Oil & Energy

Date Issued – 22nd April 2024

Courtesy of?Steve Alain Lawrence, Chief Investment Officer

Janis Urste, Chief Market Strategist

Valero and Chevron Source Crude via Trans Mountain Pipeline

Valero Energy Corp. and Chevron Corp. have begun purchasing oil from Canada's expanded Trans Mountain Pipeline system, marking a potential shift in the West Coast's oil sourcing dynamics. The pipeline, which faced delays and budget overruns increasing its cost from $33 billion to $53 billion, is set to officially start operations on May 1. Initially expanding to transport 890,000 barrels per day, it aims to connect Canadian oil producers with international markets. However, the increase in oil production may quickly utilize this new capacity, highlighting the challenges of meeting energy demands while managing environmental concerns and market dynamics. The entry of Canadian crude has already narrowed its price gap with WTI, reducing the cost benefit for U.S. refiners.

Wildfire Threat Near Canadian Oil Sands

Authorities in Alberta have issued evacuation alerts near Fort McMurray due to a nearby wildfire, reminiscent of a devastating fire eight years ago that disrupted nearly a million barrels of daily oil production. Recent wildfires, including persistent "zombie fires," have raised concerns about another severe wildfire season, potentially threatening significant oil sands output in the region. Last year, wildfires caused shutdowns of over 300,000 barrels per day, accounting for 3.7% of Alberta's production. Despite some relief from spring rains, nearly 2.7 million barrels per day remained at high risk due to wildfires in May, while the province's production reached a high of 4.2 million barrels daily in November 2023.

Potential Hormuz Closure Predicted to Spike Oil and Gas Prices

Tensions between Iran and Israel could potentially escalate to the closure of the Strait of Hormuz, causing significant spikes in crude oil and liquefied natural gas (LNG) prices, according to analysts from Indian Motilal Oswal Financial Services. They highlighted the critical role of the Strait, which processes 21 million barrels of crude and other liquid energy cargos daily. In such an event, rerouting this immense volume would be nearly impossible. The analysts point out that while the oil market has alternative pathways via the Red Sea for UAE and Saudi Arabian oil, LNG lacks such alternatives, making it particularly vulnerable to price surges. Currently, the Strait of Hormuz is a vital conduit for about 20% of the world's oil consumption and almost all of Qatar’s LNG exports, emphasizing its strategic importance on the global energy stage.

Tesla Anticipates Steepest Quarterly Downturn Since 2017

Tesla is set to report its lowest quarterly profit margins since early 2017 for Q1 2024, impacted by a price war and decreased demand in the electric vehicle sector. Financial Times anticipates that the company will also reveal its first negative free cash flow since early 2020. Additionally, Tesla's deliveries have significantly dropped for the first time since 2020, missing expectations despite price reductions. The decrease was linked to production challenges at its Fremont factory and disruptions from the Red Sea conflict and an arson at its Berlin plant. Tesla's stock has also dropped 41% this year due to intensified competition from established automakers and low-cost Chinese EVs. Recently, Tesla reportedly canceled plans for a $25,000 EV, a claim that CEO Elon Musk has publicly denied.

Sweden Advocates for EU Sanctions on Russian LNG and Shadow Fleet

Sweden's Foreign Minister Tobias Billstrom urged the EU to adopt its 14th sanctions package against Russia, which includes curbing the shadow fleet that facilitates Russian oil exports and banning Russian LNG imports. At an EU meeting in Luxembourg, he noted internal division over the LNG ban, as some member states, guided by the European Union Agency for the Cooperation of Energy Regulators (ACER), argue that Europe's reliance on LNG makes an immediate ban impractical. ACER recommends a gradual reduction of Russian LNG, starting with spot imports, while considering the implications of existing long-term contracts and the upcoming expiration of a crucial gas transit contract through Ukraine in 2024.

Russian Oil Facilities Fortify Against Ukrainian Drone Strikes

Bashneft, part of Russia's Rosneft, has implemented metal mesh defenses at its refineries to ward off Ukrainian drone attacks, according to statements from Radiy Khabirov, head of Bashkortostan. Additional undisclosed protective measures are also in place. These attacks have heightened global concerns about reduced Russian refining capacity and potential spikes in oil prices. The U.S. has advised Ukraine against these strikes to prevent Russian retaliation and further market destabilization. Despite some recovery in refining operations, ongoing maintenance means more capacity may still be offline, although Russia aims to fully restore damaged facilities by early June.

U.S. House Debates Year-Round E15 Gasoline Legislation

Representative Nunn has proposed The Year-Round E15 Act of 2024 in the U.S. House of Representatives to adjust the Reid vapor pressure limits to allow year-round sales of E15 fuel blends in several Midwestern states from May 1 to September 15, 2024. This initiative aims to support the Midwest's ethanol industry by aligning E15 fuel regulations with those of E10, potentially improving market conditions and access to higher ethanol blends while addressing air quality concerns. The bill, reflecting ongoing debates about its environmental and economic impacts, will significantly influence regional energy strategies as it progresses through legislative scrutiny.

U.S. Expected to Soft-Pedal Iran Oil Sanctions

Amrita Sen from Energy Aspects mentioned on Bloomberg Television that despite new U.S. sanctions targeting entities involved with Iranian oil, strong enforcement is unlikely due to it being an election year. She noted that the sanctions might not be rigorously applied, particularly if they could cause oil prices to rise. China, purchasing most of Iran's oil through its independent 'teapot' refineries, remains largely unaffected by these sanctions because these refineries do not interact with the U.S. financial system.

Iran's oil exports have recently increased to about 1.5 million barrels per day, with exports reaching a six-year high in the first quarter of the year, predominantly to China, generating significant revenue. Fernando Ferreira of Rapidan Energy Group pointed out that Iran has effectively circumvented sanctions, suggesting a strategic focus towards China might be more impactful.

[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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