The Global Gas Crisis Is Spilling Into The United States
Both experts and everyday consumers remain at odds about the current state of the global natural gas market. The main point of contention is whether U.S. prices will drop significantly or rise further. With inflation hitting record highs this past year, nobody can blame consumers for being wary. Most experts agree that gas prices and demand will keep up their pace. The ongoing European energy crisis weighed into this heavily. EU countries continue to search for alternatives to Russian fuel. However, Europe’s energy problems will likely ripple into the entirety of the international energy market. In fact, it might be happening already. LNG Crisis in Europe Spilling into the U.S. The Nord Stream 1 pipeline running at low capacities could hit the U.S. harder than expected. With sky-high gas prices across Europe and dwindling reserves, the EU has been scouring the world for alternatives to Russian energy. Because of this, global gas competition recently experienced a sharp – and ongoing – rise. Along with this, the winter months will prove the most strenuous on the average consumer’s wallet. After all, millions of American and European homes rely on natural gas for heat. With winter quickly approaching, the situation looks grim. While bills like the Inflation Reduction Act will likely take some of the pressure off of natural gas demand in the US, those initiatives will take time to implement and build. The real question remains; will they be ready in 3-4 months’ time? On the positive side, Europe’s frantic search for solutions could pay off in the near future. Already, countries like Norway, the US, and the UK have stepped up to aid Germany and other central EU nations in getting alternative gas imports. However, whether or not these sources are enough to tide the EU over through winter remains up for debate. Asia Watching Natural Gas Reserves Closely With competition for natural gas hitting a fever pitch, many speculate gas prices will continue rising worldwide. Not only are natural gas supplies in the US being shipped to Europe to aid with the energy crisis, but record-setting heat waves mean more power consumption as American, and European homes are relying more and more on air conditioning. Even Asia has started feeling the strain of the Western energy crisis these past few weeks. For instance, Japan has begun looking for alternative sources of natural gas in light of the war in Ukraine and gas shortages in Europe. As with the West, Northern Asia is firmly focused on making it through the coming winter. In the past couple of weeks, Russia started hinting that it might also limit gas supplies to Northern Asia. Russia halted a large shipment of natural gas bound for its southern neighbors. Countries like South Korea and Japan, which have minimal natural gas reserves of their own, are heavily reliant on natural gas imports. This puts them in direct competition with European, which has its eye on LNG supplies shipped by sea. Though the battle to secure supplies just started, many experts expect it to intensify in the coming years.
Inflation Fears Push Oil Prices Back Down
Crude oil prices declined ahead of European markets opening as fears about more aggressive rate action by central banks outweighed any possible concerns for tighter supply from OPEC. At the time of writing, Brent crude was trading at $104.50 per barrel, with West Texas Intermediate at $96.86 per barrel, both slightly down on Tuesday’s close. “Risk appetite has cooled over an anticipation that the Federal Reserve would continue to increase interest rates…A pull-back of natural gas prices in Europe also adds uncertainties to the picture of energy crisis,” analysts from Hong Kong-based Haitong Futures said, as quoted by Reuters. The gloomy mood follows remarks made by Fed chairman Jerome Powell, who said on Friday that central banks are likely to stay the course of interest rate hikes as a means of reining in inflation. In making these remarks, Powell admitted that they would cause “some pain” to households. The European Central Bank is also a supporter of aggressive rate-hiking as a tool for inflation control. Separately, economist Steven Roach, a former Morgan Stanley executive, said the United States was definitely heading for a recession, deepening the pessimistic mood on markets and the outlook for oil demand. “We’ll definitely have a recession as the lagged impacts of this major monetary tightening start to kick in,” Roach told CNBC. “They haven’t kicked in at all right now.” Meanwhile, supply uncertainty remains although oil-buying in some key markets is not particularly strong, Reuters’ Clyde Russell noted in a column this week. Russell reported that oil buying in Asia was softer than prices would suggest, as China’s imports weakened. He also noted that any potential output cuts by OPEC+ might not have a direct impact on prices since the group is already undershooting its own targets, and by a lot. Meanwhile, violence in Iraq may threaten the oil production of OPEC’s second-largest member, adding to the upward potential for prices.
Pricing pressures shrink fuel retailers’ earnings
Pressure on marketing margins remains a key concern for oil marketing companies (OMC) that otherwise benefited from a rebound in gross refining margins (GRMs) and the strong volume growth in auto fuels. Fitch Ratings said that it expects India’s petroleum product demand to remain robust, driven by GDP growth of 7.8% forecast for FY23. It expects GRMs to moderate but stay close to mid-cycle levels in the second half of FY23. Nevertheless, large marketing losses at OMCs are likely to more than offset the benefits from strong GRMs during the year. Though crude oil prices have surged from around $77 a barrel levels at the start of the calendar year and Brent even crossed $130 during the first quarter, retail auto fuel prices have not changed much. This had hurt the Q1 performance of OMCs and is likely to restrict future earnings too. Analysts at Yes Securities Ltd said the lack of revision in domestic, retail, petrol and diesel prices despite international product prices touching record highs in the aftermath of the Russia-Ukraine conflict resulted in significantly weaker marketing margins, which were incrementally amplified by marketing inventory losses. While Indian Oil Corp. Ltd (IOC) managed to report an operating profit of ₹17.50 billion (down 84% from a year ago and 85% sequentially), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) reported operating losses of around ₹59 billion and ₹125 billion, respectively. This was even though companies reported robust GRMs, which soared as the benchmark Singapore GRM averaged at around $21.4/barrel in the June quarter, which was a significant jump from $8 a barrel seen in the March quarter. These were helped by improving diesel and petrol cracks. The decline in Russian and Chinese exports of refined products also hit demand-supply dynamics at a time demand recovered in the US and Europe, and inventories remained at multi-year lows. As a result, GRMs for IOCL, BPCL and HPCL stood at $31.8, $27.5 and $16.7 a barrel, respectively, significantly above $18.5, $15.3 a barrel and $12.44 they reported during Q4, as per analysts’ calculations. The GRM for HPCL was comparatively weaker, as the company is yet to accrue the benefit of expansion at its Vizag refinery. For BPCL, the merger of the Bina refinery helped cushion overall margins, said analysts. On the positive side, volume growth remains very strong and is seen in a positive light. Nevertheless, high crude prices will crimp marketing margins. A state of prolonged government interference in auto fuel retail prices and losses at OMCs would be negative for the standalone credit profile of OMCs and may lead to a rethink of the government’s approach to fuel prices, analysts at Fitch Ratings said. “We believe freedom for OMCs to control retail fuel prices would support government attempts to re-initiate the divestment of BPCL, should it choose to do so,” they added.
Mukesh Ambani says, KG-D6 to contribute 30% of India’s gas production
In the 45th annual general meeting (AGM), Reliance Industries chairman Mukesh Ambani on Monday said KG-D6 will contribute ~30% of India’s gas production. He was addressing RIL’s 45th annual general meeting for shareholders, investors, and others. Ambani congratulated its Oil and Gas team for a spectacular turnaround, with production jumping 9x and revenues crossing $1 billion. At present, KG-D6 is contributing 20% of India’s domestic gas production. While addressing in the AGM, Ambani said, “Let me congratulate our Oil & Gas team for a spectacular turnaround, with production jumping nine times and revenues crossing a billion dollars.” Ambani highlighted that with 19 million standard cubic meters per day of production in ultra-deep water fields, KG-D6 is contributing 20% of India’s domestic gas production. Going forward, Ambani said, “With the commissioning of the MJ Field by end-2022, KG-D6 will increase its contribution to nearly 30% of India’s gas production.” Last year, in April, supermajor bp had stated RIL and bp have been developing three deep-water gas developments in block KG D6 – R Cluster, Satellite Cluster, and MJ – which together are expected to produce around 30 mmscmd (1 billion cubic feet a day) of natural gas by 2023, meeting up to 15% of India’s gas demand. Notably, the developments will each utilize the existing hub infrastructure in the KG D6 block. RIL is the operator of the block with a 66.67% participating interest and bp holds a 33.33% participating interest. The third KG D6 development, MJ, is expected to come on stream by end of December 2022. According to Ambani, this will help meet India’s growing demand indigenously, leading to import savings of nearly $9 billion/ annum. Natural gas is a major source of clean and affordable energy for India, particularly in times of significant global energy crisis.