Saudi-based ITFC signs $1.4bn deal to fund Bangladesh oil imports
The International Islamic Trade Finance Corp., a member of the Islamic Development Bank Group, has signed a $1.4 billion financing plan with the Bangladeshi government to fund the country’s oil imports, the Saudi Press Agency reported on Saturday. The signing took place during a recent official visit by a high-level delegation from Bangladesh to the ITFC headquarters in Jeddah. “This financing plan will enable the Bangladesh Petroleum Company to import oil products from July to June 2024,” the statement on SPA said. The agreement “reflects the successful long-term partnership between the two parties and will contribute to ensuring energy security for one of the fastest-growing economies in South Asia.” It “demonstrates the corporation’s commitment to supporting the economic development of its member states and providing financing solutions that meet the needs of its customers,” the statement added.
Oil Prices Drop From Ten-Week High On Macroeconomic Concerns
Oil prices slipped in Asian trade early on Monday, retreating from Friday’s ten-week high amid profit-taking and continued concerns about the world’s two biggest economies, the U.S. and China. As of early trade in Europe, WTI Crude traded at $73.15, down by 0.96% on the day. The international benchmark, Brent Crude, was down by 0.96% at $77.72. Both benchmarks settled over 2% higher on Friday, to the highest levels in ten weeks. Early on Monday, however, macroeconomic concerns again trumped the ongoing OPEC+ efforts to tighten the physical market. The Chinese post-Covid recovery may have further slowed as evidenced by the steepest drop in the producer price index (PPI) in June since the end of December 2015. Chinese factory gate prices slumped by 5.4% in June compared to the same month in 2022, data from the National Bureau of Statistics showed early on Monday. The drop in producer prices was steeper than analyst estimates and the annual decline in May. At the same time, China’s consumer inflation was flat on an annual basis in June, suggesting that the authorities could consider further monetary stimulus to revive demand. The OPEC+ cuts and the U.S. Administration’s announcement on Friday that it plans to purchase around 6 million barrels of oil for the Strategic Petroleum Reserve (SPR), with delivery scheduled for October and November, limited the oil price declines. So far, the Biden Administration has bought 6.3 million barrels at an average price of $72.67 per barrel, compared to around $95 per barrel that SPR crude was sold for in 2022. “Cuts from both Saudi Arabia and Russia have provided some support, although the market will have to continue to contend with macro uncertainty, which has capped the market over the last couple of months,” ING strategists Warren Patterson and Ewa Manthey said on Monday. “The recent action taken by Saudi Arabia will likely provide some comfort to longs as it sends the signal that the Saudis are committed to putting a floor under the market.” According to IG strategist Jun Rong Yeap, “Hopes for some recovery in the second half of this year may be pinned on expectations for China to bring in more stimulus in the months ahead while US economic conditions retain some resilience.” The oil market will be closely watching this week the U.S. Consumer Price Index (CPI) report for June due out on Wednesday and OPEC and IEA’s monthly reports on Thursday.
China’s LNG Imports Soar Despite Global Price Dip
China’s imports of liquefied natural gas (LNG) hit 5-month highs in June, but weak demand, especially in Europe, kept a lid on prices. Last month, China imported 5.96 million metric tons of LNG, 28% higher than the 4.64 million the country purchased a year ago and also higher than 5.54 million metric tons imported in May. However, that still proved inadequate as the spot price slipped to $9.00 per million British thermal units (mmBtu), 87% below its record high of $70.50 in late August and the lowest since April 2021. The much-awaited buying frenzy by the EU as it looks to fill its gas stores ahead of winter has yet to materialize. Europe imported 9.50 million metric tons in June, down from 12.11 million in May and the lowest monthly total since August 2022. Rocked by one of the worst energy crises in living memory, the European Union launched a gas buyers’ cartel in 2022 and started issuing tenders for supplies. According to Sefcovic, some 50 gas suppliers and large industrial gas consumers in the EU immediately expressed interest in being part of the bloc’s joint gas-buying effort. A key objective of the whole endeavor is to keep gas prices low by buying in larger volumes. Well, Europe’s gas buyer’s club has been a resounding success, with the continent’s gas stores nearly 80% full. Unfortunately, Europe’s purchases of U.S. LNG have also dwindled, with June’s volumes clocking in at 4.15 million metric tons, down from 5.63 million tons in May. Europe’s gas inventories, including in the United Kingdom, have now hit 889 terawatt-hours (TWh), according to data from Gas Infrastructure Europe. Stocks are now +246 TWh +38% above the 10-year seasonal average, although the surplus has narrowed from +280 TWh +81% in March. Meanwhile, U.S. gas inventories have also been ticking higher, with stocks for the week ended June 30, 2023, up 72 Bcf to 2,877 Bcf. The deluge of gas has put nearby futures prices under immense pressure, with futures for gas delivered in October 2023 now trading at a discount of almost 12 euros per megawatt-hour to prices for April 2024. In contrast, they traded at a premium of more than 5 euros at the beginning of the year and a full 38 euros a year ago. China and Asia Become Key U.S. Customers Asia’s imports of U.S. LNG climbed to 1.34 million metric tons in June, up from 1.21 million in May and the most since February. Indeed, China and Asia are now the U.S. biggest LNG customers, a position Europe held last year when it purchased as much as 65% of U.S. output. The United States’ largest producer of LNG, Cheniere Energy (NYSE:LNG), has signed a long-term liquefied natural gas (LNG) sale and purchase agreement with China’s ENN Energy Holdings. ENN will purchase ~1.8M metric tons/year of LNG on a free-on-board basis at Henry Hub prices for a 20-year term, with deliveries to commence mid-2026 ramping up to 0.9 million tonnes per annum (mtpa) in 2027. Last year, ENN signed a 13-year deal with Cheniere to purchase 900K metric tons/year, again based on Henry Hub prices. The deal is subject to the completion of Cheniere’s Sabine Pass project, which is being developed to include up to three liquefaction trains with an expected total production capacity of ~20M tons/year of LNG. Currently, Sabine Pass has six fully operational liquefaction units aka ?”trains”, each capable of producing ~5 mtpa of LNG for an aggregate nominal production capacity of ~30 mtpa. Cheniere processes more than 4.7 billion cubic feet per day of natural gas into LNG. Sabine Pass has multiple pipeline connections to interstate and intrastate pipelines, and is located less than four nautical miles from the Gulf of Mexico, thus providing easy access to seafaring vessels. Previously, Cheniere entered another long-term liquefied natural gas sale and purchase agreement with Norway’s national oil company Equinor ASA (NYSE:EQNR) that will see Equinor purchase 1.75M metric tons/year of LNG on a free-on-board basis for a purchase price indexed to the Henry Hub price, for a 15-year term.
The Great Oil Market Paradox: Inflation Fears Meet Rising Demand
Inflation concern. Rate hike fears. These have been the drivers of oil market moves for months now. Demand and supply have largely remained ignored. But this may be about to change. “This is in a year where there [are] economic headwinds, where there [are] recessionary signs everywhere … China’s still picking up,” the chief executive of Aramco acknowledged earlier this week, but added, speaking to CNBC, that he was optimistic for the future. The reason Amin Nasser was optimistic was, once again, China’s recovery. In fact, China’s recovery in the fuel use department has been quite robust. Demand for oil hit a record earlier this year and is likely to remain strong throughout 2023. Ignoring this fact to focus on factory activity does not mean it would go away. It’s not just the CEO of Aramco, either. Energy Aspects’ Amrita Sen this week noted an overlooked aspect of the central banks’ rush to tame inflation—the same rush that has kept oil prices depressed for much of the year. And that overlooked aspect could have a bullish effect on prices later in the year. It’s all about the cost of money, Sen wrote in an op-ed for the Financial Times. When central bankers hike rates, borrowing costs increase. And oil traders keeping millions of barrels in storage become unhappy. To fix this, they are beginning to sell this oil to reduce their costs. And that means there is less oil in global storage. Sen reported that, per Energy Aspects calculations, the world has just 22 days of oil demand covered with oil in storage. That’s three days below the average for 2010-2019, she noted, and about to fall further by the year’s end. Incidentally, global air travel is rebounding, and it is rebounding especially strongly in China, per a fresh report from the International Air Travel Association. The IATA this week reported a 130.4% increase in revenue passenger kilometers in the Asia-Pacific for May, which was by far the biggest increase in air travel in the world. Traffic in the region shot up by 156.7%. The figures were similar for China specifically, while every other big market—regional and national—saw much lower increases in air travel. It’s worth noting that all regions saw double-digit annual increases in air travel, meaning a solid increase in jet fuel demand, too. No wonder, then, that despite day-to-day oil price movements, Saudi Arabia’s Energy Minister remains bullish. The kingdom earlier this week announced an extension of its voluntary production cut of 1 million bpd for another month and possibly longer. On the heels of this announcement came one from Russia, which said it would cut exports by half a million barrels daily from August. Prices did not rise in any meaningful way following the news, which gave some commentators reason to argue that the output cuts were in fact bearish news for the oil market. These cuts, Reuters’ Clyde Russell wrote in a recent column, suggested that demand is falling short of expectations. Yet OPEC is either putting up a brave face, or its members are watching more than China’s factory activity. At this week’s OPEC conference in Vienna, unnamed sources close to the group told Reuters its outlook for oil demand remained quite positive. OPEC is later this month publishing its first outlook for 2024, and, according to the people who spoke to Reuters, it would feature a bullish view on demand. It would be lower than this year’s demand growth rate, but that has been extra-strong as the world exits two years of lockdowns. Indeed, even the International Energy Agency said in its June Oil Market Report that “Global oil demand continues to defy the challenging macroeconomic climate and is set to rise by 2.4 mb/d in 2023, outpacing last year’s 2.3 mb/d increase as well as earlier expectations.” It is this divorce between what oil traders are watching and what is actually happening with oil demand that is keeping oil prices depressed. And it is this divorce that can come crashing down in the second half of the year amid tighter supply, including from all-time production growth champion U.S. There is one way that prices could remain depressed, however. In fact, they could even fall further—if a large part of the world slides into a recession despite all the efforts central banks have made and are still making, whatever the pain to businesses and consumers. Indeed, in no random irony, it could be the central bank’s monetary tightening efforts that could cause a recession in a classic case of a cure being worse than the disease. Oil traders destocking is one instance of this. Another is lower consumer spending as prices rise due to higher borrowing costs for the companies that produce them. Recession fears are bound to linger, weighing on oil prices, for the remainder of the year at least. At the same time, signs of a physical tightening of the oil supply will sooner or later reach the attention of traders, and they will react accordingly, prompting a price rebound.
India ups crude oil imports from the US as Russian shipments stagnate
Triggered by OPEC+ announcement on cutting crude oil output, India is looking to diversify its crude sources, says a study As per the PPAC, India’s cumulative crude oil imports during April and May this fiscal year stood at almost 40 mt, of which 6.9 per cent was from North America. Even as crude oil imports from Russia exhibit signs of stagnation, India has gradually increased its shipments of the critical commodity from the US, which seems to be trying to claw back its lost share.
Russia oil discount to India shrinks to $4, delivery charges remain opaque
The steep discounts on Russia crude oil that India gorged on since the Ukraine war, have plunged but the shipping rates charged by Russia-arranged entities continues to remain ‘opaque’ and higher than normal, sources said. Russia bills Indian refiners at a price shade less than the $60 per barrel price cap imposed by the West but charges anything between $11 to $19 per barrel, twice the normal rate, for delivery from the Baltic and Black Sea to the west coast, three sources with knowledge of the matter said. The $11-19 per barrel shipping costs from the Russian ports to India — some of it on the 100+ tankers reportedly acquired by Russian actors for a shadow fleet — are higher than rates for comparable distances, such as a voyage from the Persian Gulf to Rotterdam. Following Moscow’s invasion of Ukraine in February last year, Russian oil was sanctioned and shunned by European buyers and some in Asia, such as Japan. This led to Russian Urals crude being traded at a discount to Brent crude (the global benchmark). The discount on Russian Urals grade has however narrowed from levels of around $30 a barrel in the middle of last year to closer to $4 per barrel, sources said. Indian refiners, who convert crude oil extracted from below ground into finished products such as petrol and diesel, are now the biggest buyers of Russian oil as Chinese imports have maxed out due to a massive electrification of vehicles and demand issues in a shaky economy. Indian refiners ramped up purchases from less than 2% of their entire buys in pre-Ukraine war times to 44% to capture the discounted oil. But these discounts have been shrinking as companies such as government-controlled entities like Indian Oil Corporation (IOC), Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd (BPCL), Mangalore Refinery and Petrochemicals Ltd and HPCL-Mittal Energy Ltd as well as private refiners Reliance Industries Ltd and Nayara Energy Ltd continue to negotiate deals with Russia separately. The discounts could have been higher if state controlled units, who account for roughly 60% of the 2 million barrels per day of Russian oil flowing into India, negotiated together, sources said. “Chinese demand has maxed out and Europe is not buying any seaborne crude from Russia. So India remains the only destination with increasing appetite. And if they (refiners) negotiated together, bigger discounts could have been extracted,” a source said. Consider this, IOC is the only company to have entered into a term or fixed volume deal. Other refiners continue to buy on a tender basis. Before Russia’s invasion of Ukraine in February last year, India was a minor importer of Russian crude, with purchases of about 44,500 barrels per day (bpd) in the 12 months to February 2022. India’s purchases of seaborne crude from Russia have surpassed those by China a couple of months back. Sources said Indian refiners buy crude oil from Russia on a delivered basis, putting the onus on Moscow to arrange for shipping and insurance. While the invoicing for oil is at or a shade less than $60 per barrel, the shipping and insurance rate billed is as per quotes Russia gets from three not-so-well-known agencies which cannot be independently evaluated and remain opaque, they said. The actual sale price of Urals crude is about $70-75 per barrel, channeling a large portion of Russian oil revenues to the three shadow agencies, they said. The G7 imposed a $60 per barrel price cap on Russian oil beginning December 2022 to try to limit Moscow’s ability to finance its war in Ukraine.