Oil & Energy

Date Issued – 29th February 2024

Courtesy of?Steve Alain Lawrence, Chief Investment Officer

Janis Urste, Chief Market Strategist

Physical Oil Market Outperforms, Pressuring Short Sellers

Despite official reports suggesting an oversupply, the physical oil market is notably constrained, highlighted by rising spreads that defy expectations. This constriction is attributed to a series of supply disruptions across various regions, including shipping diversions, freeze-offs in the US, labor disputes in Libya, and logistical hurdles in the North Sea.

This physical market tightness contrasts with the financial market's bearish stance, as traders continue to sell off and short the sector, leading to a significant increase in short interest in energy stocks. This divergence challenges the resilience of the physical oil market.

A recent Goldman Sachs analysis, featuring as the chart of the week, underscores the abrupt and significant tightening of the market due to a sudden scarcity of physical oil—a development that has yet to gain widespread attention in discussions surrounding the energy sector.

Goldman Sachs presents further charts delving into the latest trends within the physical markets, beginning with supply dynamics where they observe a notable "firmness."

Recent unusually warm weather has subtly reduced global oil demand by approximately 300,000 barrels per day on the demand side of the market equation.

Goldman Sachs has observed that due to supply constraints, total OECD inventories now fall short by approximately 21 million barrels from the firm's end-of-February forecast of 2,765 million barrels, indicating an anticipation of continued market tightness.

Oil Prices on Track for Sequential Monthly Increases

Crude oil is poised for its second monthly gain, driven by anticipated OPEC+ production cut extensions, contributing to a tighter market and elevating prices. Brent crude has risen by 2% since February, while West Texas Intermediate has climbed from $72 to over $78 per barrel. Despite the upward trend, increased crude oil inventories have raised concerns about U.S. demand, contrasting with reductions in gasoline and diesel stocks, which have fallen below the five-year average. However, the market sentiment is cautiously optimistic, with 'upside risk' becoming a more common outlook amid factors like U.S. interest rates and China's consumption, alongside supply influences from OPEC+ and U.S. shale.

U.S. Conducts 230 Operations Against Houthis to Secure Red Sea Trade

The German navy has joined U.S. forces in targeting Yemen's Houthis in the Red Sea, part of intensified efforts following the U.S.'s execution of 230 airstrikes against Houthi positions. This military action, aimed at protecting maritime commerce against what the U.S. equates to piracy, includes downing Houthi drones and targeting their logistical support. These operations have disrupted international trade, affecting 55 countries, leading to halted shipments through the Red Sea and increased insurance costs. The strategic significance of the Red Sea as a conduit for 7 million barrels per day of global oil trade underscores the broader impact of these tensions on international energy markets and shipping routes.

Shell on U.S. Solar Portfolio

Shell is divesting a significant portion of its U.S. solar power operations, representing about 10.6 GW of generation and energy storage capacity, as part of a strategic shift under CEO Wael Sawan towards reinforcing its foundational oil and gas business. This decision reflects Sawan's stance on the vital role of hydrocarbons in meeting global energy demands, countering calls for a rapid reduction in fossil fuel production due to potential economic repercussions, as exemplified by the recent energy crisis in Europe.?In realigning with its primary oil and gas focus, Shell aims to prioritize higher-margin projects and electricity trading, moving away from the lower-return business of capacity construction.

India's Potential Surge in the Green Hydrogen Sector

India is poised to become a significant player in the emerging global green hydrogen sector, which promises $500 billion in economic opportunities, according to Alvarez & Marsal. The country's abundant renewable resources, manufacturing capabilities, and low capital costs position it alongside other renewable-rich nations like the UAE and Saudi Arabia as leaders in green hydrogen production. However, high production costs currently hinder the widespread adoption of green hydrogen, which remains costlier than conventional 'grey' hydrogen. Despite these challenges, the International Energy Agency (IEA) and other experts see potential for substantial growth in low-emission hydrogen production by 2030, contingent upon significant cost reductions to facilitate a broader energy transition.

India Achieves Historic Peak in Coal Inventory Levels

India's coal-fired power generators have reached a record stockpile of 44 million tons as of February's end, nearly doubling from last year, amid a significant increase in coal mining to support record coal-fired power production. This surge addresses the previous coal shortages and aims to meet the growing electricity demand. With coal accounting for 70% of India's electricity generation, the country has intensified coal production and improved coal delivery to power plants to ensure energy security.

Further, India plans to cease coal imports by 2025-2026, aiming for 100 million tons of coal production from underground mines by 2030. Additionally, to cater to the escalating power requirements, India is expanding its thermal power capacity by 88 GW by early 2032, predominantly through coal-fired power, in light of the high costs of natural gas. This expansion includes a significant increase in coal-fired capacity in 2024, marking the largest annual growth in six years.

Spain's Renewable Energy Milestone

Spain's power prices significantly decreased in February, driven by a surge in wind and solar generation, resulting in prices far below those in France. With record renewable energy outputs, Spain, traditionally reliant on imports, began exporting electricity, even to France. This shift to renewables, which now account for over half of Spain's electricity mix, has reduced consumer prices but impacted utility profits. Spain's investment in solar and wind over the past decade has positioned it as a leader in renewable energy within Europe, showcasing strong growth potential in the sector.

Kuwait Oil Exports Following Al-Zour Refinery Expansion

In February, Kuwait's fuel oil exports reached a record high, driven by the Al-Zour Refinery reaching full capacity. This surge in exports, amounting to approximately 720,000 metric tons or 158,000 barrels per day, underscores Kuwait's growing role as a major exporter of both very low-sulfur and high-sulfur fuel oil, essential for shipping fuels. The Al-Zour Refinery, operated by the Kuwait Integrated Petroleum Industries Company (KIPIC) and one of the largest in the Middle East with a 615,000 bpd capacity, has enhanced Kuwait's export capabilities. Its flexibility in processing various types of Kuwait crude aligns with Kuwait Petroleum Corporation's strategy, positioning Kuwait prominently in the global fuel oil market.

[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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