Oil & Energy

Date Issued – 8th March 2024

Courtesy of Steve Alain Lawrence, Chief Investment Officer

Janis Urste, Chief Market Strategist

OPEC+ Elevates Oil Prices Amid Persistent Risks

April West Texas Intermediate (WTI) crude oil futures have oscillated due to factors like U.S. stock levels, OPEC+ production cuts, China's oil demand, Middle East tensions, and Federal Reserve policy outlooks. OPEC+'s extension of production reductions aims to balance the market, while the U.S. EIA report suggests strong fuel demand with less-than-expected crude inventory rises. China's selective import behavior and Federal Reserve Chair Jerome Powell's cautious stance on rate cuts add to the market's complexity.

The interplay of supportive elements like OPEC+ strategies and geopolitical concerns against demand uncertainties and potential supply increases from non-OPEC+ countries creates a mixed outlook. Short-term, WTI futures may edge higher due to supply cuts and tensions, but the overall direction remains sensitive to China's demand and global economic shifts, emphasizing the need for investor vigilance.

Guyana Dominates European Oil Imports

Guyanese crude exports to Europe reached a record 432,000 barrels per day (b/d) in February, buoyed by Europe's keen interest in the new Payara Gold stream. This surge in Guyanese oil has led to a notable drop in prices for Europe's Johan Sverdrup grade, the continent's largest producing field, which has shifted from multi-dollar premiums to a $3 per barrel discount due to the influx. Guyana's oil production is on track to exceed 1 million b/d by late 2026, thanks to the upcoming Yellowtail, Uaru, and Whiptail projects, each contributing 250,000 b/d, signaling a significant boost in the country's oil output.

China's Coking Coal Sector Seeks Government Shield

Zhao Jianze, chairman of China's leading coal miner, advocates for government intervention in the coking coal industry to mitigate the effects of "disorderly competition" and stabilize prices, which have been hovering around ¥1,750 per metric ton ($240/mt). As a member of China's consultative conference, Zhao's proposal to regulate output and integrate smaller producers into state-owned entities could gain traction in policy circles. This comes as China's coking coal sector faces challenges, including increased reliance on imports, predominantly from Australia, due to domestic production struggles. These challenges are compounded by regulatory checks following a series of fatal mining incidents, underscoring the need for a more managed approach to ensure safety and supply stability in the coking coal industry.

Iranian Oil Production Robust in Face of Sanctions

Despite pressures from the White House, Iran's oil production has reached its highest levels since the lifting of sanctions, surpassing 3 million barrels per day (b/d) since August 2023. This surge has led to calls within the US for stricter sanctions enforcement. Data from Kpler indicates that Iran's seaborne oil exports climbed to 1.38 million b/d in the first two months of the year, marking a 17% increase from the previous year, with China being the primary buyer.

Analysts suggest that the Biden administration may refrain from adopting a more aggressive stance towards Tehran, aiming to avoid escalating Middle East tensions and to preserve the potential for nuclear negotiations in 2025. Concurrently, the US has urged Iran to dilute its uranium enriched to 60% purity, highlighting concerns that, despite any downblending, Iran possesses sufficient material for two nuclear weapons by International Atomic Energy Agency (IAEA) standards.

Anticipated Sanctions Spur China's Carbon Market

China's carbon market is witnessing a surge, with spot prices reaching a record high of ¥83 per metric tonne ($11.6/mt), marking an almost 20% increase since late January. While still significantly lower than European carbon prices, China's market is poised for growth as new regulations set to take effect in May will reduce free allowances and introduce stricter penalties. Analysts speculate that the current price rally, driven by power producers rushing to meet compliance, may not sustain post-May. Presently, the carbon market in China encompasses only the thermal power generation sector, but plans are underway to expand it to include refining, chemicals, steel, construction, and aviation by 2025.

Cooling Trends Ahead for Asia's Diesel Market

Asia's diesel profit margins have remained robust, consistently staying above $20 per barrel. However, the increased diesel production in India and China is anticipated to challenge the profitability of middle distillates. During the Lunar New Year holidays, Chinese refiners prioritized domestic demand, resulting in a significant reduction in diesel exports, which fell by 65% year-on-year to 180 thousand barrels per day (kbd). With the holiday period over, March is expected to witness a surge in diesel exports from China, mirroring India's resumed diesel shipments to Europe following disruptions caused by Red Sea attacks in January. Despite these developments, the outlook for diesel profit margins in Asia looks positive, especially as the region enters its refinery maintenance season in April and May, likely reducing diesel supply to the market.

Africa Seeks Boost in LNG Production

Africa's premier LNG exporters—Algeria, Angola, Egypt, Libya, and Nigeria—are striving to revive their LNG sectors after years of stagnation, despite facing distinct challenges. Nigeria, once Africa's leading LNG exporter, has seen a continued decline in exports, marking its fourth year-on-year decrease with only 13.40 million tonnes exported last year, due to an ongoing force majeure. Egypt, which traditionally aligned its LNG exports with the winter season to capitalize on lower domestic demand, has experienced a significant drop in exports following the cessation of gas supplies from Israel's offshore fields, reducing shipments to just one or two cargoes monthly. While Algeria and Angola have demonstrated promising growth, the future of Africa's LNG market is closely tied to European demand, which absorbs two-thirds of the continent's exports, underscoring the critical role of European market health in Africa's LNG industry resurgence.

Zinc Prices Surge, Overcoming Past Lows

Zinc stands out as one of the top-performing metals globally, rallying on the London Metal Exchange due to news of constrained supplies. China, amidst its National People’s Congress, has sparked interest with proposals to rejuvenate its flagging property sector, including a government insurance scheme for pre-sale revenues. This news, alongside expectations of a Chinese economic rebound, robust demand indicators, and a production cut at South Korea's Young Poong's Seokpo smelter, has propelled zinc prices to $2,540 per metric tonne. Despite anticipations of potential resistance at prices above $2,600 per metric tonne, the forecasted surplus in zinc supply is unlikely to occur as producers face challenges in ramping up production.

U.S. Prepares for Sanctions Renewal on Venezuela

Venezuela has scheduled its presidential election for July 28, with incumbent Nicolás Maduro as the sole candidate, following the disqualification of opposition contender Maria Corina Machado over allegations of financial misconduct. This move, alongside Maduro's claim over Guyana's Essequibo region, tests the conditions of the U.S.'s sanctions relief, which hinges on the promise of free and fair elections. The U.S. has indicated sanctions could be reimposed by mid-April if the democratic process is not upheld.

The potential return of sanctions poses challenges for oil traders and companies like Chevron, which plans to continue operations and drill 30 new wells in the Orinoco Belt, targeting an additional 250,000 barrels per day (bpd) by next year, pending sanctions status. Venezuela's oil sector, already under strain, faces further decline with renewed sanctions, amidst infrastructure bottlenecks and reduced production capabilities. Despite recent increases, Venezuela's oil output remains far below its 1997 peak, contrasting sharply with neighboring Guyana's rising export volumes.

[Disclaimer: This article provides financial insights & developments for informational purposes only. It does not constitute financial advice or recommendations for investment decisions.]

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