Commodity Monthly Update - August

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Balance POV

We see balance in both EoS and WoS tightening. There's an uptick in China demand, which is in line with the rosy PMI and Industrial Production release. Saudi and Russia also announced to extend their cut to year end. In WoS, France demand remains at seasonal high.

Supply

OPEC

AG exports fell further in August by 211 kbd, bringing the total quality of crude exported to 18006 kbd, a faster rate than the previous month. The downward trend is in line with the extended voluntary oil supply cuts to year end. Saudi cuts were by 1 mil bpd while Russia has cut 300 kbpd. These were on top of the April cut agreed by several OPEC+ producers running to the end of 2024.?

Russia

Russia’s export seem to stagnate at 3230 kbd compared to the previous month. As expected, its seaborne oil exports fell to an 11-month low in August, as heavy refining maintenance hit oil product exports, and output cut pledges and Black Sea tensions continued to limit crude flows. Despite the shortfalls, exports are seen inching higher and we do not expect to see any significant decrease in supply from Russia.

Iran

In August, Iran saw a rise in oil production and exports, reaching 411 kbd, even amidst U.S. sanctions. This increase appears to be a consequence of Iran adeptly circumventing U.S. sanctions and a seemingly lenient enforcement approach from Washington, potentially reflecting efforts to foster improved relations between the two nations. Given Iran's long-standing expertise in bypassing oil sanctions through strategies such as ship-to-ship transfers and GPS spoofing, a technique that alters GPS transponders to depict inaccurate ship locations. As it seems that the nation is enhancing its proficiency in these tactics, we anticipate that Iran's export levels remain elevated.

Demand

WoS

Demand in the WoS has dipped in the past month as we observe net imports decreasing by 792 kbd MoM. The significant decrease in imports could be attributed to the end of the summer driving season. Overall the west balance has loosened significantly but remains above 2022 historic levels.

China

In August, China experienced a sharp uptick in crude oil imports, escalating to 10013 kbd, propelled by refiners building their inventory stockpiles and increased processing to capitalize on the heightened profits derived from fuel exports. This surge is a marked increase from the previous year, primarily attributed to the domestic demand which was previously stifled due to measures implemented to combat the? pandemic. Given that August marks the peak of gasoline demand during the summer vacation season and considering this is the inaugural vacation period post-pandemic, there is a notable spike in travel demand. However, China's economic prospects remains somewhat sombre, with a lacklustre property sector and subdued domestic consumption exerting pressure on fuel demand. We anticipate a decline in China's imports following its peak in August.

Macro

West

US balance

U.S. crude oil stocks have dropped to their lowest levels of the year to 350.34 million barrels, with further declines anticipated due to record demand, supply cuts, and rising storage costs. The International Energy Agency forecasts demand will grow significantly this year, outpacing supply, especially as Saudi Arabia has voluntarily reduced its output. Although U.S. oil production is expected to average 12.8 million bpd in 2023, there are concerns about sustaining shale gains without increased drilling. Current U.S. oil prices exceed futures, leading to more inventory withdrawals, and analysts believe a significant price difference is required to make crude storage profitable, signaling potential future supply constraints. Given these dynamics, we remain bullish on the demand for U.S. crude oil stocks.

US inflation act and Biden Administration grants?

The Biden Administration is handing out billions of grants as part of the Investing in America Plan in attempts of cooling down the oil industry as they angered the industry many times over the past couple years with their restrictive policies. Not only that, the U.S. Inflation Reduction Act increased credit values for carbon reduction projects across the board, with the tax credit for carbon storage from carbon capture on industrial and power generation facilities rising from $50 to $85 per ton, and the tax incentives for storage from direct air capture (DAC) jumping from $50 to $180 per ton.

Occidental Petroleum, one of the biggest U.S. oil producers has just won one of two grants by the Biden Administration and is set to build the world’s first direct air capture plant in Texas that would extract carbon dioxide directly from the atmosphere. More oil producers might be incentivized to deploy DAC technology if Occidental Petroleum successfully accelerates their DAC plans while still making profits.

Weak growth in EU?

European business activity contracted once again during August, to its lowest level since November 2020. Cyrus de la Rubia, a chief economist at Hamburg Commercial Bank, said the service sector of the euro zone is “unfortunately showing signs of turning down to match the poor performance of manufacturing.”

After ECB's July meeting, ECB President Christine Lagarde said the central bank could either raise rates or pause rate hikes. Ultimately, the decision will depend on new data.

Volatility in oil prices may persist until ECB sets their next moves so that investors get better clarity.

EU possible landmark global agreement on fossil fuels stoppage

European Union (EU) nations are rallying to propose a landmark global agreement on ending the use of fossil fuels at the United Nations COP28 climate summit slated for November in Dubai. This draft proposal, revealing the EU's negotiating position, marks an unprecedented move as countries haven't historically come together in UN climate talks to cease the utilization of CO2-emitting fossil fuels, a primary driver of climate change. While the EU aims for a shift away from fossil fuels well before 2050, challenges loom large, with countries reliant on oil and gas revenues, like Saudi Arabia, showing resistance in previous summits. With the ongoing debates on carbon capture versus fossil fuel reduction, the journey to a consensus will be challenging. The ambition of the EU underscores a global momentum towards cleaner energy, but the resistance from oil-dependent nations indicates a potentially long and contentious path ahead in climate negotiations.

East:

Saudi Arabia and Russia extend voluntary cuts to year-end, causing Brent to hit $90/bbl

Saudi Arabia is extending their 1 million bpd cuts to the end of 2023, while Russia extends their 300,000 bpd cuts to year end as well. Supply tightness is expected to persist going into the fourth quarter, especially in the medium sour crude market as that is the main quality of crude oil produced in the Arabian Gulf. Brent/Dubai spread has come under significant pressure over the last few months, and we believe that the weakness will continue amid rebounding oil imports from China in August and increasing supply in the US gulf coast.

Price of Russia’s Urals Crude has risen well above the G7 imposed $60 price cap, averaging $74 per barrel in August. This poses a potential risk that Russia may not adhere to their announced cuts like earlier in the year, as higher Ural’s crude prices directly translate to higher revenue which can be used to fund the war. Promised cuts decreased as well (500k bpd in August vs 300k bpd till EOY) and may be a direct result of higher crude prices.?

Russia’s net exports to Far East Asia increased by about 181kbd, as China continues to buy discounted Russian crude and add to their strategic stockpiles.

OPEC oil production rose in August, as cuts from Saudi Arabia offset gains from other producers (Iran, Nigeria)

According to Bloomberg, oil production from OPEC increased by 40,000 bpd in August. The largest contributor was Iran, where production rose to a 5 year high in August of over 3 million bpd despite Western sanctions, as Biden hopes for increasing supplies in the market to suppress prices as the November 2024 elections approach.

However, data from kpler showed that net exports in August from OPEC countries decreased, therefore contradicting data reported by Bloomberg.

The reason for this discrepancy is that Kpler only tracks seaborne crude, therefore the expectation is that Iran is exporting more crude through their pipelines.?

Nigeria has also increased production by 80,000 bpd to 1.34 million bpd following the restart of their Forcados terminal. Nigeria has been consistently pumping below its quota thus permitted to increase.

PMI numbers paint rosy picture for Chinese recovery

The August PMI numbers paint a rosy picture for Chinese economic growth with the Caixin Manufacturing PMI increasing from 49.2 in July to 51 in August, and the NBS official Manufacturing PMI rising from 49.2 in July to 49.3 in August. While a reading of 49.3 is still below the expansionary reading of 50, there is a clear uptick in manufacturing demand. This is further supported by a marked increase in Chinese oil demand, with crude oil imports in August up 21% from the previous month, according to official customs data.

Elsewhere in the services subindex, the Caixin services PMI fell to 51 in August from 51.5 in July, while the NBS official non-manufacturing PMI fell to 51.8 in August from 54.1 in July. Despite the downtick in the services subindex, the PMI numbers still remain firmly above the expansionary threshold of 50. The rosy sentiment is further bolstered by Chinese diesel demand, which grew more than expected with limited diesel stockbuilds, despite August being a seasonally weak month for diesel demand. This could imply that individuals are travelling more, which is a growth metric that will likely increase in the face of the upcoming Mid-Autumn Festival.?

Medium Sour tightness supports Dubai price

The Brent Dubai spread (known as the EFS) printed negative towards the end of August, indicating that Dubai briefly flipped from its usual premium for Brent to a discount. Brent usually trades at a premium to Dubai because Light Sweet crude is easier to refine and generates a slate of more valuable products.? The tightness in the Medium-Sour market can be attributed to Saudi Arabia’s voluntary 1 million b/d production cut, which reduced crude production to a two-year low of 9 million b/d. Despite this, many new complex and sophisticated refineries in India, Kuwait and China may still opt to purchase Dubai crude, since their refineries are configured to crack medium sour crude at maximum efficiency. This means that Saudi Arabia would have achieved its goal of supporting prices by production cuts. The narrowing EFS could also mean some WTI cargoes finding their way to Asia, tightening the WTI supply in a time where the US Strategic Petroleum Reserve is at a 40 year low.?

Chinese mortgage policies may support property market

Chinese authorities have rolled out a series of policy measures to support the property market, the most significant of which allows home buyers to enjoy preferential loans for first-home purchases regardless of their credit record. As long as an individual does not have an existing property in Guangzhou or Shenzhen, they will be treated as a first-home buyer, and will be accorded the corresponding benefits. For example, in Guangzhou, a first-time home buyer has a down payment ratio of 30% and a mortgage interest rate of 4.2%, while a second-home purchases is set at 70%, with a mortgage interest rate of 4.8%. This policy significantly eases the capital requirements for individuals to purchase houses, and will hopefully stimulate property demand. Land revenue is a large source of income for provincial governments, and so having policy measures targeted at stimulating property demand creates a positive outlook for Chinese economic recovery.