Analys
EU sanctions on Russian alu will likely drive EU premiums higher
The LME 3mth alu price has bounced 4.5% past two days but its a far cry from 2022 impacts. The 3mth aluminum price has bounced 4.5% (+96 USD/ton) to USD 2256.5/ton on news that the EU is considering an embargo on Russian aluminum. It’s a notable gain amid an otherwise lukewarm and bearish energy complex where natural gas and coal prices have been trending steadily lower since October last year. But it is nothing compared to what happened in 2022 when Russia attacked Ukraine. The 3mth aluminum price then rallied to USD 3849/ton and the EU aluminum premium rallied to USD 505/ton versus a more normal USD 100/ton. Thus so far the the price action in aluminum is nothing like what we experienced in 2022.
It looks likely to us that the EU will indeed impose sanctions on Russian aluminium. We don’t know yet if the EU actually will implement sanctions on Russian aluminum. Personally I think its likely that they will do it as it is kind of a moral stand and the last large piece of the Russian energy complex which is possible to place under sanctions. But the actual effects both on the EU and Russia will likely be limited. Russia will not stop producing and exporting aluminium. Rather it will export it and send it elsewhere in the world. That is what happened to Russian crude and product exports. They weren’t lost in terms of global supply, but rerouted elsewhere.
New sanctions will have limited effect on Russia and dissipate over time. It’s a moral stand. Previously it was possible to enforce effective sanctions on one specific country. Those were the days when the US ruled the world and China chose to side with the US. For example with sanctions on Iran. These sanctions have not at all been lifted yet. But Iranian oil exports have rebounded from 1.9 m b/d at the low in 2019 to now 3.2 m b/d as China now is accepting to import Iranian crude oil and is placing less emphasis on the US.
The effect of sanctions have a tendency to deteriorate over time. Even when the US ruled the world and China played along. But sanctions today will leak massively if China isn’t playing along with what the EU and the US wants. And China isn’t playing along.
The goal is to hurt Russia’s income from aluminum exports. But the effect will be limited. The aim with the sanctions towards Russian oil, and now possibly also aluminum, isn’t to bar the supply from the global market. Rather the opposite. Neither the US nor the EU wants to put a stop to Russian raw materials exports as it could drive up the price of these globally which would hurt consumers and generate inflation. The aim is to keep exports flowing but to try to hurt Russian earnings from the exports. The same will likely be the case for the potentially upcoming EU sanctions on aluminum.
But even the ”hurt the income” strategy with a cap on the price of Russian crude and products has deteriorated over time. Russian Urals crude had a discount to Brent crude in 2022 of as much as USD 36/b and today it is only USD 12/b below Brent.
Russia has probably made contingency plans a long time ago. Russia has also probably made contingency plans for its aluminum exports as the risk has been there all along since 2022. Thus new EU sanctions towards Russian aluminium exports will likely be less of a shock today versus when all hell broke lose in 2022.
Europe has also already reduced its Russian imports of primary aluminium, to about 10% of its primary needs. A large proportion of imports are now increasingly coming from middle eastern producers.
EU alu premiums already rising along with Mid-East issues (Red Sea). Will rise further with sanctions. Issues in the region has pushed up freight costs, insurance costs and added transit delays and length of journey to Europe. A combination of these issues have already lifted the European premium. New sanctions on Russia will likely lift the regional premiums further.
The dirty details. How deeply is EU’s industrial supply chains embedded in Russian alu semies? The actual effects of new EU sanctions on Russian aluminum will be down to the dirty details. An important question is how deeply Russian semies, and prefabricated aluminum parts (which also looks to be sanctioned) are embedded and integrated in the European industrial system (supply chains). If the EU is deeply dependent of pre-fabricated aluminum parts from Russia, then it could be painful for EU to disentangle from these imports.
Sanctions = additional costs and frictions as global aluminum flows are rerouted. New sanctions will naturally lead to frictions and some added price due to that. Aluminum can of course be transported across the world. It is cheaper to transport it from Russia to Europe and that is why it historically has landed in the EU. But, if need be, due to possible EU sanctions towards Russia on aluminum, then Russia can and will send its aluminum to other global regions, maybe and possibly predominantly, to China. Then the EU can and must import more aluminum from other places instead. Probably the middle east and maybe from China
The Global LME 3mth price will likely rise only marginally as no supply is actually lost. Just rerouted. The price of aluminum across the world may increase a little bit due to such sanction-frictions but probably not all that much since there will not be any loss of supply and only added transportation frictions and costs.
EU aluminum premiums will naturally rise in order to attract non-Russian supply from further away. EU Alu-premiums should naturally increase in order to attract aluminum from further away. China will probably be able to import Russian aluminum on the cheap. So Russia will lose some income on its aluminum exports as it potentially has to cover transportation costs all the way to China and possibly an additional discount in order for China to take it. China may only import a lot of Russian aluminium if it can get it on the cheap. China can then export more as its country balance will improve and possibly export all the way back to Europe.
A weak macro-backdrop in Europe makes sanctions easier. The backdrop to all of this is very weak aluminum demand in Europe amid a bleak macro-picture. Disruption of Russian supply to the EU should thus be less painful than it otherwise would have been.
What to do with Russian alu stocks already in EU LME storage? Consume it or export it? A tricky question is what to do about all the Russian aluminum which currently is sitting at EU LME storage sites where it is constituting some 90% of aluminum stocks. If it has to leave EU LME storage sites due to sanctions then it may have to be sold at a discount in order to get it to flow elsewhere. Maybe it will create deep front-end contango is one speculation. A natural solution however would be that sanctions allows consumption of Russian aluminum currently in stock in the EU but bans new and further stocking of Russian aluminum. Then these Russian stocks would gradually be consumed and dissipate and instead gradually be replaced by non-Russian aluminum.
”Futures market can tighten quickly and spreads could rally.” The following is a comment from one of SEB’s metals traders: ”The futures market could get very tight very quickly following EU sanctions on Russian aluminum. Spreads could tighten aggressively until market reaches a new balance.”
The LME 3mth aluminum price rallied to USD 3,849/ton when Russia attacked Ukraine. Price has now gained a little (+4.5%) to USD 2,254/ton on possible EU sanctions.
Aluminum premiums across the world. EU premiums rallied to USD 505/ton and USD 615/ton (duty unpaid and paid resp.) in 2022 vs normal USD 100-150/ton. Now gained a little on Mid-East troubles and rerouting. Could rise much more on EU sanctions.
Russia probably has a normal, net export of alu semies and primary alu of around 3 m mtpa. This would normally be destined to Europe.
Analys
Brent resumes after yesterday’s price tumble
Since last Friday’s close at USD 72.9 per barrel, Brent crude prices have seen an overall increase throughout the week, sustaining the upward momentum established in late October. However, trading yesterday was marked by significant volatility, including a sharp sell-off during the early morning and afternoon (CEST).
Global financial markets reacted predictably to Donald Trump’s victory, with US rates rising, the USD strengthening, and equities rallying (S&P 500 +2.5%, Dow Jones +3.6%, and Nasdaq +3.0%). In contrast, European equities fell (Euro Stoxx 50 -1.4% and OMX -0.9%), and rates were pushed lower.
The steep appreciation of the USD was a primary driver behind the substantial crude sell-off yesterday. Additionally, the market initially viewed Trump’s victory as potentially negative for global economic growth, with concerns over increased protectionism and reduced global trade, which could weigh on global oil demand.
On the other hand, Trump’s leadership may lead to tougher sanctions on Iran and Venezuela, potentially reducing their production and exports of crude oil to the global market. This could limit the downside risk for oil prices, although it’s unlikely to drive a substantial price increase on its own. Trump’s support for Israel’s defense against Iran could also raise the risk of further regional conflict, which might threaten Iranian crude supplies to a larger degree.
In the longer term, US policies under Trump could encourage further growth in domestic crude production, which reached a record high of 13.4 million barrels per day (mb/d) in August. Data released in late October showed that US crude production rose by 195,000 barrels per day (kb/d) to 13.4 mb/d, while US NGLs increased by 135 kb/d to 7.03 mb/d. When combining US crude, NGLs, biofuels, refinery gains, and adjustments, total US liquid production likely reached 23.13 mb/d in August. With US liquids demand at 20.4 mb/d, this results in a net export of 2.7 mb/d, complicating OPEC+’s plans for production increases.
Yesterday evening, crude prices rebounded significantly from the morning sell-off, reaching the current level of USD 75 per barrel. A minor pullback in the USD supported this recovery, but more importantly, the market is now weighing potential supply risks from the US election outcome and an impending Gulf of Mexico hurricane against increased US inventories and uncertainties around Chinese demand.
China’s oil imports declined again last month, highlighting continued soft demand. Stimulus measures are anticipated soon, with the legislature’s standing committee meeting this week. According to Chinese customs data, crude imports fell about 2% month-over-month to 44.7 million tons in October.
Hurricane Rafael has passed through Cuba and is expected to weaken as it moves toward the US coast. However, Bloomberg reports that approximately 1.55 mb/d of Gulf of Mexico production is now estimated to be impacted, down slightly from 1.6 mb/d. The Bureau of Safety and Environmental Enforcement (BSEE) reported yesterday that 304,418 barrels per day (or 17.4% of oil production) in the US Gulf has already been shut in – thus supporting prices to the upside.
Data from the US DOE yesterday showed a larger-than-expected increase in commercial crude inventories (excl. SPR), which rose by 2.15 million barrels from the previous week to reach 427.7 million barrels (see page 12 attached). Despite this increase, inventories remain about 5% below the five-year average for this time of year.
Total gasoline inventories rose by 0.4 million barrels and are approximately 2% below the five-year average, while distillate (diesel) inventories increased by 2.95 million barrels, remaining 6% below the five-year average.
Although crude inventories rose more than anticipated, signaling a bearish trend, total commercial petroleum inventories (crude and refined products) decreased by 1.1 million barrels last week, indicating that market conditions remain relatively tight in the short term!
Analys
Crude oil comment: A price rise driven by fundamentals
Brent crude prices have maintained their upward momentum, rebounding from last week’s low of USD 70.7 per barrel, spurred by relief over limited Israeli retaliation toward Iran, which left energy infrastructure (both oil and nuclear) undamaged. Since that point, as projected, prices have risen by USD 4.6 per barrel in just seven days.
This momentum has been further fueled in the last two days by changes in market fundamentals. Reports confirming OPEC+ plans to delay its previously scheduled oil production increase, originally set for December, have contributed to the continued rise, pushing prices up to the current level of USD 75.2 per barrel.
Late last week, Brent prices were also influenced by Iranian rhetoric, with Iran pledging further retaliation. The latest WSJ report suggests that Iran may be planning a ”strong and complex” response against Israel, likely after the US election. The report also notes that Israel’s October 26 strike inflicted significant damage on Iran’s air defenses, heightening tensions. While the timing of any Iranian response remains speculative, further hostilities between Iran and Israel appear very predictable.
Despite looming geopolitical uncertainty and the potential for a heightened risk premium, the impact of current market fundamentals remains significant. To our surprise, OPEC+ has confirmed it will postpone its planned December production increase of 180,000 barrels per day.
However, this deferral doesn’t remove the target of adding a cumulative 2.2 million barrels by December 2025. OPEC+ will continue to monitor the market, increasing supply as soon as conditions favor it, which will likely keep substantial oil price gains in check over the coming year.
Analys
OPEC+ holds back on December increase while US produces more
OPEC+ will not to lift production by 180 kb/d in December as planned. Of course an effort to prevent the oil price from sliding lower. US crude oil production is at the same time ticking up by 38 kb/d/month in September and the growth pace looks like it is ticking higher by the month as new US shale oil production is growing faster than losses in existing production. US crude oil reached a new, all-time high of 13.4 mb/d in August. The US is not making it easy for OPEC+. The group is trying to tell the US: ”Slow your growth, because we need to produce more!”. To no wain it looks. Iranian sabre-rattling helps to lift Brent this morning.
Brent crude fell 3.9% last week in a sense of eased Iranian-Israeli tensions. Brent crude traded in a range of USD 70.72 – 76.05/b last week and closed down 3.9% week on week on Friday at USD 73.1/b. The low point last week was driven by relief that the Israeli retaliation towards Iran looked fairly limited with no damage to either oil infrastructure or nuclear installations. Muted rhetoric from Iran Iran to start with also helped to drive the price to its low point last week. Iranian rhetoric with promises of re-retaliation increased through the week and the oil price rose along with that towards the end of the week. What is for sure is that there will be more rocket exchanges between Iran and Israel to come. That barrier is totally broken.
But tensions are rising again as Iranian re-retaliation is in the planning. News this morning (Wall Street Journal) is that Iran is planning a ’Strong and complex’ re-retaliation attack on Israel at some point after the US election. The article also states that the Israeli attack on Iran on 26 October severely damaged parts of Iran’s air defenses. This isn’t over.
OPEC+ holds back planned increase in December to avoid price declines. Brent rises 2% to USD 74.5/b this morning as OPEC+ decides to delay its planned increase of 180 kb/d in December. The planned increase of a total of 2.2 mb/d over a 12 month period has however not been called off. That still hangs over the market as a dark cloud. It tells the market that there is limited upside in the oil price in the year to come. Global demand acceleration in 2025 – OPEC+ will take that. Disruptions in supply in 2025 – OPEC+ will step in and take that. It is only a massive loss of supply involving the Strait of Hormuz which would be out of the hands of OPEC+ to cover.
US crude oil production at new all-time high in August of 13.4 mb/d. Not making it easy for OPEC+. US production reaches new all-time high in August at 13.4 mb/d. Monthly controlled data released in late October showed that US crude oil production increased by 195 kb/d to 13.4 mb/d and a new all-time high in August. US NGLs increase by 135 kb/d to 7.03 mb/d as well. If we add together US crude, NGLs, bio, refinery gains and adjustments, then total US liquids probably came in at 23.13 mb/d in August. With US liquids demand at 20.4 mb/d it leads to a net US liquids export of 2.7 mb/d
US shale oil production growth pace is ticking higher. US shale oil production grew at a marginal, annualized pace of 451 kb/d/month in September. The annualized growth pace was 401 kb/d in August. The pace is picking up. US shale oil producers are not making it easy for OPEC+.
US crude oil production reached a new all-time high in August at 13.4 mb/d. Production of NGLs also increased. US crude + NGLs + bio + refinery gains + adjustments puts US total liquids production at more than 23.1 mb/d in August.
US shale oil production grew at a marginal, annualized pace of 451 kb/d in. The growth pace is picking up as new production grows faster than legacy losses.
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