit of oil from Russia are planned at 56.05 million tonnes in the first quarter of 2022 versus 58.3 million tonnes in the fourth quarter of 2021, a quarterly export schedule seen by Reuters showed on Friday.

Russia’s plan for lower export loadings comes at a time of its planned gradual increase in the state’s oil output next year under a recent OPEC+ agreement. -Reuters

Lukoil will run out of spare capacity by April

Lukoil Fedun has doubts about Russian crude output growth

Russian private-sector oil producer Lukoil’s co-owner and vice president Leonid Fedun doubts the country will be able to restore its crude production to pre-pandemic levels in April.

Speaking after the presentation of Lukoil’s Global Energy Perspectives to 2050 report today, Fedun said Lukoil has some idle capacity to deliver a slight production increase at the beginning of next year, but a further increase is in doubt. -ARGUS

This is far faster than I thought. I went over this is from the webinar last month.

NOTABLE: This only adds to my bullish 2022 thesis. Also, if Russia is lowering exports it is because they fear a supply crunch at home.

CHINA

Nov crude throughput hits five-month high to 14.57 million b/d

NOTABLE: China also just bought 18M barrels from theUS, now that oil has pulled back, China is on a buying spree again to replenish the stocks that they drew down this summer.

BLOOMBERG OIL DEMAND MONITOR

Specter of Omicron Yet to Hammer Mobility

Oil demand is hovering below pre-pandemic levels as high-frequency data shows the latest, fast-spreading omicron virus variant is tempering mobility without so far causing a massive plunge in the global road or air travel.

U.S. gasoline consumption is at broadly similar levels to 2018 and 2019 and has been for weeks, while global commercial flights are some 18% less than the equivalent date in 2019, the same deficit as on Nov. 1. The U.S. Energy Information Administration will give its next weekly estimate of gasoline use later Wednesday, while FlightRadar24 tracks airplane journeys daily.

“New containment measures put in place to halt the spread of the virus are likely to have a more muted impact on the economy versus previous Covid waves, not least because of widespread vaccination campaigns,” the International Energy Agency said Tuesday in a monthly report.

The Paris-based IEA did revise down annual demand estimates slightly, mainly to reflect reduced jet fuel use, yet it still expects global oil demand to return to pre-Covid levels in 2022, with the latest surge in infections slowing, but not upending, the recovery

Four out of 13 major world cities tracked in this monitor — Taipei, Berlin, Rome, and Paris — had traffic congestion on Monday morning that was busier than the average for 2019 at that time of the week, according to data collected from in-car navigation devices by TomTom NV. Tokyo and London were not far behind, trailing the pre-pandemic figure by just a few percentage points. New York congestion at 8 a.m. on Monday was down 17% from 2019, with an extra 26 minutes added to a commute that would take only 60 minutes on empty roads.

A broader measure of American road use showed vehicles traveled 16.3 billion miles on U.S. highways in the week ended Dec. 5, which was 1.2% more than in the equivalent week of 2019. A similar kind of all-vehicle index for the U.K. was 4% lower than the average of the first week of February 2020, a proxy for the pre-pandemic era, government data show

More Seats on Planes

The latest week of airline seat capacity data from OAG Aviation showed the U.K. jumping ahead of Mexico, topping 2 million seats per week, and France leapfrogging Germany.

The week also saw significant gains in the U.S. and Australia, both led by more domestic flights. Australia’s seat capacity has risen to 1.29 million a week, almost double the level seen in early November. Queensland reached a vaccination threshold that allowed it to reopen its borders with larger Australian states on Monday, boosting air travel.

There was also a small — but noticeable — uptick in the number of flights arriving and departing from Austria, according to daily tracking by Eurocontrol. The country ended a three-week national lockdown on Sunday, having successfully halted an increase in infections.

The biggest airline markets are still the U.S., China, and India. Globally, seat capacity is now about 26% smaller than the same week of 2019, an improvement in early November when it was down 29%.

An aggregated view of jet fuel demand, based on BloombergNEF estimates from flight schedule data, shows the dominance of North America, Asia, and Western Europe to the overall picture, and an anticipated further improvement in demand early next year, despite omicron.

NATURAL GAS

NORDSTREAM2 (BIG NEWS AND VERY UNDER THE RADAR)

Senate cuts deal on Nord Stream 2 to end Cruz blockade of Biden’s ambassador picks

Senate Majority Leader Chuck Schumer and Sen. Ted Cruz (R) cut a deal overnight to hold a vote on Nord Stream 2 sanctions next month in exchange for the Texas senator lifting his hold on more than three dozen of President Biden’s ambassador picks.

Biden has fallen far behind his predecessors in the rate at which his ambassadorial and other high-level State Department picks have been confirmed, leaving gaping holes in critical foreign-policy and national-security roles.

Biden in May waived sanctions on the operator of Nord Stream 2 as a gesture of goodwill toward long-time U.S. ally Germany, which pledged to act if Russia used energy as a “weapon” to achieve its political goals.

But a growing bipartisan chorus of lawmakers on the hill has aggressively pushed for the U.S. to reimpose sanctions as Russia threatens Ukraine. -AXIOS

NOTABLE: So what does this mean? This means that Cruz made a deal to accept Biden’s ambassador picks to re-instate sanctions on Nordstream2. the natural gas wars have begun again. The US natural gas producers will benefit from this.

In addition, the German regulator repeats no decision on NordStream2 in 1H22.

EUROPE

Europe Plans End-Date to Long-Term Gas Deals

The European Union is planning a hard deadline to end long-term contracts to import natural gas as part of its green shift, a setback for top supplier Russia.

The bloc’s executive arm wants to prevent such contracts from being extended beyond 2049 in a sweeping overhaul of its energy markets, according to documents seen by Bloomberg News. The European Commission will also propose measures to strengthen the security of supply as the bloc faces record prices and acute shortages this winter. -BBG

NOTABLE: remember last week, when I pointed out that the greens were looking at 10-15 years? Well, looks like they pushed it out even further. the energy crisis is forcing many to re-think policies and it is in favor of fossil fuels.

NOT ONLY THAT…BUT:

EU Likely to Put Gas, Nuclear in Green Lists, Commissioner Says

The European Union will likely include gas and nuclear power as sustainable green-energy investments in its proposed list to be unveiled in mid-January, a key commissioner said. 

Gas is not an “ideal” energy source but better than coal, the EU’s internal market chief Thierry Breton said in an interview published by Die Welt over the weekend. “If you don’t want nuclear power, you have to be pragmatic and not afford ideological doggedness.”

“Atomic energy and natural gas will help us meet our climate goals,” Breton said. “That is why we in the Commission are counting on presenting a taxonomy that includes nuclear power and natural gas.” -BBG

NOTABLE: I love this. How quickly minds change when it starts getting cold, your power prices are surging with nat gas prices over $44 US contract equivalent and over $250 a barrel oil equivalent. Great news for nat gas equities in the US as they are trading at a significant discount (exports) and our UROY (uranium) position.

COAL

CHINA

China coal output hits record in Nov to ensure winter supply

China’s coal output hit a record high in November as Beijing urged miners to ramp up production to ensure sufficient energy supplies in the winter heating season.

China, the world’s biggest coal miner, and consumer-produced 370.84 million tonnes of dirty fossil fuel last month, data from the National Bureau of Statistics showed. -PLATTS

NOTABLE: China is not giving up coal anytime soon. I do not care what they say.

IEA

Coal-fired electricity generation will hit this year a record of 10,350 terawatt-hours, according to a new IEA report published this week. Based on current trends, overall global coal demand (electricity and other uses) will set a fresh record high in 2022.

SOUTH AFRICA

South African thermal coal prices inch up again amid reduced port stocks

AUSTRALIA

La Nina’s Threat Extends Beyond Farming to Iron and Coal Fields

The phenomenon typically results in below-normal temperatures in the northern hemisphere, heavier rainfall in Australia and northern Brazil, and droughts in the southeast of the South American nation. In the severe La Nina of 2010-2012, coal producers declared force majeure after storms hit the Australian state of Queensland. -BBG

UNITED STATES

State, federal leaders seek common ground on coal

In a meeting with federal officials on Friday, Wyoming leaders made one thing clear: The state is not giving up on coal.

“We cannot adequately plan for the future without respecting our past and our current situation,” said Randall Luthi, Gov. Mark Gordon’s chief energy adviser, in his opening remarks. “We do believe that coal should be a part of our future.” -Casper Star-Tribune

NOTABLE: All of this amounts to good news for BTU. We exited half the position at 19.43 and started adding back in again. I still like this play for another run-up.

CARBON MARKETS

CHINA

China’s daily carbon trading volume hits record high 14.88 mil mtCO2e Dec 14

The national environment ministry had asked provincial authorities to ensure that 95% of eligible companies meet their emissions compliance obligations by Dec. 15 and all companies by Dec. 31. CEA trading volumes are expected to increase in the coming days as the due dates for the first compliance cycle get closer.

China’s national carbon market saw a large CEA trade volume on the opening day July 16 at 4.10 million mtCO2e, mainly supported by state-owned enterprises. After that, trade volumes fell sharply to as low as 10 mtCO2e on Sept. 6.

The turning point was in late September when most companies were notified about their total emission quotas, enabling them to calculate the number of CEAs they could buy or sell. Starting from October, CEA trade volumes saw steady growth every week, and recent trading volumes have exceeded 3 million mtCO2e daily as the due dates approach. -PLATTS

NOTABLE: This is good news for the KRBN position, again, been a parabolic move, but not too late to get in on this pullback. We are long since January of 2020. I think this is buyable between 44.75 -42.00 if you are not already long.

SOLAR

California’s $8 Per KW Solar Proposal Would Punish Homeowners For Using Clean Energy

California’s Public Utility Commission (PUC) is proposing not only cutting the state’s rooftop solar energy incentive after several years of success (and debate), but it also wants to punish homeowners who use solar power to generate their electricity. Reuters notes that under these proposed reforms, California homeowners with new solar installations would see a monthly utility charge of $8 per kilowatt to cover the state’s cost of maintaining the grid. Solar homeowners will also get paid less for sending excess electricity into the grid.

Elon Musk commented that this was insane, and rightfully so. This is a literal financial punishment for those willing to install and use solar power instead of electricity generated from fossil fuels or other sources such as nuclear, which is another thing California wants to do away with. The state wants to close its Diablo Canyon nuclear plant, and the LA Times noted that California should focus on renewable energy to replace it, especially considering nuclear energy is another low-carbon source of electricity. Unfortunately, the state looks to be headed in the wrong direction.- CleanTechnica

NOTABLE: Again Solar is not the place to be right now …also California is still insane.

RECCOREAD when you have some time: Solar’s dirty secrets: How solar power hurts people and the planet

PRECIOUS METALS

PLATINUM

Platinum’s discount to gold rise to $865 and highest since January with Nov car registrations in Europe falling to lowest level on record

BASE METALS

COPPER

MMG shuts Las Bambas copper production as talks to end blockade fail

Hong Kong-listed miner MMG Ltd said on Thursday it would shut production at its Las Bambas copper mine in Peru from Saturday, after failing to reach an agreement with the Peruvian community blocking a transport road used by the facility.

The blockade by residents of the Chumbivilcas province has been in place since Nov. 20, and the shutdown now will halt production at the Chinese-owned mine, which accounts for 2% of world’s copper supply. Peru is the world’s no. 2 copper producer.- SWISSINFO

Copper inventories are nearing depletion

Mining Capex has also shrunk, generating large forward deficits in metals

NOTABLE: I have heard that copper stocks are being hoarded off the exchanges. So I will be looking at this market with a lot of scrutinies over the next few months. That said, I still like VALE ( copper, nickel, iron ore) play from last week.

COMMITTMENT OF TRADERS

COT on commodities as of Tuesday 14 Dec., the day before the FOMC hawkish tilt, saw specs sell metals led by gold and silver. The agriculture sector was lifted by corn, sugar, and cocoa. In energy, crude oil selling continued while natgas buyers returned following slump -SAXO

OIL INVENTORIES

GLOBAL ONSHORE INVENTORIES

GLOBAL FLOATING STORAGE

Vortexa crude Oil floating storage for 12/17 fell -3.29 WoW. Floating storage is estimated at 85.89 million barrels.

FUJAIRAH DATA

Oil product stocks fall, led by light distillates drop

Oil product stockpiles fell to a 12-week low as of Dec. 13, led by a slump in gasoline, naphtha, and other light distillates, according to Fujairah Oil Industry Zone data provided exclusively to S&P Global Platts Dec. 15.

The total inventory was 15.312 million barrels as of Dec. 13, down 2.9% from a week earlier to the lowest since Sept. 20.

Light distillates led the way with a 4.4% drop to 4.205 million barrels, the lowest since Oct. 26, 2020.

Middle distillates stood at 2.297 million barrels as of Dec. 13, down 2.2% from a week earlier to a four-week low

Heavy distillates and residues including fuel for power generation and marine bunkers dropped 2.4% to 8.81 million barrels, a six-week low. -PLATTS

EIA

TRADE IDEA

I am trying to wind down this year so I do not really want to add to too many positions. That said, I like Gazprom Neft GZPFY and will be looking for a good entry. Keep your eye on this one.

MERRY CHRISTMAS AND HAPPY NEW YEAR!