The Global Diesel Crunch Is Going To Get Worse
Despite signs of weakening economic growth globally, regional diesel markets are tight and could tighten even further when winter comes and when Europe bans imports of Russian crude and fuels. Distillate fuel inventories are low in the United States and Europe. Stockpiles in the U.S. haven’t increased this summer as usual, and in one month since the end of June, they have seen the biggest drawdown for this time of the year in at least 32 years. The fuel market in Europe is even tighter as industries and utilities look to switch to oil products from natural gas, whose prices are at record highs after Russia slashed deliveries to the EU and showed it could not be considered a reliable energy supplier. Over the next few months, the shortages could become even worse when heating season begins, which will coincide with the planned EU ban on imports of Russian seaborne fuels at the start of 2023. The U.S. exports growing volumes of diesel to Europe, but it is unlikely to ramp up flows much higher because American inventories are also well below seasonal averages while refineries already operate at close to capacity levels. Distillate fuel inventories in the United States fell by 2.4 million barrels in the week to July 29 and are about 25% below the five-year average for this time of year, the latest weekly inventory report by the EIA showed this week. At 109.3 million barrels as of July 29, the stockpile of diesel, heating oil, and other distillate fuel oils currently sits at its lowest level for this time of the year since 1996, according to estimates from Reuters market analyst John Kemp. Typically, U.S. distillate fuel inventories rise during the summer season when refiners process crude into more gasoline to meet summer driving season demand. But this has not been the case this year. In fact, distillate stocks fell in July by up to 3 million barrels, which is the largest seasonal drawdown since at least 1990, Kemp notes. In Europe, the looming EU embargo on Russian crude and products is prompting traders to source growing amounts of diesel from non-Russian sources. The U.S. has been one such source, and its exports hit 1.4 million bpd in July, the highest in five years. A lot of the increase is coming from Europe. Europe itself hasn’t made a significant advance in cutting its diesel imports from Russia – it actually increased imports of Russian diesel in July, data from energy analytics firm Vortexa showed this week. European diesel imports from Russia rose to an unseasonably high level of 680,000 bpd in July, up by 13% month-on-month and 22% year over year, and outpacing non-Russian supplies by about 200,000 bpd, according to Vortexa data. “Overall it appears questionable whether Europeans will manage to fully carry through on the announced diesel import ban, given record diesel prices already over the last five months, Europe’s rising rather than falling dependency on Russian diesel, limitations within the global refining system, and the likely significant role of diesel as a replacement fuel for natural gas and power shortfalls. The above will challenge the resolve of Europe and its politicians in particular,” Vortexa Chief Economist David Wech wrote. Going forward, it will be crucial to see if U.S. refiners – attracted by high European margins – would produce more diesel for export to Europe, Wech told the Financial Times. According to U.S. refiners, there isn’t much room for a further increase in diesel shipments from America to Europe. Gary Simmons, Executive Vice President and Chief Commercial Officer at Valero Energy, said on the Q2 earnings call last week that “It’s going to be a real challenge for us to be able to supply a lot more diesel into Europe.” With U.S. inventories low and “the industry basically running all out,” “it’s very difficult for me seeing that there’s going to be a lot of flow from the U.S. into Europe,” Simmons added. Fuel supply across Europe is being further disrupted by critically low water levels on the River Rhine, a major petroleum product transportation corridor. The German unit of OMV told Bloomberg it “is observing a current run on heating oil and diesel.” Even as economies slow down, the fuel switch to oil from gas in Europe as we approach the winter heating season is likely to support distillate fuel demand and potentially tighten the diesel market further.
Turkey Agrees To Pay For Russian Gas With Rubles
Turkey’s President Tayyip Erdogan and Russia’s President Vladimir Putin agreed on Friday to bolster cooperation after a four-hour meeting, a joint statement from the two nations has revealed as cited by Reuters. As part of the deal, which would increase cooperation in the transportation, agriculture, finance, and construction industries and present a seemingly united front against “terrorist organizations” in Syria, Turkey agreed to change how it pays Russia for natural gas. Under the new agreement, Turkey has agreed to pay Russia partially in rubles, Deputy Prime Minister Alexander Novak said after the meeting. Russian President Vladimir Putin announced months ago that unfriendly nations would be required to pay for Russian energy through a rubles account to insulate Russia from the effects of Western sanctions. While Russia would not consider Turkey an unfriendly nation, Turkey’s payment in rubles for Russia’s natural gas would protect those payments from sanctions, and could smooth things over with Moscow, who might otherwise frown on Turkey’s activities in Syria. Last month, Turkey also helped broker a deal to ship grain between Russia and Ukraine, further strengthening ties between Russia and Turkey. Turkey opposes the Kurdistan Workers’ Party (PKK) and its affiliate, YPG—long considered by Turkey, the United States, and the EU to be a terrorist group—which has waged an insurgency for decades against the Turkish government in support of Kurdish minorities in Turkey. Russia has strong ties with Syrian President Bashar al-Assad, who controls most of the airspace in northern Syria. Erdogan, facing an election next year, is in a complicated situation, with Turkey experiencing skyrocketing annual inflation of nearly 80%. This economic crisis would no doubt intensify without Russian gas supplies. Turkey imports nearly half of the gas it uses from Russia.
Dodgy Demand Data? The Oil Price Collapse Conspiracy
WTI crude oil prices fell to their lowest point since early February on Thursday, giving up virtually all gains since Russia invaded Ukraine. WTI crude for September delivery tumbled -1.5% to close at $89.26/bbl while Brent crude for October delivery fell -2.1% to $94.71/bbl. WTI crude has lost ~9.5% over the course of the week, marking the largest one-week percentage decline since April amid growing fears that oil demand will collapse when western nations descend into a full-blown recession. While oil producers are certainly beginning to feel the heat, it’s refiners like Valero Energy (NYSE: VLO), Marathon Petroleum Corp.(NYSE: MPC), and Phillips 66 (NYSE: PSX) who have been hardest hit by the pullback thanks to a sharp decline in their refining margins aka crack spreads. For months, refiners have been enjoying historically high refining margins, with the profit from making a barrel of gasoil, the building block of diesel and jet kerosene, hitting a record $68.69 in June at a typical Singapore refinery. The margin later settled in the high 30s a few weeks later, a level still nearly four times higher than the $11.83 at the end of last year, and some 550% above the profit margin at the same time in 2021. But crack spreads have now gone into full reverse: according to Refinitv data, Asian gasoline margins plunged more than 102% in July to a discount of 14 cents a barrel to Brent crude, a far cry from a premium of $38.05 a barrel they reached in June. Asian refining margins have now crashed to just 88 cents a barrel over Dubai crude, from a record $30.49 in June. The effect: a sharp rise in inventories from the United States and Singapore to Amsterdam-Rotterdam-Antwerp. Refiners are being forced to cut gasoline output to minimize losses and switch to producing more profitable fuels. Indeed, Taiwan’s Formosa Petrochemical Corp. (6505.T), Asia’s top fuel exporter, is planning to reduce operating rates at its residue fluid catalytic cracking (RFCC) units by 5% in the coming weeks, with a Formosa spokesman telling Reuters that the company plans to sell more very low sulphur fuel oil (VLSFO) due to higher margins for those products. The Big Conspiracy The collapse in oil prices has been so epic and unexpected that some oil pundits are now accusing the Biden administration of fabricating low gas demand data in a bid to hammer oil prices. To wit, in late June the EIA shut down reporting for several weeks, ostensibly due to a server malfunction. But as ForexLive has pointed out, gasoline demand data has been consistently bad ever since the EIA returned: “Maybe there’s an issue with reporting or maybe it’s a conspiracy”, ForexLive has declared. Even Wall Street has begun questioning the EIA data. Bank of America energy strategist Doug Legate has published a note titled the “fall of gasoline demand appears grossly exaggerated.’’ “For the week ending July 22nd, implied gasoline demand rebounded to 9.2 million b/d – a 1 million b/d increase vs the last two week average, and the second highest level of 2022,” BofA wrote in the note to clients. Curiously, the EIA reported a steep drop in gasoline demand shortly thereafter, prompting Piper Sandler global energy strategist to label the data “crooked”, saying the methodology left “significant room for error”. Related: What’s Really Happening With Gasoline Demand? “We are supposed to believe that in July, in the middle of driving season we are only using 8.6 million barrels per day. That would be down half a million barrels a day from May of this year; that would be below the Covid low of 2020,” Sandler noted. “So we ask all the refiners, we ask all the retailers, we ask everybody that reported earnings this season. Every single one of them tells you that their sales are not down materially from even pre-covid days. Some report record high sales,” he added. Piper Sandler’s allegations are buttressed by U.S. refining giant Valero. Asked about falling gasoline demand at the company’s earnings call last week, CEO Gary Simmons had this to say: “I can tell you, through our wholesale channel there is really no indication of any demand destruction… In June, we actually set sales records. We read a lot about demand destruction and mobility data showing in that range of 3% to 5% demand destruction. Again, we’re not seeing it in our system.” Further, alternate demand data from GasBuddy deviates considerably from EIA’s. GasBuddy tracks retail gasoline demand at the pumps in the U.S. According to GasBuddy, there was a 2% rise in gasoline demand last week, making it the strongest demand of the year. In sharp contrast, the EIA reported a 7.6% drop in demand for the same time period. The Biden administration certainly is gunning for even lower fuel prices. In an interview with Bloomberg on Tuesday, Amos Hochstein, the White House’s senior adviser for global energy security, said that gas and oil prices need to go even lower while U.S. producers and OPEC+ need to raise output. But as Adam Button, chief currency analyst at Forexlive, notes, it’s the Biden administration calling the shots now, and “at the end of the day, traders have to trade what’s in front of them”. “Right now it’s a crude chart that’s breaking support after a major period of consolidation — that’s not good. The calls for a recession are growing louder crude demand has a long history of following global growth. There are supply factors that will eventually be bullish — like the SPR releases ending in October — but that’s months away and OPEC is still adding some barrels,” he said.
How India is gravitating towards a gas ecosystem
India has been a predominantly fuel economy. The country’s current energy mix is characterized by low domestic production, high dependence on coal imports, and growing use of natural gas along with renewable energy for electricity. In 2020, the country imported crude oil worth $59 billion, which is, by far, the largest item of its total import bill. Natural gas is an essential energy source in many parts of the world because it emits almost 50% less carbon dioxide than other forms like coal or diesel when burned for power generation or vehicles, respectively. Thus, making it more environmentally friendly than conventional sources such as diesel or coal-fired thermal plants used across sectors. The country is now rapidly moving towards a gas-based economy. This shift will lead to greater competition, enhanced flexibility and transparency, modern and improved processes, ease of doing business, and investor confidence. Such measures will also encourage import substitution through local manufacturing by MSMEs. In such a scenario, where India is moving towards becoming an exporter of energy sources such as crude oil and natural gas, it will become an important stepping stone towards the vision of ‘Make in India.’ The recent changes in the Petroleum and Natural Gas Regulatory Board Act The Petroleum and Natural Gas Regulatory Board Act initiatives have increased private players’ participation in natural gas. The government has developed policy guidelines for onshore and offshore exploration, production, and testing under the New Exploration and Licensing Policy (NELP) Blocks. • The revenue sharing model adopted by the government has helped monetize marginal fields of National Oil Companies (NoCs) under Discovered Small Fields (DSF) Policy, with policy for grant of extensions to medium fields. • The policies for uniform licensing in hydrocarbon exploration and marketing freedom for gas produced from deep water are significant steps towards a sustainable future. • Significant progress has been made in operationalizing stranded R-LNG power plants and developing gas-consuming markets for a cheap supply of raw materials such as fertilizers to the farmers. • In a rare scenario, the government has also decided to give a capital grant as VGF to GAIL for pipeline infrastructure development. This will help connect the eastern parts of India with the National Gas Grid. These reforms come as a part of the series of new policy initiatives such as LPG cylinders subsidy, EoI to procure Compressed Bio Gas (CBG), and the recently announced policy for exploration of coal bed methane resources to leverage India’s potential. Consequently, India’s primary energy mix is expected to comprise approximately 15% natural gas by 2030, as per “Vision 2030: Natural Gas Infrastructure in India” of the Petroleum & Natural Gas Regulatory Board. The greater economic impact of the shift The government has been trying to make the economy more efficient, reduce India’s dependence on fossil fuels, prevent pollution, and increase employment opportunities. Import substitution and job creation are some of the significant benefits that would be derived from a move toward natural gas as an alternate fuel source, the share of which has averaged 6% of India’s total primary energy supply (TPES) in the last decade. Natural gas is being adopted rapidly by sectors for power generation, especially heavy industries like steel production, because it’s cheaper than diesel and can be used in industrial processes incompatible with the fuel. India is aiming to be self-sufficient in energy products, in addition, to becoming a net exporter of other commodities. Final thoughts India’s natural gas Exploration and Production (E&P) industry has evolved phenomenally since the 2000s, with the capacity to trap reserves up to 3 km below sea level. The government has also approved 100% FDI in the E&P efforts. With the government trying to make the process of bidding and marketing for natural gas more transparent and accessible, it is a matter of time before India completely shifts towards a gas ecosystem.
Russia Becomes Second-Biggest Crude Oil Supplier To India, Surpasses Saudi Arabia
In order to increase the market share amid competition, Russia is now offering oil to India cheaper than Saudi Arabia. During April-June, Russian crude was cheaper than Saudi Arabia with the discount widening to almost $19 per barrel in May. Russia surpassed the kingdom as the second-biggest supplier to India in June, ranked just behind Iraq, according to a report by Bloomberg. India is dependent on imports to meet 85 per cent of its oil needs. After Russia’s invasion in Ukraine, the Russian oil prices fell as most countries shunned it. During the period, India and China have become willing consumers. According to official data, India’s crude import bill increased to $47.5 billion in the second quarter after a surge in global prices coincided with rebounding fuel demand. That compares with $25.1 billion in the same period last year, when prices and volumes were lower. Oil has tumbled recently on concerns over an economic slowdown, offering some respite to consumers. “Indian refiners are going to try and get their hands on the cheapest crude possible that works with their refinery and product configurations… Russian crude fits that bill for now. The Saudis and Iraqis are not entirely losing out because they are directing more supply to Europe,” said Vandana Hari, founder of Vanda Insights in Singapore, according to the Bloomberg report. While the discount of Russian oil to Saudi crude narrowed in June, barrels were still around $13 cheaper, averaging about $102. India increased Russian oil imports by 4.7 times in April-May, or by more than 400,000 barrels per day (bpd), year-on-year, thanks to a price discount, the Russian central bank said on Tuesday. Indian refiners have been snapping up relatively cheap Russian oil, shunned by Western companies and countries since sanctions were imposed against Moscow for what it calls a “special military operation” in Ukraine. The central bank also said that China increased Russian oil purchases by 55 per cent in May as Russia surpassed Saudi Arabia as the top oil seller to China. India and China have bought oil, gas and coal worth $24 billion from Russia in only three months after its invasion of Ukraine. Out of this, India spent $5.1 billion on Russian oil, gas and coal, more than five times the value of a year ago. China spent $18.9 billion in the three months to the end of May, almost double the amount a year earlier. The $24 billion is an extra $13 billion in revenue for Russia from both countries compared to the same months in 2021. Russia has been offering big discounts on its energy exports, which prompted India to buy more from the country. Russian oil arrivals into India for May were at 740,000 barrels a day, up from 284,000 barrels in April and 34,000 barrels a year earlier, according to data from Kpler.