Energy Market Scan - March 2023

We believe that the banking crisis, in the short term, will impact the ability to pay and hence oil demand.

Posted on Apr 17, 2023 by PRAKASH KINI (PK)

Prologue

Everyone is trying to figure out how the current banking crisis will impact global commodities. We believe that the banking crisis, in the short term, will impact the ability to pay and hence oil demand. This is also validated by the recent OPEC+ cuts, although the cut did raise prices in the interim. Continued longer term deal making between Russia and China, and now with Saudi getting into the mix signing a deal to put up a refinery in China, will ensure the flow of discounted oil and potentially oil products to satiate large demand markets such as China and India. This will, in the short to medium term keep oil prices in check, and will compel the oil benchmarks to dip towards discounted oil prices. Meanwhile, the Russian “shadow fleet” is now 20% of the global tanker share.

In the long term, the banking crisis will hit upstream and operational investments and hence supply, and the oil and gas arena will heat up in major importing countries in China and South and Southeast Asia as well as in supplier regions such as Venezuela, Iran and Iraq as these supply constraints hurt. The battle for E&P and mining land rights might also very well be spilling over into the Arctic with the announcement of the Polar Silk Road project, which also has major geopolitical implications.

New deals between major demand markets and origin markets will have the effect of a fresh throw of the dice in the markets and have a potential to reshape tanker movement and routes.

And amidst all this, refining companies and countries will have a field day.

Meanwhile, rising biofuel demand, is re-raising the food vs. fuel debate, and could lead to a vegetable oil and feedstock crunch.

PetroYuan and PetroRupee media narratives will bloat as new yuan and rupee deals are made and the death of the US dollar will be announced, although we still hold that a credible shift away from the PetroDollar is unfeasible in the short to medium term.

From our Trading Desk

The most conspicuous geopolitical development is a picture in the WSJ on 10th Mar of the Secretary of Iranian National Security Council, Saudi Arabia’s national security advisor and a senior Chinese diplomat in Beijing. This is built on the back of what seems like an elaborate image building plan which included the Chinese leader agreeing to reopen the economy following protests, or heeding calls from its citizens.

The weakness in the Ruble over the past nine months is reminiscent of a similar weakness following the Ruble’s depegging in 2013 followed by a cash generating long-dated gas supply arrangement with China in mid-2014. The meetings between China and Russia over the past month included signing several natural resources linked agreements; the impact of those agreements may not be felt in the near dated price.

The near-term implication of a multi-tier market created by sanctions and bilateral arrangements is its impact on the price transmission mechanisms to global benchmarks. The price of the sanctioned, marginal barrel may be lower as opposed to being higher. The dampening effect of the lower priced marginal barrel gets replaced by an asymmetric upside risk on the benchmark at the point disappearance outpaces restricted supply.

Forward curves have traded relatively flat and the modest contango in the front contracts has traded to a flat structure. Cash basis reflects a balanced to tight availability of crude oil, globally.

From our Narratives Scan

Crude Oil and Oil Products

Banking crisis may be more a supply hit than demand hit: Goldman

The current banking crisis in conjunction with interest rate hikes will impact investments and supply operations costs more than it will impact demand which will regain pre-pandemic levels and some more, says Goldman Sachs.

Sanctioned oil continues to flow, large deal making is in progress

Global oil refinery expansion is centered in China, India, and Asia

Refining and Blending capacity major constraint for Russian exports

Russia has already procured the vessel capacity to tap into major global product markets, its refining and blending capacity now is a major cap on its products exports.

Iraq, Iran and Venezuela will play a big role in the future oil arena

Venezuela, Iran, Iraq will play a big role in the future oil arena.

Iraq can triple its oil production output, but the current internal strife in Iraq with the Kurd region does pose a major challenge. Moreover, its deal with TotalEnergies is also going through tough times, political maneuvers by its competitors are putting a wrench in the works.

Upstream oil M&A activity in Southeast Asia heats up

Indonesia, Malaysia and Vietnam are going be hotspots for upstream oil M&A activity in the Southeast Asian region.

The battle for E&P and mining land rights spills into the Arctic

The Polar Silk Road project underlines the burgeoning interest in the Arctic for E&P, mining rights, this also has geopolitical implications.

France labor strikes cause refining shortfall

France labor strikes cause refining shortfall prompting release of strategic reserves.

Global biofuel boom impacts veg oil supply, raises the food-fuel question

Natural Gas

China conducts first LNG trade settled in Yuan

California might penalise companies for high gas prices

Power

Dip in gas prices may provide families relief in their fuel and power bills

Is a reliable decarbonised power system possible by 2035?

At least some people think this is possible, and hydrogen will have a major role to play.

Saudi and China collaborate on solar power plants

New 1 GW wind farm planned off the coast of France

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