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Oil Prices Inch Lower On Hot Inflation Data

·5 min read

Crude prices fell on Tuesday morning, ahead of the weekly crude inventory reports, as August inflation data came in hotter than expected.

Chart of the Week

Gas-to-Oil Switching Counteracts Recession Fears

- Despite the drop-off in European spot prices, the cost of natural gas remains prohibitively high, paving the way for global gas-to-oil switching in the power generation industry.

- Refiners and energy-intensive industries are already adding some 350,000 b/d of incremental oil demand, coming from the burning of fuel oil and other oil products (instead of gas).

- According to Platts Analytics, further fuel switching could boost oil demand by another 300,000 b/d in Q1 2023 when gas prices are expected to peak amidst curtailed Russian supply.

- Right now, benchmark European and Asian LNG prices are five to six times higher than high sulphur fuel oil values, meaning most power generation companies avoid using gas whenever possible.

Market Movers

- The largest independent energy trader in the world, the Netherlands-headquartered Vitol Group has reportedly made $4.5 billion in profits over H1 2022, more than in the entire (record) year of 2021.

- Leading US LNG exporter Cheniere (NYSEAMERICAN:LNG) will ramp up its share repurchase program by $4 billion for additional three years, with 2022 EBITDA estimates moving up to $11.0-11.5 billion.

- In arguably the last divestment move before the Brazilian elections this October, Norway’s fertilizer giant Yara (OSL:YAR) is rumored to buy the fertilizer unit of Petrobras (NYSE:PBR) for an undisclosed sum.

Tuesday, September 13, 2022

Inflation is rearing its ugly head again, with U.S. consumer prices gaining 0.1% month-on-month in August, just when the analytical community and US Federal Reserve alike expected a month-on-month dip. This will only bring grist to the mill of the Fed, meeting next week to discuss further interest rate hikes. With ICE Brent dropping to $93 per barrel after several consecutive daily increases, demand woes in the U.S. and China seem to be temporarily overpowering upside factors such as continuously shrinking global inventories. But there the bullish sentiment should still be there with U.S. Secretary of State Anthony Blinken claiming the Iranian nuclear deal is unlikely in the near term (most probably a coded way of saying until mid-term elections) and that Iranian proposals were a step backward.

Iran Deal Fades as Europe Loses Faith. In a joint statement issued by three European countries privy to nuclear talks with Iran, the governments of France, Germany and the UK criticized Iran for not seizing the opportunity presented by the EU draft deal and that there remain ‘serious doubts’ about Tehran’s intentions.

South Sudan to Leave OPEC+. A first sign of discontent within the ranks of OPEC+ members, South Sudan threatened to leave the oil group if it stands in the way of its ambitious production ramp-up that sees output increasing from 150,000 b/d now to 230,000 b/d by 2024.

India May Need 28 GW of New Coal Capacity. CEA, India’s advisory body to the power ministry, claimed India may need up to 28 GW of new coal-fired capacity by 2032 to meet soaring power demand, expected to double over the upcoming 8 years from the current 404 GW.

Diesel No Longer That Attractive. The U.S. and European diesel contracts have seen the biggest selloff since early March, both totaling -8 million barrels and reversing three consecutive weeks of middle distillate purchases as fears of slowing growth sap confidence across the Atlantic.

Related: Permian Oil Production Is Set To Hit A Record High

U.S. Shale Growth Might Not Be That Stellar. With well costs edging up by 15% year-on-year and drilling costs up 10% y-o-y, Scott Sheffield, the head of Pioneer Natural Resources (NYSE:PXD), forecast US oil output growth will only be 500,000 b/d this year, with 2023 increments perhaps even lower than that.

Saudi Arabia Bets Big on Steel. According to the Saudi industry minister Bandar bin Ibrahim al-Khorayef, the Middle Eastern country intends to build three steel plants at a cost of $9.3 billion, with total assumed capacity at 6.2 million tons.

Norway Fervently Rejects EU Gas Price Cap. Norway’s prime minister Jonas Gahr Stoere has warned against a price cap on Norwegian gas sold to EU countries, saying that such steps would lead to “unintended consequences” aggravating the EU’s access to energy.

Instead of Caps, EU Mulls Levy on Energy Profits. With gas caps rather unlikely, the European Commission has unveiled a draft proposal that would see EU countries introduce a so-called solidarity contribution, effectively a levy based on taxable surplus profits made in 2022 by oil, gas and companies.

U.S. Courts Poland to Build Nuclear Plants. Poland has received an offer from the U.S. nuclear energy firm Westinghouse to build six large-scale reactors in the European country, trying to ward off French and South Korean competitors as Europe is gradually changing its perception of nuclear.

Nigeria Output Falls to Lowest Level on Record. For the first time on record, Nigerian oil exports plunged below 1 million b/d, halving compared to pre-pandemic figures, as oil theft, force majeure events, and structural underinvestment continue to plague operations in the African country.

Europe’s Green Credentials Marred by Coal Binge. Having set some of the boldest green energy targets globally, the European continent has struggled to shake off its coal dependence with imports rising 35% year-on-year to 57.3 million tons in January-August 2022, according to Kpler data.

New Battlefield Opening Between Ukraine and Russia. Ukraine’s state energy firm Naftogaz has initiated a new arbitration proceeding against Russian gas firm Gazprom (MCX:GAZP), reportedly for not paying gas transportation services, marking yet another future bullish factor for European gas.

DOE to Incentivize Geothermal Power in the U.S. The U.S. Department of Energy unveiled a new plan to cut the cost of geothermal generation by 90% to 45 per MWh by 2035, arguing that the country has 5 TW of potential heat resources, of which only 3.7 GW are currently being exploited.

By Tom Kool for Oilprice.com

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