China Surpasses India as Largest Importer of Russian Crude
China has surpassed India as the primary importer of Russian crude oil via sea routes, with China importing 1.82 million barrels per day (bpd) in March compared to India’s 1.36 million bpd. This shift is attributed to India’s slowdown in imports due to sanctions and rising prices. China’s Rising Imports In March, China imported 1.82 million bpd of Russian crude by sea, exceeding India’s 1.36 million bpd. This trend marks a significant shift, as China has become the largest buyer of Russian seaborne crude. India’s Changing Import Dynamics India’s recent slowdown in Russian crude imports is linked to various sanctions and escalating prices. Despite a 7% month-on-month increase in March, India’s imports fell short of China’s, indicating a strategic shift in its oil procurement. India’s Oil Import Portfolio Urals sour-grade oil remains India’s primary import from Russia. However, India has also diversified its sources, with increased imports from Iraq and decreased imports from Saudi Arabia in March. Geopolitical Implications India’s increased reliance on Russian crude stems from geopolitical tensions, particularly since Russia’s invasion of Ukraine in 2022. Prior to this conflict, Russia accounted for only a small fraction of India’s total crude oil imports. OPEC+ Dynamics and India’s Strategy Despite pressure from Western nations and OPEC+’s efforts to stabilize crude prices, India continues to purchase oil from Russia due to significant demand and Moscow’s discounted offerings. Indian officials argue that this strategy contributes to stabilizing global crude prices.
The Energy Sector Is A No-Brainer, but There’s More to Come
Historically, different market sectors and investments have responded differently as the economy moves from one stage of the business cycle to the next. Understanding how various financial assets have historically performed at various points in the business cycle can help investors identify opportunities and risks and adjust their portfolios accordingly. Shifts from one phase of the business cycle to the next have historically taken place every few months or years on average. With the global monetary tightening cycle almost over, many major economies, including the U.S., have advanced into the late stage of the business cycle. According to Fidelity Investments, technology, financials, and consumer discretionary sectors tend to outperform during the early and mid-stages of the business cycle while energy and commodity stocks tend to be late-stage winners. Well, the U.S. stock market appears to be largely playing out along those lines, with tech lagging while oil and gas stocks have emerged as some of this year’s best performers. The energy sector has managed to post a 17.1% return in the year-to-date, the second highest sector return and nearly double the 9.1% return by the S&P 500 and 7.1% gain by the tech sector. Interestingly, not even a red-hot labor market and diminished prospects for interest rate cuts have slowed the energy sector. Last week, energy and communication were the only sectors to finish in the green while the S&P 500 dropped nearly a percentage point, its biggest weekly loss so far in 2024, following a healthy jobs report. A report released by the Bureau of Labor Statistics revealed that the country added 303,000 new jobs in March, way higher than the 205,000 consensus call among economists surveyed by FactSet or 231,000 jobs added in March 2023. The unemployment rate slipped to 3.8% from 3.9%, marking the 26th consecutive month unemployment has remained below 4%, the longest streak since the 1960s. The markets, however, reacted negatively to the solid jobs report because it’s likely to make the U.S. Federal Reserve even more hesitant to be urgent or aggressive with interest rate cuts. Indeed, some economists now say recent data has pushed a summer cut completely off the table while others are saying to expect zero cuts in 2024. “Personally, I wouldn’t be surprised if we saw less rate cuts and pushed more towards the end of the year. This is a strong economy. Make no mistake, it is backed by debt and somewhat by overburdened credit cards, but it is a strong economy. So the Fed will struggle to find the case to cut rates soon,” George Lagarias, chief economist at Mazars, told CNBC on Monday. According to the CME’s FedWatch tool, the market is pricing a less than 50% probability of a rate cut in June and July, significantly lower than a month ago. Whereas high interest rates tend to hurt many sectors of the economy, clean energy companies are much more sensitive to interest rates than oil and gas companies. It’s the reason why the iShares Global Clean Energy ETF (ICLN) has returned -11.2% vs. 17.0% YTD gain by the Energy Select Sector SPDR Fund (XLE). Robust Fundamentals Another interesting development: even the bears now recognize the energy sector’s momentum. To wit, Morgan Stanley remains pessimistic about the U.S. stock market overall; however, MS has upgraded energy stocks to overweight from neutral, noting that energy companies have lagged the performance of oil, and the sector remains favorably valued. With a PE ratio of 13.4, the U.S. energy sector is the cheapest of the 11 market sectors. However, the most important catalyst working in favor of the energy sector is robust market fundamentals. Commodity analysts at Standard Chartered have reported that fundamentals in the oil markets remain strong and can support Brent prices in the $90s. According to StanChart, there’s ample room for OPEC to increase output in Q3 without either causing inventories to rise or prices to weaken. According to StanChart, the U.S. market swung into a deficit of over 1.7 mb/d in both February and March, with the seasonal recovery in demand offsetting the recovery in U.S. output from its January low. The analysts estimate there was a counter-seasonal Q1 inventory draw of 1.12 mb/d, which led to a significant tightening compared with the inventory build recorded in Q1-2023. StanChart attributes the ongoing oil price rally to the 3 mb/d relative improvement from Q1-2023, and sees further price gains coming in Q2-2024.
India’s fuel consumption shrinks 0.6% in March as petcoke use falls
Fuel consumption in India, a proxy for oil demand, fell by a marginal 0.6 per cent on an annual basis in March due to reduced petroleum coke use, as data released by the Petroleum Planning and Analysis Cell (PPAC) has shown. Consumption of fuel totalled 21.09 million tonnes (mt) in March, down from 21.22 mt in March 2023. For FY24 (2023-24), fuel consumption rose by 4.6 per cent. However, this was lower than the 10.57 per cent rise seen in FY23. Oil demand usually picks up from late February onwards and rises in tandem with the temperature in India. For instance, consumption rose by 13.7 per cent in March, on a sequential basis. Sales of diesel, the most used fuel in the country, rose 3 per cent to 8.03 mt in March. In the last 12 months, sales had reached an all-time high of 8.21 mt in May 2023 Petrol sales also reached a four-month high, rising 5.1 per cent to 3.14 mt in October. Sales had stood at 2.99 mt in the same month of the previous year. Other major categories also saw rising sales. The monthly numbers were pulled down by the lower consumption of petcoke, a by-product created by the refining of bitumen into crude oil. Used in the manufacturing of steel, glass, paint, and fertilisers, petcoke usage fell 16.8 per cent in March to 1.63 mt.
Are Oil Prices Heading To $100 This Summer As A Global Shortage Takes Hold?
When oil jumped above $90 a barrel just days ago, military tensions between Israel and Iran were the immediate trigger. But the rally’s foundations went deeper — to global supply shocks that are intensifying fears of a commodity-driven inflation resurgence. A recent move by Mexico to slash its crude exports is compounding a global squeeze, prompting refiners in the US — the world’s biggest oil producer — to consume more domestic barrels. American sanctions have stranded Russian cargoes at sea, with Venezuelan supply a potential next target. Houthi rebel attacks on tankers in the Red Sea have delayed crude shipments. And despite the turmoil, OPEC and its allies are sticking with their production cuts. It all adds up to a magnitude of supply disruption that has taken traders by surprise. The crunch is turbocharging an oil rally ahead of the US summer driving season, threatening to push Brent crude, the global benchmark, to $100 for the first time in almost two years. That’s amplifying the inflation concerns that are clouding US President Joe Biden’s reelection chances and complicating central banks’ rate-cut deliberations.
Biden’s LNG export pause will hobble Asia’s energy plans
As Japanese Prime Minister Fumio Kishida arrives in Washington this week to meet with Joe Biden, it is worth reflecting on the American president’s decision in January to pause approvals for new liquefied natural gas exports. First, it is important to understand how critical gas from the U.S., the world’s biggest exporter of LNG, is for Asia. Asia is a net importer of energy and depends on other parts of the world to keep industry going and households powered. Second, much of Asia relies on high-emitting coal for electricity generation, particularly fast-growing Southeast and South Asia where lifting people out of poverty remains a primary goal. Of total coal demand worldwide last year, three of every four tons were consumed in China, India or Southeast Asia. In Japan, South Korea, Singapore, Taiwan and Thailand, LNG has an established role ensuring energy security and economic stability, while also providing the foundations for a low-carbon future. Massive volumes of coal must be displaced through the 2030s and beyond across emerging Asia to achieve the region’s net-zero aspirations. This inevitably will mean substantial gas imports As the sole realistic coal alternative in terms of affordability and energy density, LNG from the U.S. offers a much cleaner option for always-available power generation that, in partnership with renewables, can meet growing energy demand while facilitating climate progress. India, Vietnam and the Philippines are among the fast-growing Asian nations that plan to increase the role of gas in their economies through LNG imports as a reliable complement to renewable energy investment. Therein lies the concerning disconnect between Asia’s energy realities and the U.S. government’s LNG pause. National energy plans and research from regional experts who know Asia best, including The Institute of Energy Economics, Japan, indicates natural gas demand in the region over the next 30 years will be much higher than implied by the projections the Biden administration used to justify the export pause. These higher forecasts are driven by crucial differences in economic and demographic outlooks and the country-specific feasibility of scaling renewables at speed. Optimism is a positive attribute, but reality has no substitute. Utilization of the full export potential of U.S. LNG — which would be 52% higher than the level currently approved — will be required by 2040 to meet Asia’s demand during energy transition, according to a report last year by energy research company Rystad Energy commissioned by the Asia Natural Gas and Energy Association.
Asia’s March LNG imports surge amidst favorable spot prices
Asia’s imports of liquefied natural gas (LNG) rose sharply in March as the top-buying region took advantage of lower spot prices to draw cargoes away from Europe, as Reuters reported. A total of 24.16 million metric tons of the super-chilled fuel landed in Asia in March, up from February’s 22.73m and also up 11.5% from the 21.67m in March 2023, according to data compiled by commodity analysts Kpler. The strength in imports came as spot prices for LNG for delivery to North Asia remained muted in February and early March, when the bulk of cargoes would have been arranged. The spot price hit the lowest in nearly three years in late February, when it dipped to $8.30 per million British thermal units (mmBtu) in the week to Feb. 23. This was down from the northern winter peak of $17.90 per mmBtu in the week to Oct. 20. The spot price has shifted slightly higher in recent weeks, ending at $9.5 per mmBtu in the seven days to April 5, up from $9.4 the prior week. The small lift in prices is probably not enough yet to deter the price-sensitive buyers of LNG in Asia, which include India and South Asian neighbors Pakistan and Bangladesh, but also increasingly China. China’s imports of LNG rose to 6.61m tons in March, up from February’s 5.82m and 5.43m in March 2023, according to Kpler. China is the world’s largest LNG importer and it tends to buy more spot cargoes when the price is below $10 mmBtu as this allows the fuel to remain competitive in some areas of China’s partially regulated natural gas market. India’s LNG imports rose to a 40-month high of 2.29m tons in March, up from 1.98m February and 1.84m in March last year. This is the future home of the Rixos Baghdad, a luxury hotel financed by Qatar in the city’s heavily fortified Green Zobe
Russia’s Yamal LNG to resume LNG supplies to India’s GAIL – Kommersant
Russia’s Yamal LNG plant is set to resume liquefied natural gas (LNG) supplies to India’s GAIL under a long-term contract involving a Gazprom unit, Kommersant daily reported on Wednesday citing Russian government sources. Novatek, Yamal LNG’s main shareholder, has not replied to a request for comment. Kommersant said that supplies under the deal were suspended in 2022 when Germany seized assets of Russian energy giant Gazprom. GAIL agreed to a 20-year deal with Gazprom Marketing and Trading Singapore (GMTS) in 2012 for annual purchases of an average of 2.5 million tonnes of LNG on a delivered basis. At the time, GMTS was a unit of Gazprom Germania, now called SEFE, but the Russian parent gave up ownership of SEFE after Western sanctions. The initial contract with GMTS was also for supplies from the Yamal project in the Arctic, but the former Russian entity was arranging supplies from elsewhere to cut freight costs as the deal was done on delivered basis, industry sources said earlier this year. Kommersant said on Wednesday that the issue of LNG supplies to India has been resolved. It said, citing a source, that the deliveries are set to resume in the previous volumes in nearest future
India’s fuel demand hits new FY record, up about 5%
India’s fuel consumption fell 0.6% year-on-year in March, but demand for the 2024 financial year was up about 5%, primarily driven by higher automotive fuel and naphtha sales. Total consumption, a proxy for oil demand, totalled 21.09 million metric tons (4.99 million barrels per day) in March, down from 21.22 million tons (5.02 mbpd) last year, preliminary data from the Petroleum Planning and Analysis Cell (PPAC) of the oil ministry showed on Saturday. However, fuel demand for the 2024 financial year, ending in March, hit a record high of 233.276 million tons (4.67 mbpd) compared to 223.021 million tons (4.48 mbpd) a year earlier. Sales of diesel, mainly used by trucks and commercially run passenger vehicles, rose 3.1% year-on-year to 8.04 million tons in March and was up 4.4% for the previous fiscal year. Sales of gasoline in March rose 6.9% year-on-year to 3.32 million tons and were up 6.4% for the fiscal year. Sales of bitumen, used for making roads, were largely steady in March, but were up 9.9% for the fiscal year. Sales of cooking gas, or liquefied petroleum gas, rose 8.6% to 2.61 million tons, while naphtha sales jumped 5.5% to about 1.19 million tons, compared with last March, the data showed. The usage of fuel oil fell 9.7% year-on-year in March and declined 6.3% for the fiscal year.
Oil at $100? Will oil prices hit a century this summer as a global shortage takes hold?
When oil jumped above $90 a barrel just days ago, military tensions between Israel and Iran were the immediate trigger. But the rally’s foundations went deeper — to global supply shocks that are intensifying fears of a commodity-driven inflation resurgence. A recent move by Mexico to slash its crude exports is compounding a global squeeze, prompting refiners in the US — the world’s biggest oil producer — to consume more domestic barrels. American sanctions have stranded Russian cargoes at sea, with Venezuelan supply a potential next target. Houthi rebel attacks on tankers in the Red Sea have delayed crude shipments. And despite the turmoil, OPEC and its allies are sticking with their production cuts. It all adds up to a magnitude of supply disruption that has taken traders by surprise. The crunch is turbocharging an oil rally ahead of the US summer driving season, threatening to push Brent crude, the global benchmark, to $100 for the first time in almost two years. That’s amplifying the inflation concerns that are clouding US President Joe Biden’s reelection chances and complicating central banks’ rate-cut deliberations. For oil, “the bigger driver right now is on the supply side,” Amrita Sen, founder and director of research at Energy Aspects Ltd., said in a Bloomberg Television interview. “You have seen quite a few pockets of supply weakness, and demand overall on a global basis is healthy.” Oil shipments from Mexico, a major supplier in the Americas, slid 35% last month to their lowest since 2019 as President Andres Manuel Lopez Obrador tries to make good on promises to wean the country off costly fuel imports. The country’s exports of so-called sour crude — the heavy, dense kind that many refineries are designed to process — now stand to shrink even further as state-controlled oil company Pemex has canceled some supply contracts to foreign refiners, Bloomberg News reported last week. That decision has roiled oil markets around the world. Mars Blend, a medium-density sour crude from the US Gulf Coast, has in recent days risen to a multi-year premium over lighter West Texas Intermediate, the national benchmark. Mars usually trades at a discount to WTI. Brent crude hit $90 a barrel on Thursday, the highest since October, and extended gains on Friday. JPMorgan Chase & Co. has said it could hit $100 by August or September. Canadian Cold Lake oil priced at the Gulf Coast traded at the narrowest discount to WTI in almost a year. Key indicators for Middle Eastern medium-sour crude, such as Oman and Dubai contracts, are rallying too. Before Mexico’s move, there was a sequence of supply disruptions both large and small. In January, a deep freeze ate away at crude output and inventories in the US at a time when they would normally grow, keeping stockpiles below seasonal averages through late March. Mexico, the US, Qatar and Iraq cut their combined oil flows by more than 1 million barrels a day in March, tanker tracking data compiled by Bloomberg show. Baghdad has pledged to limit output to make up for non-compliance with prior pledges to the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+. Adding to the tightness, OPEC member the United Arab Emirates curbed shipments of Upper Zakum, a medium-sour oil, by 41% in March compared with last year’s average, according to data from maritime intelligence firm Kpler. The state oil company is diverting more supplies of that crude to its own refinery, traders said. Though the cuts were expected and Abu Dhabi National Oil Co. is offering buyers another type of crude as a substitute, the decline in Upper Zakum exports is contributing to higher regional prices amid the broader OPEC+ curtailment. Crude markets in Europe, meanwhile, were pressured higher by the Houthi attacks in the Red Sea, which sent millions of barrels of crude on a detour around Africa, delaying some supplies for weeks. Disruptions to a key North Sea pipeline, unrest in Libya and a damaged pipe in South Sudan also contributed to the rally, while US sanctions have deprived Russia of tankers that previously transported its oil to buyers including India. The supply pinch could become even more acute in the weeks ahead. With President Nicolas Maduro showing no sign of heeding promises to move toward free and fair elections, the Biden administration could reimpose sanctions this month. The market for heavier, dirtier oil “has been rangebound to bearish for some time now, but this tightness in sour markets and the outlook for the summer driving season in the US suggest the market is turning a corner,” said Samantha Hartke, an analyst with analytics firm Sparta Commodities. It’s a stark contrast from just a few months ago, when oil plunged to multi-month lows as US production climbed and Russian seaborne crude exports ratcheted higher despite sanctions, which have since been expanded. The US Energy Information Administration, after forecasting global inventories to remain unchanged this quarter, now predicts they’ll fall by 900,000 barrels a day. That’s the equivalent to the production from Oman. The supply squeeze comes as demand is ramping up. US refiners are preparing to boost fuel production for the summer, when millions of Americans take to the roads and gasoline consumption peaks. Gasoline stockpiles on the populous East Coast are tightening and manufacturing activity in the US and China is also signaling a boost in fuel use. In Asia, refining margins are around 50% higher than the five-year seasonal average, suggesting healthy demand. Crude’s rally has snarled the Biden administration’s plans to refill emergency US oil reserves, which reached a 40-year low following an unprecedented drawdown after Russia’s invasion of Ukraine. It’s also a political risk for Biden as prices for food and energy remain stubbornly high. Oil’s advance threatens to push retail gasoline, now near a daily national average of $3.60 a gallon, toward $4, a key psychological level. That’s contributing to concern that commodities will reverse the recent slowdown in consumer price gains. Oil prices are now boosting
Gas Glut? Not for Long.
Natural gas prices are falling all over the world. There is abundant supply, and demand has been lukewarm this northern hemisphere winter, which was relatively mild. Indeed, the global gas market is in oversupply. This prompted Morgan Stanley to recently forecast a gas glut that we have not seen in decades. It was going to materialize as a result of strong growth in LNG production capacity, the bank’s commodity analysts said. They cited numbers showing that there was 400 million tons in such capacity to date, but another 150 million tons were under construction—“a record wave of expansion”. It appears the forecast was based on an assumption of not very strong demand growth—but it may be the wrong assumption. Because natural gas demand is set to grow, and grow quite robustly. At the same time, some producers, notably in the United States are already starting to withhold production, because of the low price of the commodity. Asia imported record volumes of liquefied natural gas last month, data from Kpler showed recently. The biggest buyers were China, India, and Thailand, with India’s LNG purchases up by 30% from a year earlier and China’s 22% higher than in March 2023. That record would not have been possible had prices not fallen—and prices had fallen because Europe was buying less LNG. The reason Europe was buying less LNG were its full gas storage sites. Winter was once again mild in Europe and it never got to exhaust the gas it had purchased in anticipation of the heating season. In fact, Europe saw record gas in storage as of the end of this heating season, and that contributed to the weakness of natural gas prices—along with the depressed industrial activity on the continent. The fact that demand for LNG immediately rebounded as prices fell suggests that the longer they stay low, the stronger demand will get, especially among countries that have been trying to reduce their consumption of coal in favor of gas. There are a lot of these, under pressure from transition-focused governments that, though no fans of any hydrocarbons, acknowledge that natural gas has a lower emissions footprint than coal. Two years ago, Europe priced these countries out of the market. Now, with prices so low, they may well consider returning to it, driving higher demand. Supply, on the other hand, may not grow as much as Morgan Stanley expects. The bank’s analysts point to U.S. gas exporters that are planning a lot of new LNG capacity. But whether all of this capacity would end up getting built is another question. Tellurian’s Driftwood LNG project is one example. The facility has been in the works for years, but it has kept failing to secure the necessary long-term buyer commitments to proceed. The future of Venture Global’s second LNG plant is also uncertain—as is the future of all new LNG plants as the federal government paused new capacity approvals. Demand, meanwhile, may be set for even stronger growth, thanks to artificial intelligence. Data centers, which already consume substantial amounts of electricity, are about to become an even bigger drain on the grid as AI gets incorporated in more services. This will automatically mean stronger demand for natural gas for generation—because wind and solar will not be able to handle the surge. “Gas is the only cost-efficient energy generation capable of providing the type of 24/7 reliable power required by the big technology companies to power the AI boom,” the founder of Energy Capital Partners, an investor in both alternative and hydrocarbon sources of energy, told the Financial Times recently. Doug Kimmelman added that gas will be critical for the power supply of data centers in the AI era. Demand for electricity from data centers, according to the International Energy Agency, is set to swell twofold from 2022 by 2026, potentially topping 1,000 TWh. This is a lot of electricity consumption and for all the pledges that Big Tech has made for using low-carbon energy to power its data centers, most of its actual energy comes from hydrocarbons, simply because there is no low-carbon energy that is available around the clock without interruption—and carbon credits can and are bought separately from the electricity they are tied to. All this means that the outlook for natural gas demand in the coming years is quite bullish. Low prices invariably stimulate stronger demand and in this case the ambition for lower emissions helps gas demand specifically grow even more strongly. Then there is the question of supply. It may look abundant now, but in a few months, U.S. drillers’ move to curb supply by drilling but not completing new wells will begin to be felt. Besides, no one can say how the next winter in the northern hemisphere will turn out. It may be mild, but it may be harsh. It is a little bit ironic that if the milder winters of the last two years were driven by climate change, Europe has climate change to thank for its lower use of hydrocarbons.