Analys

What is behind the recent fall in US crude oil stocks?

Published

9 år ago

8 oktober, 2013

US crude oil stocks have fallen significantly during the summer months. This was mainly attributable to an increase in crude oil processing. In this way US refineries reacted to robust demand for middle distillates, which is reflected in low US distillate stocks and record US distillate exports. As crude oil processing declines, US crude oil stocks will likely rise again in the fourth quarter. Robust US distillate exports are exerting pressure on refinery margins in Europe, which will probably increase Europe’s dependency on imports of oil products.

US crude oil stocks have fallen significantly during the summer months. Since the end of June they have declined by 38m barrels and in mid-September reached their lowest level for 18 months. Destocking has been concentrated on two regions: in the Midwest (PADD 2) stocks have fallen by more than 20m barrels, and on the US Gulf Coast (PADD 3) by more than 14m barrels (chart 1). The lion’s share of the destocking in the Midwest related to the storage hub in Cushing, where stocks have fallen by a total of 16.5m barrels for 13 weeks in succession. What is the reason for this surprising trend and will the destocking continue?

The trend in stock levels can be divided into three sub-components: on the supply side are US oil production and US oil imports, and on the demand side, crude oil processing by refineries. US oil production has increased until recently. In mid-September it reached its highest level since May 1989 of more than 7.4m barrels per day. This component cannot therefore explain the destocking of recent weeks. On the other hand, imports of crude oil have fallen sharply. In the summer months they were, on average, 1m barrels per day lower than in the previous year. However, this will not be sufficient to balance out the simultaneous increase in US oil production. Between the end of June and mid-September this was, on average, 1.4m barrels per day above the previous year’s level. The trend on the supply side would therefore have been an indication of stockbuilding. The main reason for the significant destocking this summer is therefore to be found on the demand side, i.e. from the higher volumes of crude oil processed at refineries.

Crude oil processing in the USA was higher than usual this summer

US refineries stepped up crude oil processing much more significantly than usual this summer. Between the end of June and mid-September, an average of 16m barrels of crude oil was processed daily. This was 600,000 barrels per day more than in the corresponding period last year, and 900,000 barrels per day more than the long-term average level (chart 2). At the beginning of July, more crude oil was processed than at any time in the last eight years. It was also striking that refineries maintained processing rates at their high levels of July and August up to mid-September. Normally, refineries scale back their utilisation from the end of August as the summer driving season approaches an end. Refineries usually use the time in early autumn to carry out maintenance and to switch operations to the winter season. Hence, significantly more crude oil has been processed this summer than would otherwise be normal at this time of the year. This has only been possible by consistently dipping into crude oil stocks, although more crude oil has also been available as a result of the increased level of domestic oil production.

This cannot be explained with trends in the US gasoline market…

The fact that US refineries have increased their crude oil processing so strongly over an extended period this summer cannot be explained by trends in the US gasoline market, which is normally the most important driver of refinery activity in the summer months. Demand for gasoline in the US during the summer driving season showed virtually no increase compared to last year. US gasoline stocks have remained consistently 5 to 6 per cent above their long-term average for weeks with a few exceptions. US gasoline production was just slightly higher this summer than in the previous years. Moreover, the US exported less gasoline between March and July than one year ago, according to the EIA.

…but is attributable to distillate production in particular

The reason for the unusually high level of refinery activity over a prolonged period is above all attributable to middle distillates. US refineries have significantly increased the production of middle distillates in particular. This increased to an average of 5m barrels per day in the summer months, which was 13% higher than average for the last five years. More than half of the increase in crude oil processing this summer is therefore attributable to the middle distillates segment. The varying trend in processing margins is likely to have played a part here. While margins for gasoline production have fallen to the lowest level since end of 2011, they are still relatively high for middle distillates (chart 3). The fact that margins for middle distillates have held up much better is attributable to low US distillate stocks, which have remained well below their long-term average levels despite robust production of middle distillates.

Strong demand for distillates in and outside the USA

This is mainly the result of higher domestic demand and robust demand for distillates from abroad. Distillate demand from US consumers was 10% higher than last year during the summer months and 6% above the average of the last five years. Moreover, the USA exported 1.276m barrels of middle distillates per day on balance in July after having reached a level nearly as high in June (chart 4, page 3). Daily net distillate exports were almost twice as high in June and July as in the first four months of the year and also 26% above the same period last year. Weekly estimates from the US Energy Information Administration also indicate that distillate exports remained at a similarly high level in August and September.

Refinery activity is unlikely to sustain these exceptionally high levels

US refineries have benefited from cheaper crude oil from the country’s interior until recently, which, thanks to new pipeline capacity, can be transported to the US Gulf Coast, where roughly half of US refinery capacity is situated. This also enables US refineries to avoid the continuing restrictions on crude oil exports from the USA, since these restrictions do not apply to the export of oil products. Despite everything, US refineries are unlikely to maintain their distinctly high levels of crude oil processing of recent months, given lower margins. The EIA expects average crude oil processing of 15.3m barrels per day in the fourth quarter. This would still be more than 500,000 barrels per day above the average of the last five years, but some 600,000 barrels per day less than in the third quarter. The lower demand for crude oil from refineries indicates higher stock levels, if US oil imports are not being reduced markedly, as US oil production is likely to increase further as a result of the surge in shale oil production in North Dakota and Texas. In fact, the decline in US crude oil stocks seems to have come to an end. In the second half of September stocks were already increasing by roughly 8m barrels, due to lower volume of crude oil processing and higher oil imports.

Decline in crude oil stocks has recently also slowed at Cushing

The 13-week long decline in crude oil stocks at Cushing has also weakened visibly in recent weeks (chart 5). Whereas, between the beginning of July and the end of August, on balance an average of 1.36m barrels of crude oil per week were drained off Cushing, in September the figure had fallen to an average of less than 500,000 barrels per week. At the end of September, the decline in stocks at Cushing had almost come to an end. Should stocks be built up also at Cushing in the weeks ahead, this would not be attributable to a lack of transport or processing capacities. These are now sufficient – as the steady fall in Cushing stocks over the summer months despite rising shale oil production in the Midwest demonstrated. In fact, once the Southern leg of the Keystone XL pipeline is completed, additional transport capacities of 700,000 barrels per day will be available by year-end. A stock build-up would instead be attributable to lower crude oil processing at refineries. This should exert pressure on the WTI price in particular.

Record US distillate exports creating problems for refineries in Europe

What are the implications of these trends for Europe? According to data from the EIA, the USA was already exporting record volumes of middle distillates to Europe in May and June. Based on shipping data, this trend has continued in September. The high levels of US distillate exports will exert pressure on refinery margins in Europe. Despite low gasoil stocks, the price differential between gasoil and Brent oil has been moving in a narrow range around USD 15 per barrel for some months, which is hardly sufficient to offset the very low margins in gasoline production. The situation has been compounded by the fact that the USA itself has now become a net gasoline exporter. As a result the US market – formerly the most important sales market for European refineries – has been lost. At the same time, the USA is also competing in gasoline on other sales markets such as South America, for instance. Further refinery closures in Europe are thus on the cards, which would further increase Europe’s dependency on imports of oil products.

Analys

How renewable fuels are accelerating the decarbonisation of transport

Published

2 månader ago

31 januari, 2023

Redaktionen

On 16 November 2022, UK’s Royal Air Force (RAF) Voyager aircraft, the military variant of the Airbus A330, took to the skies for 90 minutes over Oxfordshire. What looked like a routine test flight in its outward appearance was ultimately deemed ground-breaking. Why? It was a world-first military transporter aircraft flight, and the first of any aircraft type in the UK to be completed using 100% sustainable jet fuel.

Mobeen Tahir, Director, Macroeconomic Research & Tactical Solutions, WisdomTree

What are renewable fuels?

Renewable hydrocarbon biofuels (also called green or drop-in biofuels) are fuels produced from biomass sources through a variety of biological, thermal, and chemical processes. These products are chemically identical to petroleum gasoline, diesel, or jet fuel.

In other words, renewable fuels are sources of energy chemically identical to fossil fuels but produced from domestic, commercial, or agricultural waste (see Figure 1 below).

Figure 1: Converting waste into energy

Why the excitement?

Renewable fuels, like renewable diesel and sustainable jet fuel, can reduce greenhouse gas emissions by around 80-90% compared to fossil fuels. And because they burn much cleaner, engine filters remain cleaner for longer reducing the need for maintenance. Furthermore, given used cooking oil, vegetable oil, processing waste, and animal fat waste are used as inputs, the production of these fuels reduces biowaste, thereby cutting emissions from landfills.

This makes renewable fuels a key component of the circular economy. Humans have largely operated on the linear model historically when it comes to utilising natural resources. The circular model, in contrast, is much less wasteful and seeks to recycle as much as possible (see Figure 2 below).

Figure 2: The Circular Economy

The most exciting thing about renewable fuels is the immediacy with which they can make an impact. The reason why they are referred to as drop-in fuels is that they can replace fossil fuels in internal combustion engines with little or no modification required. So, if supply was abundant enough, forms of transport which cannot be electrified easily like heavy duty trucks, ships, and aeroplanes can be switched across to renewable fuels making a significant improvement to the environmental footprint. According to BP, “A return flight between London and San Francisco has a carbon footprint per economy ticket of nearly 1 tonne of CO₂ equivalent. With the aviation industry expected to double to over 8 billion passengers by 2050, it is essential that we act to reduce aviation’s carbon emissions.”

The challenge

Renewable fuels or biofuels are still in their infancy. This means the obvious hurdle to overcome is cost competitiveness with fossil fuels. Cost estimates vary, but figures from the International Air Transport Association (IATA) provide a useful sense for the ballpark. In May 2022, IATA stated that the average worldwide price of jet fuel is about $4.15 per gallon compared to the US average price of a gallon of sustainable aviation fuel, which is about $8.67.

So, roughly double the price of the incumbent polluting technology. This is not a bad starting point at all. Considering how rapidly the cost of energy storage in batteries has fallen in the last decade, renewable fuels could become competitive quite soon if sufficient investment is made and economies of scale are achieved. IATA also predicts that renewable fuels could make up 2% of all aviation fuels by 2025, which could become a tipping point in their competitiveness.

Businesses are acting

Businesses pursuing their own net zero targets have already started exploring renewable fuels to minimise their waste. Darling Ingredients Inc, which produces its trademark Diamond Green Diesel from recycled animal fats, inedible corn oil, and used cooking oil, was chosen by fast food chain Chick-fil-A in March 2022 to turn its used cooking oil into clean transportation fuel.

Similarly, McDonald’s entered into a partnership with Neste Corporation in 2020 to convert its used vegetable oil into renewable diesel and fuel the trucks that make deliveries to its restaurants. According to TortoiseEcofin, both Darling Ingredients and Neste have a net negative carbon footprint given emissions produced by these businesses are lower that the emissions avoided because of their renewable fuels.

A final word

Renewable fuels alone will not tackle climate change. No single solution can. But they can help us make meaningful progress. The Intergovernmental Panel on Climate Change (IPCC) emphasises how crucial it is for the world to halve its greenhouse gas emissions this decade to at least have a chance of limiting global warming to 1.5^oC. This means that solutions with an immediate effect have an important role to play. Biofuels can cut emissions from waste in landfills and provide much cleaner alternatives to fossil fuels to help accelerate the world’s decarbonisation efforts. They don’t require different engines to be of use. They just need funding to reach scale.

Mobeen Tahir, Director, Macroeconomic Research & Tactical Solutions, WisdomTree

Analys

SEB Metals Weekly: China Covid exit is bullish for metals

Published

2 månader ago

24 januari, 2023

Redaktionen

China Covid exit is bullish for metals

Softer inflation, slight macro-optimism, and China taking a rapid exit from Covid restrictions. Markets have become more optimistic. Inflation indices have eased and that has created some hopes that central banks won’t lift interest to a level that will kill the economy in 2023. Natural gas prices in Europe have fallen sharply. This has suddenly reduced energy-inflationary pressure and removed the direst downside economic risks for the region. But general market optimism is far from super-strong yet. The S&P 500 index has only gained 1.9% since our previous forecast on 1 Nov 2021, and oil prices are down nearly 10% in a reflection of concerns for global growth. China has however removed all Covid-restrictions almost overnight. It is now set to move out of its three years of Covid-19 isolation and lockdowns at record speed. Industrial metals are up 20% and the Hong Kong equity index is up 40% as a result (since 1 Nov-22). China’s sudden and rapid Covid-19 exit is plain and simply bullish for the Chinese economy to the point that mobility indices are already rebounding quickly. SEB’s general view is that inflation impulses will fade quickly. No need then for central banks across the world to kill the global economy with further extreme rate hikes. These developments have removed much of the downside price risks for metals in 2023 and we have to a large degree shifted our 2024 forecast to 2023.

Lower transparency, more geopolitics, more borders, and higher prices and exponential spikes. The first decade of this century was about emerging markets, the BRICs, the commodity price boom, the commodity investment boom, and free markets with free flow of commodities and labor with China and Russia hand in hand with western countries walking towards the future. High capex spending in the first decade led to plentiful supply and low prices for commodities from 2011 to 2020. A world of plenty, friends everywhere, free flow of everything, and no need to worry. The coming decade will likely be very different. Supply growth will struggle due to mediocre capex spending over the past 10 years. Prices will on average be significantly higher. There will be frequent exponential price spikes whenever demand hits supply barriers. Price transparency will be significantly reduced due to borders, taxes, sanctions, geopolitical alignments, and carbon intensities. Prices will be much less homogenous. Aluminium will no longer be just one price and one quality. Who made it, where was it made, where will it be consumed and what the carbon content will create a range of prices. Same for most other metals.

Copper: Struggling supply and China revival propel copper prices higher. Unrest in Peru is creating significant supply risks for copper as the country accounts for 10% of the global supply. Chile accounts for 27% of global production. Production there is disappointing with Codelco, the Chilean state-owned copper mining company, struggling to hit production targets. The Cobre Panama mine in Panama is at risk of being closed over a tax dispute between Quantum and the government. Cobre Panama is one of the biggest new mines globally over the past 10 years. The rapid exit from Covid restrictions in China is bullish for the Chinese economy and thus for copper demand and it has helped to propel prices higher along with the mentioned supply issues. The Chinese property market will continue to struggle, and it normally accounts for 20% of global copper demand while China accounted for 55% of global copper demand in 2021. While China is no longer prioritizing the housing market it is full speed ahead for solar, wind, EVs, and electrification in general. So, weakening Chinese copper demand from housing will likely be replaced by the new prioritized growth sectors. Global supply growth is likely going to be muted in the decade to come while demand growth will be somewhere between a normal 3% pa. to a strong 4% pa. to a very strong 5% pa. Copper prices will be high, and demand will hit the supply barrier repeatedly with exponential spikes as the world is working hard to accelerate the energy transition. Copper prices could easily spike to USD 15-16,000/ton nearest years.

Nickel: Tight high-quality nickel market but a surplus for a low-quality nickel. Nickel production is growing aggressively in Indonesia. The country is projected to account for 60-70% of global supply in 2030. This will become a huge and extremely concentrated geopolitical risk for the world’s consumers of nickel. Indonesia has an abundance of low-grade C2 nickel. The challenge is to convert low-quality C2 nickel to high-quality C1. We are set for a surplus of C2 nickel but the market for C1 nickel will depend strongly on the conversion capacity for C2 to C1. Low price transparency will also help to send prices flying between USD 20,000/ton and USD 30,000/ton. Strong growth in nickel production in Indonesia should initially call for prices down to USD 20,000/ton. But Indonesia is a price setter. It will account for 50% of global supply in 2023. It doesn’t make sense for Indonesia to kill the nickel price. If the nickel price drops, then Indonesia could quickly regulate supply. There should be a premium to nickel due to this. As a result, we expect the nickel price to average USD 24,000/ton in 2023. C2 to C1 conversion capacity may be strained and there should also be a monopoly premium due to the size of Indonesia. Converting C2 to C1 is however extremely carbon intensive and that could be an increasing issue in the years to come.

Zinc: Super-tight global market. European LME inventories are ZERO and zinc smelters there are still closed. European zinc smelters account for 16% of global zinc smelter capacity. Most of this was closed over the past year due to extremely high energy prices. European LME zinc stockpiles are now down to a stunning zero! The global zinc market is extremely tight. Reopening of European zinc smelting seems unlikely in H1-23 with a continued super-tight market as a result both in Europe and globally.

Aluminium: Price likely to be in the range of USD 2400 – 3200/ton and line with coal prices in China. Aluminium prices have historically been tightly tied to the price of coal. But coal prices have been all over the place since the start of 2021 with huge price differences between Amsterdam, Australia, and domestic Chinese coal prices which are now largely state-controlled. China banning imports of Australian coal, the Chinese energy crisis in 2021, and Russia’s invasion of Ukraine in 2022 are ingredients here. This sent aluminium prices flying high and low. Coal prices in China today imply a price of aluminium between USD 2400/ton and 3150/ton with the LME 3mth aluminium price nicely in between at USD 2590/ton. The global coal market should now become more orderly as China now again is accepting Australian coal. Energy costs have fallen sharply in Europe and some producers in the Netherlands have talked about possible restarts of production. China is likely to reduce its exports of primary aluminium. Energy security of supply is high on the agenda in China, and it makes no sense to emit lots of CO2 in China and indirectly export energy in the form of primary aluminium. Growth in non-China aluminium demand in the years to come will have to be covered by non-China producers which have the potential to force prices higher and away from coal as the price driver. While LME has one price for the 3mth aluminium price we’ll likely get larger and larger price differences across the world in the form of possibly extreme price premiums for example in the EU and the US.

SEB Commodities price outlook — **Source: SEB Markets – Commodities. Historical data: Bloomberg**

Analys

Solid demand growth and strained supply to push Brent above USD 100/b

Published

3 månader ago

2 januari, 2023

Redaktionen

Brent crude had a strong end of the year as it traded at the highest level since 1 December. It is a slow start to the new year due to bank holidays and Dated Brent trades close to USD 85/b. It averaged USD 99.9/b in 2022. We expect it to average more than USD 100/b on average for the coming year amid strained supply and rebounding demand. Chinese oil demand is set to recover strongly along with re-openings while non-OECD will continue to move higher. At the moment oil looks absurdly cheap as it is cheaper than natural gas in both EU and Japan and also cheaper than coal in Australia.

Some price strength at the end of the year. The Dated Brent crude oil price index gained 2.3% on Friday with a close at USD 84.97/b. It was the highest close since 1 December. This morning it is trading slightly lower at USD 84.8/b but the market is basically void of action due to bank holidays.

Bjarne Schieldrop, Chief analyst commodities at SEB — Bjarne Schieldrop, Chief analyst commodities, SEB

Gloom and doom but IEA, OPEC and US EIA project global crude oil demand to rise between 1 m b/d and 2.2 m b/d YoY in 2023. They also expect call-on-OPEC to rise between 0.3 m b/d and 1.0 m b/d. The US EIA projects demand to increase 1 m b/d in 2023 on the back of a growth of 1.3 m b/d in non-OECD where demand in India rises by 0.2 m b/d and China by 0.6 m b/d. In China this is of course to a large degree due to re-opening after Covid-19 lock-downs. But it is still a good reminder of the low base of oil demand in non-OECD versus OECD. India last year consumed 5 m b/d which only amounts to 1.3 b/capita/year versus a world average of 4.5 b/capita/year and European demand of 10 b/capita/year. Even China is still below the world average as its demand in 2022 stood at 15.2 m b/d or 4.0 b/capita/yr. Non-OECD oil demand thus still has a long way to go in terms of oil demand and that is probably one of the things we’ll be reminded of in 2023 as Covid-19 lock-downs disappear entirely.

Solid demand growth in the face of strained supply. Important to remember is that the world has lost a huge amount of fossil supply from Russia due to the war in Ukraine. First in terms of natural gas where supply to the EU and thus to the world has declined by some 2.5 m boe/d versus pre-war levels. Secondly in terms of crude and products. The latter is of course a constant guessing game in terms of how much Russian crude and product exports has declined. The US EIA however projects that crude oil production in the Former Soviet Union will be down 2 m b/d in 2023 versus pre-Covid levels and down 1.3 m b/d YoY from 2022 to 2023. We are thus talking up to 4.5 m boe/d of lost supply from Russia/FSU. That is a huge loss. It is the reason why coal prices are still trading at USD 200 – 400/ton versus normal USD 85/ton as coal is an alternative to very expensive natural gas.

Overall for 2023 we are looking at a market where we’ll have huge losses in supply of fossil energy supply from Russia while demand for oil is set to rebound solidly (+1.0 – 2.2 m b/d) along with steady demand growth in non-OECD plus a jump in demand from China due to Covid-19 reopening. Need for oil from OPEC is set to rise by up to 1.0 m b/d YoY while the group’s spare capacity is close to exhausted.

We expect Brent crude to average more than USD 100/b in 2023. Despite all the macro economic gloom and doom due to inflation and rising interest rates we cannot help having a positive view for crude oil prices for the year to come due to the above reasons. The Dated Brent crude oil price index averaged USD 99.9/b in 2022. We think Brent crude will average more than USD 100/b in 2023. Oil is today absurdly cheap at USD 85/b. It is cheaper than both coal in Australia and natural gas both in Japan and the EU. This is something you hardly ever see. The energy market will work hard to consume more what is cheap (oil) and less of what is expensive (nat gas and coal).

Latest forecasts by IEA, OPEC and US EIA for oil demand growth and call-on-OPEC YoY for 2023. Solid demand growth and rising need for oil from OPEC.

Oil demand projections from the main agencies and estimated call-on-OPEC. More demand and higher need for oil from OPEC

EIA STEO projected change in oil demand for different countries and regions YoY to 2023

US EIA Dec STEO forecast for FSU oil production. Solid decline projected for 2023.

US commercial crude and product stocks still below normal

Total US crude and product stocks including SPR. Declining, declining, declining.

US crude and product inventories both excluding and including Strategic Petroleum Reserves

US oil sales from US SPR is now coming to an end. Will make the market feel much tighter as it really is.

Brent crude oil is absurdly cheap as it today trades below both Australian coal and natural gas in both Japan and the EU. Coal and natural gas prices should trade lower while oil should trade higher.