Oil & Energy

Date Issued – 8th April 2024

Courtesy of?Steve Alain Lawrence, Chief Investment Officer

Janis Urste, Chief Market Strategist

Argentina's Oil War

President Javier Milei's aggressive stance against Argentina's oil provinces, particularly in Patagonia, risks sparking a major energy conflict. Milei's efforts to centralize power and address economic woes by challenging provincial autonomy over natural resources have led to threats from regions like Chubut to withhold oil and gas supplies. This battle casts a shadow over Argentina's energy future, especially concerning the Vaca Muerta shale gas reserve, which Milei hopes will transform Argentina into a key regional energy player.

As tensions mount, Milei's refusal to engage in traditional political bargaining with powerful provincial governors, who control the vast majority of the country's energy production, could either reshape Argentina's energy policy and political dynamics or lead to a deadlock with far-reaching consequences.

OPEC+

The OPEC+ Joint Ministerial Monitoring Committee has maintained the group's production quotas, despite surging Brent prices reaching $90 per barrel and growing pressures to increase output. The committee emphasized the importance of adherence to these quotas, specifically instructing Iraq and Kazakhstan to outline how they intend to align their output with second-quarter expectations. Despite an overall February production of 34.5 million barrels per day, slightly over the set quotas, key members like Saudi Arabia and Russia are compliant with their allocations. Amid escalating tensions in the Middle East, Ukrainian conflict developments, and a demand rebound, OPEC+ has postponed further discussions on production adjustments until their scheduled meeting on June 1.

Egypt Turns to LNG Imports

Egypt, which previously experienced severe summer power outages and achieved gas self-sufficiency with the discovery of the Zohr gas field, has resumed importing LNG. Facing a significant drop in domestic gas production and a projected 30% decrease in Zohr's output from its 2021 peak by year-end, Egypt is now seeking an IMF bailout exceeding $50 billion. After its last LNG export to Turkey on March 11, Egypt's national energy company ENGH has procured at least one LNG shipment for delivery to Jordan’s Aqaba terminal. With 2024 anticipated to be Egypt's hottest year on record and natural gas being crucial for both power generation and energy-demanding industries like fertilizer production, the country is adjusting its energy strategy to meet its growing needs.

Europe's Refining Sector

The global refining sector, despite enjoying remarkable margins recently, faces vulnerability similar to the COVID era, with potential closures of up to 3.6 million barrels per day (b/d) in capacity. Wood Mackenzie projects that nearly 20 million b/d of refining capacity might be shut down by 2030, with Europe—a region abundant in standalone catalytic cracking facilities—being particularly affected.

The emergence of new refineries, such as Nigeria's Dangote and Mexico's Dos Bocas, is set to intensify global gasoline supply and diminish Europe's export prospects, prompting consolidation within the sector. Moreover, the final expansion stage of China's refineries could edge out up to seven independent refineries as the country favors state-run entities, posing additional challenges for Japanese refiners against the backdrop of China's more efficient oil companies

U.S. Weighs Venezuela Policy

Facing an April 18 deadline, the US government deliberates on whether to renew Venezuela's six-month sanctions waiver or to reimpose sanctions, as advocated by 20 former US officials in response to the disqualification of opposition candidate Maria Corina Machado. Despite concerns that reinstating sanctions amid Brent prices surpassing $90 per barrel could trigger further price surges, the State Department is considering targeted measures against Maduro's regime to avoid bolstering China's involvement in Venezuela. US imports from Venezuela have reached 165,000 barrels per day in 2024, with Valero, Chevron, and Phillips 66 as the principal buyers.

Japan's Electricity Market Attracts International Traders

Global trading firms are increasingly engaging in Japan's electricity market, spurred by the liberalization of electricity prices and the initiation of futures trading following Tokyo's 2016 reforms. This market has seen significant volatility due to the restart of nuclear facilities and extreme weather events. Mercuria, along with Vitol, BP, and Engie, has recently entered Japan's power trading scene, with the volume of traded electricity in the first quarter of 2024 surging nearly 15-fold compared to levels before the 2016 reforms. While direct participation in the physical electricity market requires a permit and accurate production forecasts to avoid fines, futures contracts can be traded without government approval, even from outside Japan.

Rising Coal Use in South Asia Challenges Global Reduction Efforts

South Asia is emerging as a key region for increased coal consumption, driven by population growth and a surge in electricity demand. In Bangladesh, coal is poised to surpass natural gas as the main electricity source, with coal generation in 2023 doubling from the previous year to a record 17 TWh. The country has not only increased coal imports from India but also boosted its seaborne imports by 50% to a record 12.7 million tonnes, addressing the challenges of powering a rapidly growing economy with an average annual growth of 6% from 2019 to 2023. Given that coal costs half as much per unit as imported LNG, with Australian coal priced around $130 per metric tonne, nations like Bangladesh and India are anticipated to further escalate their coal use, barring a significant drop in LNG prices.

China's Export Restrictions Spike Gallium Prices

China's imposition of export restrictions on the rare earth minerals gallium and germanium has dramatically driven up their market prices, with gallium nearing its highest price point since 2011 due to tightened global supplies. Essential for defense and aerospace technologies, gallium now requires export licenses, causing its price to surge to $575 per kg for delivery to Rotterdam—a doubling since August 2023. China's gallium exports for January-February 2024 plummeted by 70% year-over-year, from 8,865 kg to just 2,760 kg, with Japan, South Korea, and Germany as the principal purchasers. Significantly, the U.S. Defense Department disclosed last year that it lacks a strategic reserve of gallium, while China dominates 94% of the global gallium refining capacity.

[Disclaimer: This article provides financial insights & developments for informational purposes only. It does not constitute financial advice or recommendations for investment decisions.]

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