Macro Crude: Understanding Finance and The Global Economy (Oil, Stocks, Commodities, Currencies)

Q2 21: Support from LNG Supply outages in the Pacific Basin and nuclear outages in Japan and Korea

·South Korea had to shut its HanulNo.1 and 2 nuclear reactors (1.9 GW) this week after an influx of sea salps(marine organisms) clogged water systems used to cool the nuclear reactors. This is the second time in less than three weeks these units have had to be shut down and could lead to incremental demand for 1-2 spot LNG cargoes.

·Japan’s nuclear regulator has temporarily banned TEPCO from operating its nuclear plant in Niigata – due to safety concerns. TEPCO had originally planned to restart its two nuclear reactors (2.6 GW) over the May-June period and the latest ruling pushes out the chances of TEPCO operating the plant until at least H2 2022. Japanese LNG imports are expected to be up by 0.45 Mt y/y in Q2 21.

·Prelude and Sakhalin are back to full operation after undergoing maintenance in March, the next planned works will likely happen at Gorgon.

·Gorgon T3 will go offline for large-scale maintenance later this month—starting from 26 April according to Chevron’s schedule. If Chevron finds similar issues to those found at its first two trains last year – the total works could last ~14 weeks until early August (based on T1 work timeline).

·Large-scale maintenance works scheduled at Ichthys, GLNG and North West Shelf in May.

Planned maintenance at PNG LNG will reduce exports from Papua New Guinea in May, although the exact timing of these works has not been officially announced

Q3 21 gas balances to weaken relative to Q2 21 – on higher pipeline supplies

Bearish factors

·Strong pipeline imports from Russia and central Asia will limit Chinese LNG demand growth y/y to 1.0 Mt over the same period.

·Nuclear availability is set to improve in Japan - translating to a drop of 1.1 Mt y/y between July–September.

·11.4 Mt y/y growth of global LNG supply in Q3 21—primarily from the US and Egypt—will far outpace the call from Asia-Pacific markets.

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Constructive factors

•European gas inventories replenished.

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•Argentina expected to import 3 Mt (60-65 cargoes) this sumer of which only 1.7 Mt thus far tendered. They will have to secure another ~1.3 Mt of LNG (June-September). Through the Escobar terminal and Bahia Blanca FSRU terminal.

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•India and Pakistan. ~ 1 Mtpa incremental of imports due to FSRU (HoeghGiant) and ExcelerateSequoia)

This episode helps you understand the basics of California's carbon cap and trade programme. Its a primer that goes through the basic of the program, some history, the sectors included and some of the defining mechanisms of the programme like the maximum holding limit, minimum auction price.

The premium of Asian LNG spot prices (JKM) over the US Henry Hub benchmark has widened to the highest level in nearly two years (spread >US$5/mmbtu). This is partly a function of Pacific basin supply outages coinciding with congestion at the Panama Canal. As a result JKM contracts are pricing in the cost of securing US cargoes through longer transit routes around the Cape of Good Hope (costing an extra US$2.4/mmbtu at current freight rates). Wait times outside the Panama canal have been around nine days recently (Chart of the day), adding almost $0.40/mmbtu to using the route to Northeast Asia without waiting. 

Panama Canal congestion is causing delays to LNG deliveries from the US to Asia, driving up freight rates

Below factors could help ease strength in the JKM Feb-21 contract to reflect the cost of securing the marginal cargo through the Panama route, rather than pricing on more longer routes at present:

Per the below LHS chart, the JKM-TTF spread is incentivising transit through the Cape of Good Hope (green line). Costs of using the Panama canal have risen. With higher transit times through the Panama Canal – ships are using the route through the Cape

As rig counts continue to fall. Producers are high grading ie. Shifting to tight oil areas with higher well productivity.  High grading is more pronounced thus far in the current price downturn compared to 15/16.

As a result of high grading, well cost reductions expected in both Delaware and Midland Basins, more moderate reductions expected elsewhere.

Energy demand is 4% lower than it would have been without efficiency gains. Between 2015-2018 energy efficiency improvements helped reduce 3.5 Gt of Co2 – roughly equivalent to the energy-related emissions of Japan over the same period. 

Why has energy efficiency fallen:

But with COVID-19 oil intensity is likely to go higher - although overall consumption faces a cyclical headwind due to the economy. The per user oil intensity is likely to be higher. Especially with demand for PPE , Face Masks and more protection for packaging food.

Oil Market Outlook. Oil (Brent crude) has managed to stay above US$40/bbl over the second week of July, despite a choppy macro environment and looming risks. We explore the key reasons for this and highlight some of the key risks.