Despite serious supply problems in the market, oil prices crashed on Tuesday morning due to renewed recession fears and the prospect of demand destruction.
Whilst most of 2022 could only be characterized as a period of hardship for Europe’s embattled industries, things are about to get even worse as Russian pipeline supply falls and power prices across the continent soared.
- Day-ahead prices in Italy and France have soared above €400 per MWh, with Germany trending slightly lower – attesting to the tightness, annual 2023 forward prices are only marginally lower than the current pricing range.
- Despite its gas-focused power generators struggling, with main sufferer Uniper (ETR:UN01) losing some 60% of its stock value since the beginning of June, Germany is still reticent about its plans to declare a gas emergency.
- Poor hydro performance has also aggravated the situation, with Platts estimating a loss of 6GW across Europe, whilst nuclear continues to be kneecapped by recurring French strikes and outages, as well as German decommissioning.
Market Movers
- As we had predicted, Algerian national oil and gas company Sonatrach confirmed it would be seeking to review gas pricing formulas with all its clients, moving away from the oil peg.
- UK-based energy firm Shell (LON:SHEL) signed a deal with QatarEnergy for the North Field East expansion project, taking a 6.25% stake in the project, the same stake as TotalEnergies and ExxonMobil.
- Speculation is rife that US oil major ExxonMobil (NYSE:XOM) might be in for its best-ever quarterly performance, with Q2 operating profit moving above $16 billion, probably much to the ire of the Biden Administration.
Tuesday, July 05, 2022
A look at today’s stock market is enough to understand the main concern for oil markets right now, recession. Whilst most assessments expected recession to kick in later this year, its first signs are already emerging with European economies potentially entering a recession in Q3. Seeing Brent futures losing a hefty 10% today and dropping close to $102 per barrel, one would perhaps fail to notice that supply remains very much an issue – Libya’s almost complete degradation into an all-out internecine conflict and Norway’s offshore production seeing the first massive strike campaign of recent years have narrowed potential supply sources even further. Moreover, Saudi Aramco’s August OSPs also point towards little if any remaining spare capacity. Yet all of this is not enough to break the cycle of fear.
Saudi Aramco Flirts with Record High OSPs. Due to weak supply, robust demand, and exorbitantly steep backwardation, Saudi Aramco increased all its August 2022 formula prices, with the Asian Arab Light benchmark set at $9.30 per barrel, only 5 cents off the all-time high seen in May.
Germany Overhauls Bailout Law to Help Energy Firms. Confronted with an ever-aggravating outlook for Uniper (ETR:UN01), the German government revamped legislation that would allow Berlin to provide firms with bailout packages modeled on pandemic relief for airline Lufthansa.
JP Morgan Warns of $380 Oil After Price Cap. Analysts from US investment bank JP Morgan (NYSE:JPM) warned that in case a price cap is introduced on Russian crude, the subsequent (deliberate) cutting of oil production could send oil prices more than tripling to $380 per barrel.
Saudi Arabia and Kuwait Want More Crude from Neutral Zone. Negotiators from Riyadh and Kuwait met this week to discuss ways to develop output from the jointly managed Neutral Zone, seeking to move the current production of 175,000 b/d to the nameplate capacity of 500,000 b/d.
Security in Libya Gets Even Worse. Tensions have reached an apogee this week as Libyan protestors not only continue blocking oil fields but have also stormed the parliaments of both the Tripoli and Tobruk governments, decrying never-ending power cuts across the North African country.
Pakistan Is Looking Into Russian Crude. Impressed by India’s sudden ramp-up of Russian crude imports to almost 1 million b/d, the Pakistani government has asked its refineries to look into its discounted purchases as a means to alleviate the impact of a soaring energy import bill.
Norway Goes for Offshore Oil Strike. Starting from today, a union-organized strike of offshore platform workers will be gradually paralyzing some 10% of Norway’s oil and gas production after previous rounds of negotiations failed to yield any progress on wage demands.
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Uneven Outlook Scares Oil Permabulls. Amidst a deteriorating economic outlook, the past week has seen another decrease in long positions held in petroleum contracts by investors, though the sale of 9 million barrels last week is much milder than the hefty 71 million barrels in the week to 21 June.
Green Investors Pledge to Go Hard on Utility Firms. Less than a week after the US Supreme Court curbed federal powers on environmental regulation, activist green investors vowed to follow even more thoroughly the ESG performance of utility companies.
US LNG Exports Continue Their Decline. US outflows of LNG have fallen to their lowest level since February at 6.42 million tons as the shut-down of Freeport LNG continues to kneecap export possibilities, whilst hot weather has so far kept domestic gas prices from plummeting.
Russia Finds Light Oil in Offshore Arctic. Russia’s largest oil producer Rosneft (MCX:ROSN) has announced a more than 600 million barrel discovery of light sweet crude in the Pechora Sea in the Arctic, claiming that it has the competence to go it alone.
India Slaps Windfall Tax on Fuel Exports. With India seeking ways of managing its fiscal deficit, the government in New Delhi has introduced a windfall tax on exports of gasoline, diesel, and jet fuel, despite actual exports being lower than last year amid strong domestic demand.
Chile Moves Closer to Implementing Copper Mining Royalties. The government of Chile has introduced a draft bill that would increase copper mining royalties to fund its social programs, whilst also taxing the adjusted margins by a marginal rate of 2%-40%, depending on the current market prices.
By Michael Kern for Oilprice.com
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