IEA: Russian Crude Ban Will Take 2.4 Million Bpd Off The Market
As the European Union prepares to implement a ban on Russian seaborne crude in December, the market will have to prepare itself for a loss of 2.4 million bpd, according to the International Energy Agency (IEA). The ban on Russian crude imports by sea will take 1.4 million bpd of oil off the market, along with 1 million bpd of petroleum products. This is in line with the ban on Russian seaborne crude that goes into effect on December 5th, and the embargo on petroleum products, which goes into effect on February 5, 2023. In addition, due to the pending EU ban on maritime services, the IEA expects forced reallocations from countries that are not on board with the G7’s own proposed price cap on Russian oil. The G7 is reportedly considering sanctions on oil importers who refuse to comply with the group’s proposed price cap on Russian oil, which has prompted threats from Mosocw to withhold oil from the market. Furthermore, by February next year, the IEA predicts that total Russian oil production will decline to 9.5 million bpd, which represents a 1.9 million bpd plunge year-on-year. This comes after the IEA said in August that Western sanctions were not significantly impacting Russian oil output, as rerouting of crude to Asia had served as a stop-gap measure. The new Russian barrels will also have to find new buyers in Asia to mitigate any negative effects on Russian revenues. The oil market remains highly volatile as it attempts to determine whether fears of declining demand–particularly coming out of China’s COVID lockdowns–or tight supply will rule fundamentals. The IEA highlighted decelerating growth in global oil demand in its latest monthly report, but also noted that due to significant gas-to-oil switching, total demand growth was actually only slightly lower. In the meantime, heading into the ban, Europe continues to import large volumes of Russian crude, with Bloomberg recording 1 million bpd of imports in the week ending September 2. While that figure is higher than August, it is also lower than June.
Bid to Ease Crisis: Energy Update
France is planning to cap energy-price hikes for households at 15% starting next year as it seeks to ease the financial pain of an energy crisis that has gripped the continent. The European Commission earlier proposed a mandatory cut on energy use in the bloc, as well as steps to ease the crunch in markets caused by ballooning collateral demands. Commission President Ursula von der Leyen laid out plans to raise 140 billion euros from energy companies’ profits. The changes all need to be signed off by member states and discussions won’t be easy. Gas prices rose, following extreme volatility in recent weeks. They’re about eight times higher than the typical levels for this time of the year, underscoring the challenge policy makers face. France to Cap Price Hikes From January France said it will limit energy price increases to 15% for households from the start of next year to ease the burden of the energy crisis on consumers. The caps will cost the government a net 16 billion euros ($16 billion) in 2023, Finance Minister Bruno Le Maire said. Prices would have risen by 120% without the limit, he said. The state will also continue handing over subsidies, with a one-time payment of up to 200 euros each going to 12 million poorer households, Prime Minister Elisabeth Borne said. French Grids Urge Less Fuel Use France’s gas system can cope with demand for an “average” winter, as well as underpinning the power sector and contributing to Europe’s “solidarity,” grid operators GRTgaz and Terega said in a statement. In a very cold winter, the gas deficit for the period could reach 5% of French winter demand. Cold snaps are easier to manage in the first part of winter due to larger storage-injection capacities. Meanwhile, France is working on capacity to send 100 GWh/day of natural gas to Germany from October, GRTgaz chief Thierry Trouve said at a press conference. The would go through a pipeline previously used to send flows from Germany to France. EU Proposes Easier Collateral Rules The Commission has proposed a series of regulatory changes that could help mitigate the liquidity crisis currently ripping through the continent’s energy providers. Measures include raising the clearing threshold for commodities and other derivatives to €4 billion ($4 billion) and allowing bank guarantees to be accepted as collateral against margin calls, according to the document.
Gas policy shifts divert focus from LNG sea changes
2022 has seen the specter of government interventions envelop gas markets: whether it’s price caps, encouraging benchmark diversification, pooling procurement in a centralized platform or using state-owned banks to directly buy LNG cargoes, all ideas appeared to be on the table. While pipeline gas and LNG share several fundamental attributes, they are also different in many aspects. In this flurry of policy proposals and announcements, there are significant changes taking place in the LNG industry itself. These changes relate to price indexation, market participation and trade flows. This piece, as part of a series of articles on LNG industrychanges, will tackle the first point: price indexation. LNG price markers are being used in the spot market, while long-term contracts are still prone to utilizing substitute oil or pipeline gas prices. As substitute prices diverge significantly from the LNG market, a hybrid solution in long-term contracts, combining both mechanisms, is seeing some adoption. Price indexation Price benchmarks used in LNG trade have been in great flux over the last 12 months, triggering large changes in relative values between them. While LNG has always been a difficult market to analyze from a pricing perspective, 2022 has seen this complexity deepen. Here are some broad points to start with, based on data collected by market reporting teams at Platts, part of S&P Global Commodity Insights, and the IHS Connect contract database from January to August: • Fixed price trade has globally been in retreat for some time, but North Asia’s usage of fixed prices significantly slumped in 2022; • As LNG cargo prices have converged and gas hub prices have diverged an increasing amount of trade referenced LNG-based benchmarks; and • Contracts signed for long-term volumes are on course to surpass 2021’s total with ease while crude oil-linked contracts have dropped significantly as a proportion of total trade. Fixed price trade has dropped to around 43% of total spot and short-term trades, or cargoes for delivery within the next two years or so, in 2022 versus 65% of trade in 2021. Digging deeper, fixed price trade in North Asia has fallen from 52% in 2021 to under 20% so far in 2022. Fixed prices now largely appear in tenders issued by state-owned companies in South Asia, Thailand, and Argentina. These locations account for 75% of fixed price trades in 2022. The significant drop in fixed price trades is due to increased market volatility and more developed futures markets. It has been well documented that LNG prices (JKM, Platts West India Marker, Platts Northwest Europe, Platts Gulf Coast Marker) have been moving in a tight band while gas hub prices on either side of the Atlantic (represented by Henry Hub and the Dutch Title Transfer Facility, or TTF) have been at record differentials. Added to this, LNG prices have been trading at large discounts to TTF in 2022. Platts Northwest Europe LNG benchmark reached a record discount of $24.475/MMBtu against Dutch TTF on Aug. 26. It is in this context that the amount of JKM-indexed trade in the spot and short-term market globally increased to some 33% in 2022, more than double the 2021 figure. Also apparent from this data is that within Europe itself there is greater variety of indexation being used for LNG cargoes. For example, a recent tender issued requested pricing against the French PEG gas hub for 12 cargoes delivered between 2023 and 2025. Activity reported in the Atlantic LNG Market on Close assessment process of S&P Global indicates this, with almost 40% being reported against the UK’s NBP in 2022. There was no NBP-indexed activity reported in the process in 2021. A peculiarity specific to LNG is the appearance of substitute prices in the long-term contract space. It is also surprising that these substitute prices very rarely appear in the short-term contract space. Henry Hub and Brent, widely used in long-term contracts ex-US and within Asia respectively, are each used less than 5% in near-term trade. While Henry Hub has appeared considerably more in long-term Sales and Purchase Agreements (SPAs) in 2022 – largely due to most of the projects seeking a final investment decision being based in North America – Brent-linked long-term contracts have foundered. According to IHS Connect’s LNG contract database just 0.675 million mt of purely Brent-linked SPAs have been signed so far this year, compared to nearly 18 million mt of such SPAs in 2021. Companies involved in negotiations for contracts that may conclude on a Brent-linked basis have complained that the relationship between LNG prices and Brent slope levels used in historical contracts has become a moving target. Because LNG prices are elevated relative to historical Brent slopes, buyers see a risk in agreeing to contracts now that would leave them at historically high slope levels with a risk of downwards LNG price movement. Sellers also do not want to leave value on the table given the potential to sell LNG in the next few years at considerably higher prices – based on current forward curve values – than historical Brent slope levels would imply. After having a reasonably steady relationship for many years the LNG price-Brent term slope relationship started to crack from 2019 onwards. However, the differences between the two have been greatest since 2021. The few purely Brent-linked term contracts signed this year were agreed in January. Platts has heard of several companies having protracted negotiations for term contracts with a proposed Brent pricing basis, but there is little breakthrough yet on these. For the few short-term tenders concluded on Brent-linked pricing, from winter season strips of cargoes to agreements for deliveries up to two years ahead, the slopes have reportedly been between 20%-35%. This reflects the difficulty of using substitute price benchmarks, as they do not share the same market fundamentals as the LNG market. The current impasse is probably unhelpful for the industry given that consumers are keen to tie down volumes for the next few years when the market is expected to be tight, and producers are
India’s oil imports from Russia jumped to 18% of crude purchases in July
India’s import of Russian oil rose to nearly 18 percent of its total petroleum crude imports in July in value terms, according to the latest commerce ministry data. As per the data, India imported Russian petroleum crude worth $2.88 billion in July, down a marginal 0.4 percent from the June figure of $2.89 billion. However, with India’s petroleum crude imports falling by more than a billion dollars in July from June, Russian oil amounted to 17.9 percent – compared to 16.8 percent in June – as a percentage of total petroleum crude imports. Country-wise import data for August is not yet available. Provisional data for trade in August, released on September 14, showed imports of petroleum, crude and products increased to $17.7 billion last month from $16.11 billion in July. The rise in Russian oil imports in recent months has been remarkable, with the Indian government taking advantage of the discounts that have been offered. Last week, Finance Minister Nirmala Sitharaman praised Prime Minister Narendra Modi for taking the decision to quickly ramp up Russia’s oil imports even in the face of sanctions announced following its invasion of Ukraine in late February. “Wherever there are sanctions, countries are finding their own ways to get Russian crude, Russian gas. That also is a part of inflation management,” the finance minister had added. In April-July, India’s import of petroleum crude from Russia totalled $8.95 billion. In contrast, the figure for the entirety of FY22 was $9.87 billion. The pace with which Russia has become a key source of petroleum crude for India can also be gauged by the following: in April, Russian oil made up 8.4 percent of India’s total petroleum crude imports. This figure rose to 12.8 percent in May, 16.8 percent in June, and finally 17.9 percent in July. The rapid rise of Russian oil imports meant it became India’s second-largest source of petroleum crude in June after overtaking Saudi Arabia. It is now on track to cross the leader, Iraq, in the coming months. In July, India imported $3.2 billion worth of petroleum crude from Iraq, just $321.7 million more than what was imported from Russia. In volume terms, oil imported from Iraq exceeded that from Russia by a mere 0.28 million tonne.