Demand Destruction Could Help America Refill Its Oil Inventories
U.S. petroleum inventories are still sitting at multi-year lows for this time of the year despite record releases from the Strategic Petroleum Reserve (SPR), reports of weakening gasoline demand over the past weeks because of high prices, and a slowing economy. Commercial crude and product stockpiles have failed to rebuild over the last few months, and the low levels point to continued tight markets for gasoline and diesel in the short term, potentially supportive of oil prices. Yet, emphasis has been placed on a fall in U.S. gasoline demand in recent weeks after the national average price hit a record $5 a gallon in the middle of June. This, combined with fears of a recession, have weighed on WTI Crude prices. The U.S. benchmark hit this week its widest discount in over three years compared to the international Brent Crude benchmark. This faltering demand for gasoline has weighed on WTI, while Brent prices reflect tight global physical supplies, buoyed by Russia’s war on Ukraine and Western sanctions, as well as the European Union ban on Russian oil set to be implemented before the end of this year. The biggest discount of WTI to Brent in three years is driving a surge in U.S. crude oil exports, which hit a record high of 4.5 million barrels per day (bpd) in the reporting week to July 22. The most recent data, however, shows that gasoline demand destruction isn’t as clear-cut as it initially looked, with the four-week average gasoline demand still trending upward, according to EIA data. Despite signs of downward price pressures on WTI Crude, the lowest U.S. petroleum inventories in years—for some products in decades—are one strong bullish factor for oil prices, although it’s not a given that it could outweigh market fears of recession. In the latest reporting week to July 22, commercial crude oil inventories declined by 4.5 million barrels, the EIA data showed. At 422.1 million barrels, U.S. crude oil inventories are about 6% below the average for this time of the year. In gasoline, inventories decreased by 3.3 million barrels last week and are about 4% below the five-year average for this time of the year. Distillates, which include diesel, have been the tightest market this year, with current stockpile levels 23% below the seasonal five-year average. Distillate fuel oil inventories, which are most closely related to the economic cycle, are at the lowest for the time of year since 2000, according to data compiled by Reuters market analyst John Kemp. So far in the third quarter, distillate stockpiles have risen by less than 1 million barrels, an unusually low pace of inventory builds. This is one of the tiniest distillate inventory builds of the past four decades, Kemp notes. An economic slowdown could help rebalance those very low levels of distillate stocks, but the rebalance could need a deeper and longer downturn in activity, Kemp argues. Indeed, the U.S. economy is slowing down. The advance estimate from the U.S. Department of Commerce showed on Thursday that GDP contracted by 0.9% in the second quarter, following a 1.6% decline in Q1. In theory, the GDP data met one common definition of a recession—two consecutive quarters of GDP contraction. But policymakers insist the ‘technical’ recession is not a broad-based recession because many areas in the economy are still going strong, especially the labor market, and external conditions pushing inflation higher are unique. “When you’re creating almost 400,000 jobs a month, that is not a recession,” U.S. Treasury Secretary Janet Yellen said on NBC’s Meet the Press last weekend, a few days before the GDP data was released. Policymakers admit there is a slowdown, but the U.S. economy doesn’t present broad-based signs of a recession. “I do not think the U.S. is currently in a recession. And the reason is there are just too many areas of the economy that are performing too well,” Fed Chair Jerome Powell said at a press conference this week after the Fed announced another 75-basis-point hike in key interest rates. “Really the growth was extraordinarily high last year, 5 and a half percent. We would have expected growth to slow. There’s also more slowing going on now,” Powell said, reiterating the Fed’s goal of a “soft landing.” “If you think about what a recession really is, it’s a broad-based decline across many industries that sustain for more than a couple of months and there are a bunch of specific tests in it. And this just doesn’t seem like that,” the Fed Chair added.
Green Hydrogen Can Help Latin America’s Energy Transition
With countries and energy companies around the world looking to accelerate their transitions towards cleaner energy resources, Latin American nations are developing plans to scale up the production, consumption and export of so-called green hydrogen, which is generated from clean energy resources. One of the most recent, high-profile developments came in June, when the Argentine province of Tierra del Fuego – located at the southernmost tip of South America – outlined plans to develop a hydrogen and ammonium industry. The province is attempting to utilise the region’s ample wind resources to attract $6bn in investment in technologies to produce the fuel. This includes investment in wind farms to generate electricity that can be used to power electrolysers, which remove oxygen atoms from water to produce hydrogen. Once established, some of the project’s hydrogen will be used to make ammonium, which in addition to being used to create fertiliser, can also serve as a carrier fuel for transporting hydrogen through pipelines to downstream markets. Along with renewable sources like solar and wind, hydrogen is seen as a potential low-carbon or zero-carbon fuel that is key to the transition away from fossil fuels. While countries across Latin America and the Caribbean are focused on green hydrogen, hydrocarbons-producing countries like Argentina, Colombia, and Trinidad and Tobago can use carbon-capture utilisation and storage technologies to remove carbon emissions from their production process and generate so-called blue hydrogen. The Tierra del Fuego announcement comes as appetite for hydrogen – and its economic and environmental benefits – continues to grow. While there were just three hydrogen pilot projects in Latin America in 2019 – in Argentina, Chile and Costa Rica – by 2021 the region had a pipeline of more than 25 projects, according to the International Energy Agency, with many of them GW-scale mega-projects that intend to export hydrogen to Europe and Asia. Economic benefits Hydrogen has significant potential as a clean energy substitute for fossil fuels in power generation, most notably in the energy-intensive industrial sector, but also as a transport fuel across numerous sectors. Argentina and Brazil have the most expansive hydrogen plans on the continent and are also looking to become major export hubs to feed markets in Europe, the centre of the world’s hydrogen demand, and Asia. As the world’s second-largest producer of hydroelectric power and home to substantial wind and solar resources, Brazil has significant potential to produce hydrogen. Some estimates suggest the country could earn $4bn-6bn by 2040 through the export of hydrogen to the EU and the US alone. In the country’s north-east, the $5.4bn Base One green hydrogen project will be the world’s largest when completed, capable of producing 600,000 tonnes per year from 3.4 GW of combined solar and wind power generation capacity. Beyond energy, hydrogen has important applications for the food sector, among others, highlighting the positive effects that developing hydrogen can have in addressing global challenges. “Hydrogen has multiple applications, not only for the energy sector but in the manufacturing of fertilisers, which is of an increasingly critical concern for countries around the world,” Rodrigo Rodriguez Tornquist, Secretary of Climate Change, Sustainable Development and Innovation at Argentina’s Ministry of Environment and Sustainable Development, told OBG. “Globally, three major crises are being discussed: the energy, food and environmental crises. Hydrogen is a key component in all three, as it generates a more sustainable energy solution, enables food production and accelerates the decarbonisation of the economy.” Reaching export markets To fulfil their hydrogen ambitions, Latin American countries need to consider the most challenging and expensive part of the energy industry: transport. This will likely involve both internal pipelines for intracontinental markets and seaborne export terminals to reach Europe and Asia. One of hydrogen’s most appealing aspects is that hydrocarbon pipelines can be repurposed to transport it. Latin America and the Caribbean already has strong pipeline networks in both the north, starting from Venezuela and T&T, and the south, from Bolivia, which feed into Argentina and Brazil and could serve these export ambitions. In Tierra del Fuego’s case, the province’s location at the tip of South America means that it is also eyeing potential exports to Asia. Aside from supplying export markets, the production of hydrogen could also result in the use of more cost-effective and environmentally friendly fuels domestically. “Latin America not only has the potential to supply high-demand international markets like Europe, which has been more aggressive in its clean energy adoption, but also to displace imported fuels,” Alfonso Blanco, executive director of the Latin American Energy Organization, told OBG. “The large natural advantages of countries like Argentina and Chile to produce renewable energy enables the low-cost and large-scale production of green hydrogen.” Development timelines Hydrogen’s uptake in the global energy system will be decades-long, with most mega-projects in Latin America looking to 2030 as a target date for completion. This timeline gives governments more time to establish the regulatory, institutional, legal and commercial frameworks that will allow hydrogen to penetrate the global energy system in a meaningful way. For instance, one of the largest projects in Latin America is the $8.4bn Pampas facility in Argentina’s Río Negro province, which seeks to generate 15 GW in power that will produce 2.2m tonnes of green hydrogen by 2030. Similarly, Uruguay has crafted a roadmap for hydrogen that aims to build 10 GW of renewable energy to power electrolysers as part of plans to become a net-exporter in the 2030s. Ultimately, the key to developing such capital-intensive, low-carbon hydrogen projects will be cooperation between government and business, which industry figures say must continue to include incentives for renewable energy. “On a global level, hydrogen will allow for the decarbonisation of many sectors – in terms of not only electricity generation, but also energy consumption, especially in the industrial and transport sectors,” Rodriguez Tornquist told OBG. “However, this transition requires a long-term roadmap and significant resources, which will require all stakeholders in the public and private sector to align their needs and expectations.”
Decoding oil price math: Indian Oil loses Rs 10 a litre on petrol, Rs 14 a litre on diesel
Oil PSU Indian Oil Corporation suffered a loss of Rs 10 on selling a litre of petrol and Rs 14 a litre on diesel during the April-June quarter, according to a report. IOC, the nation’s largest oil refining and fuel retailing firm, reported a net loss of Rs 19.9253 billion in the June quarter as compared to Rs 59.4137 billion of net profit in the same period a year ago and Rs 60.219 billion in the preceding January-March quarter. “IOC (Indian Oil Corporation) reported an 88 per cent year-on-year decline in its standalone EBITDA to Rs 13.589 billion and a net loss of Rs 19.925 billion, despite record high gross refining margins (GRMs) of USD 31.8 per barrel for the quarter,“ ICICI Securities said. Earnings decline was driven by a sharp fall in retail fuel margins for petrol and diesel with an estimated net loss of Rs 10 per litre for petrol and Rs 14 a litre for diesel for the quarter and inventory loss of Rs 15-16 billion due to excise duty cut in the quarter, it said. IOC and other state-owned firms Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) have kept prices on hold despite a rise in input cost. The basket of crude oil India imports averaged USD 109 per barrel, but the retail pump rates were aligned to about USD 85-86 a barrel cost. This is the first quarterly loss for IOC in over two years. The company had reported a net loss in January-March 2020, but that was on account of inventory losses on processing costlier crude. “While GRMs have come off post the Q1 highs to levels of USD 11.8 per barrel (a low of USD 0.8 per barrel was reached in the third week of July), marketing margins have improved owing to lower product prices. Therefore, we do factor in lower losses for FY23 (April 2022 to March 2023) and GRMs sustaining at USD 17-18 per barrel levels over the full year,” ICICI Securities said in the report. IOC, BPCL and HPCL stopped revising rates ahead of assembly elections in states like Uttar Pradesh last year. That 137-day freeze ended in late March, with prices being raised by Rs 10 per litre each before another round of freeze came in force in early April. This is despite international oil prices soaring to multi-year high on supply concerns following Russia’s invasion of Ukraine.
Tullow Oil in talks with Indian groups over Kenyan project
Executives from Tullow Oil (TLW.L) held talks with India’s ONGC Videsh Ltd (ONVI.NS) in Nairobi this week as the London-based firm seeks a strategic investor for its onshore oil project in Kenya, the company said on Saturday. A senior official at Kenya’s Ministry of Petroleum and Mines tweeted earlier this week that ministry officials had met the Indian High Commissioner to Kenya along with representatives of ONGC Videsh, the overseas investment arm of Oil and Natural Gas Corp, and Indian Oil Corporation Limited (IOC.NS). “The meeting was positive and the parties agreed to hold further discussions in the coming weeks,” Africa-focused Tullow said in a tweet about the meeting, adding that the talks had been hosted by the ministry of petroleum and mines. Africa-focused Tullow said earlier in July it was confident it could make substantial progress to find an investor for its onshore oil project in the East African country in the second half of the year.
India Opening More Channels to Buy Shunned Russian Crude
According to a report by Bloomberg, a swarm of smaller and less well-known oil traders are making their way to India to sell Russian crude, offering greater discounts and new channels for Indian buyers to purchase supplies rejected by the West. India has already been importing crude from Russia at a markdown amid Western sanctions, which has resulted in the country becoming one of Russia’s largest oil consumers since Russia’s invasion of Ukraine. Some overseas dealers have reportedly been offering Russian Urals barrels at markdowns of approximately $8. It has been reported that state-run refineries such as Indian Oil Corporation are mulling over these deals because they involve less red tape than purchasing straight from Russia. According to the statistics provided by Kpler, Indian Oil has been importing crude from Russia at a rate never seen before, allowing it to pass its private competitors and set a new record. India’s imports of Russian barrels increased by 3 percent, reaching about 1 million daily. Inflows averaged 450,000 barrels daily in July, a 44 percent increase from the previous month. Wellbred and Montfort have begun marketing Russian oil to Indian clients, joining Coral Energy and Everest Energy as additional traders appear to fill the void left by larger traders like Vitol Group, according to unnamed authorities. Some traders are beginning to accept payment in other currencies, such as the Dirhams used in the United Arab Emirates. Separately, India’s Reserve Bank of India (RBI) has revealed plans to settle international transactions in Indian Rupees. Even before the world’s top oil traders reduced their handling of Russian crude exports in May, India’s typically more agile private petro refiners, such as Rosneft-backed Nayara Energy Limited and Reliance Industries Limited, had already increased their purchases from the smaller traders. According to Bloomberg, Sri Lanka has also turned to international traders. In May, the country received a consignment of oil from Russia (via a vessel chartered by Coral Energy), and in July, it purchased even more of the commodity.