1. There is no good way to solve the US fuel shortage
– As Valero (NYSE:VLO) kicked off a third-quarter earnings call from U.S. refiners with net income of $2.82 billion, it said margins were boosted by higher-than-pre-pandemic demand for gasoline and diesel.
– Despite all the talk of destroying demand amid further elevated gasoline prices, inventories continue to tumble as the U.S. finally faces a shortage of refining capacity.
– Although the average utilization rate of refineries has been on trend at 94-95%, the supply of oil products in the USA has been well over a million b/d lower than in October 2019, which is mainly due to a lack of capacity.
– All of this raises the likelihood of a ban on US products — a move that could save US consumers about $5 billion and wipe out $30 billion in revenue from US refiners, according to Wood Mackenzie projections.
2. Europe can drop natural gas to fuel bridges
– As European TTF spot natural gas prices have tripled this year from an average of 46/MWh in 2021 to 134/MWh so far this year, the long-term sustainability of gas demand has been called into question.
– According to Rystad, at recent gas prices, the use of gas power plants would be 10 times more expensive in the long term than building new solar power capacity in Europe.
– For gas-fired power plants to become competitive against renewables by 2030, spot prices should drop by at least 17/MWh…
1. There is no good way to solve the US fuel shortage
– When Valero (NYSE:VLO) started its third-quarter earnings call for U.S. refiners with net income of $2.82 billion. It said margins were boosted by demand for petrol and diesel, which was higher than pre-pandemic levels.
– Despite all the talk of destroying demand amid further elevated gasoline prices, inventories continue to tumble as the U.S. finally faces a shortage of refining capacity.
– Although the average utilization rate of refineries has been on trend at 94-95%, the supply of oil products in the USA has been well over a million b/d lower than in October 2019, which is mainly due to a lack of capacity.
– All of this raises the likelihood of a ban on US products — a move that could save US consumers about $5 billion and wipe out $30 billion in revenue from US refiners, according to Wood Mackenzie projections.
2. Europe can drop natural gas to fuel bridges
– As European TTF spot natural gas prices have tripled this year from an average of 46/MWh in 2021 to 134/MWh so far this year, the long-term sustainability of gas demand has been called into question.
– According to Rystad, at recent gas prices, the use of gas power plants would be 10 times more expensive in the long term than building new solar power capacity in Europe.
– For gas-fired power plants to become competitive against renewables by 2030, spot prices would have to fall to at least 17/MWh and carbon dioxide prices would have to collapse to 10/mtCO2, which is a very unrealistic view.
– Consequently, Rystad estimates that the share of natural gas in European electricity production will decrease to 3 percent by 2045 from the current 19 percent.
3. Russian diesel continues to flow to Europe
– Although the EU’s ban on Russian products enters into force on February 5, diesel deliveries from Russia have started to rise again this month, around 500,000 bar/d.
– With French strikes and the takeover of the German Schwedt refinery restraining diesel fuel production in Europe, cutting import dependence from Russia is not easy.
– According to Euroilstock’s figures, distillate stocks in the 16 largest European countries are 11% lower this time than last year, and it is impossible to build stocks at this rate.
– The EU was widely expected to replace Russian diesel with supplies from the Middle East, although delays in commissioning refineries in both Saudi Arabia and Kuwait may complicate plans.
4. As banks withdraw from oil, industry finds new ways of financing
– As leading banks are increasingly reluctant to finance fossil fuel extraction, the industry is moving to more creative and innovative ways of financing by offering their assets as collateral.
– So-called PDP securitizations have grown rapidly this year, and funds have already been raised around $4 billion, mainly from small and medium-sized companies.
– These bonds are backed by the oil and gas reserves of the companies, which means that the producers pledge a portion of their future income in exchange for cash up front, at a lower price than banks.
– PDP securitization has an additional advantage – collateral is not revalued during rising prices, as could be observed this year when loan bases remained unchanged.
5. When does the Lithium Bull Run end?
– Lithium prices continue to rise to unprecedented heights, with battery-grade lithium carbonate and lithium hydroxide up 180% this year alone, with Chinese DDP prices around ¥550,000/mt ($76,000/mt).
– The lead times for lithium mining projects are at least 5 years, and the demand for lithium is expected to increase sixfold by 2030, so the market has fallen into a supply trap.
– Lithium mining by Suolajärvi producers is expected to slow down with the coming of winter, but the production of battery-quality metal will continue firing on all cylinders.
– This creates a new loop of insufficient supply, which means that lithium prices could rise even higher than today, possibly reaching the 600,000/mt threshold by the end of 2022.
6. Base metals will suffer even as stocks run out
– With Europe’s production sector shrinking and facing deindustrialization, the USA is expected to follow soon, the situation for industrial metals does not look very rosy at the moment.
– Industry groups unleashed a wave of demand cuts, with zinc use in 2022 falling 2% from the previous year instead of growth previously assumed, while nickel demand growth is only 4%, half of what was forecast back then. in May 2022.
– The future of Russia’s supply of metals may tilt the market balance even further – aluminum producers, e.g Alcoa (NYSE:AA) are openly advocating a ban, while European consumers are warning of doom if that happens.
– The current downturn in pricing is all the more peculiar because it combines a low price environment exacerbated by recession risks in 2023 with very low inventories, which would escalate if the LME banned deliveries of the Russian metal.
7. Very warm October facilitates the use of coal, lifting gas
– European power producers have returned to burning natural gas as its spot prices continue to collapse amid a continent-wide gas glut, driven by steady LNG supplies and warm weather.
– Gas-fired production in the Netherlands increased by 45% this week compared to the monthly average, as coal use fell, while in Germany the same measure was 33%.
– At the same time, gas futures in Europe are in a steep contango, with February futures trading at a 45% premium to November at almost 150/MWh, which means that the market is still expecting a hard winter.
– Throughout October, coal prices in Europe have been stable and traded at around $250/mt, which encourages a return to gas-powered production.
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