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While oil futures are rocketing – on Friday they were just below $95 a barrel in London – the rally pales in comparison with the surge in diesel.

The world’s oil refiners are proving powerless to make enough diesel, opening a new inflationary front and depriving economies of a fuel that powers industry and transport alike.

While oil futures are rocketing — on Friday they were just below $95 a barrel in London — the rally pales in comparison with the surge in diesel. US prices jumped above $140 to the highest ever for this time of year on Thursday. Europe’s equivalent soared 60% since summer.

And it could get worse. Saudi Arabia and Russia have turned down the taps on production of crudes that are richer in diesel. On Sept. 5, both nations — leaders in the OPEC+ alliance — announced they would prolong those curbs through year-end, a period in which demand for the fuel usually picks up.

“We’re at risk of seeing continued tightness in the market, especially for distillates, coming into the winter months,” said Toril Bosoni, head of the oil market division at the International Energy Agency, referring to the category of fuel that includes diesel. “Refineries are struggling to keep up.”

The situation is challenging for a global refining fleet that’s been dogged by lackluster production for months. Searing Northern-Hemisphere heat this summer forced many plants to run at a slower pace than normal, leaving stockpiles stunted.

There’s also been pressure on them to make other products instead like jet fuel and gasoline, where demand has rebounded hard, according to Callum Bruce, an analyst at Goldman Sachs Group Inc.

Other Fuels

All this comes on top of a global refining system that shuttered less-efficient plants when Covid-19 trashed demand. Now consumption is rebounding but many refineries are gone.

There’s still hope that the diesel crunch can ease. With cooler winter months approaching, the weather-related constraints on the refineries overall decrease — even if some of them will undergo routine seasonal maintenance.

“We think margins have overshot for now,” Bruce said, adding that stretched market positioning and the temporary nature of some refinery disruptions could spark a reversal.

Still Concerns

Even so, there are still worries about supply from some key diesel-exporter nations.

Russia — still a major supplier to the world despite Western sanctions — has indicated that it’s looking to limit the volume of the fuel it sends to global markets. 

China — another potential supply-relief valve — recently issued a new fuel export quota, but traders and analysts in Asia said the volume currently planned won’t be enough to prevent a tight market through the end of the year. The country’s shipments have been stuck near five-year seasonal lows for much of 2023. 

Those lower flows are showing up at key storage hubs. Observable stockpiles in the US and Singapore are all currently below seasonally normal levels. Inventories in OECD nations are lower than they were half a decade ago.

The restricted supply has economic consequences. The surge in US futures has been driven in part by truckers snapping up the fuel.

“Diesel is the fuel of the 18-wheeler truck that moves products from factory to market, so when prices spike, those higher transportation costs get passed on to businesses and consumers,” said Clay Seigle, director of global oil service at Rapidan Energy Group. 

While there has been growing hope that the US economy can avoid recession, “an energy price spike – whether in gasoline or diesel fuel prices – could undermine much of that progress,” he added. “This risk is not lost on anyone in Washington as election campaign season approaches.”

Soaring diesel prices may also push refineries to prioritize the fuel at the expense of making gasoline, he said.

Weak Demand

The situation for diesel could have been worse because consumption growth hasn’t been as robust as other parts of the barrel. 

The IEA’s monthly report last week anticipated consumption growing by about 100,000 barrels a day this year. That compares with almost 500,000 barrels a day for gasoline and more than 1 million barrels a day for jet fuel and kerosene.

“It’s a supply issue at heart,” said Eugene Lindell, head of refined products at consultant FGE. “European refineries were also unable to build up supplies over the summer because of widespread unplanned outages which has left inventories tight ahead of winter.”

Business Standard by Jack Wittels, September 29, 2023

Hopes that inflation might really have been “transitory” look premature.

How worried should we be about the oil price?

I’m only asking because it has gone up an awful lot in the last few months. In fact, since it hit a low for the year in early June, the price of Brent crude has risen from just under $72 a barrel to nearly $94 today – a gain of more than 30%.

Thankfully, the US has not seen the same sort of leap in petrol prices as yet. But it is fair to say that petrol prices in the UK bottomed out in June/July and are now significantly higher – up about 7%, from an average of £1.42 per litre to £1.53 now.

It’s entirely in keeping with the ornery nature of markets that central banks around the globe are now largely agreed to be at or near the peak of interest rates, just as the price of fuel — which is of course, a big component of overall price indexes — is taking off again. That obviously bodes ill for global consumption. Even if the world can avoid the scary cost-of-living crisis expected in a wartime economy, the spectre of global inflationary pressures subsiding anytime in the near future is still a mirage.

Supply is tight, demand uncertain

So why is the price of oil rising? Long story short, the big issue right now is mostly on the supply side. Russia and Saud Arabia have reduced their exports, and have been unusually disciplined about sticking to the plan.

This is happening at a time when the US Strategic Petroleum Reserve has fewer barrels in it than usual, because it unleashed them to try to keep prices down back in 2021 and also when Russia invaded Ukraine, and it hasn’t yet rebuilt that stockpile.

Note too that Javier Blas, Bloomberg energy columnist, warns that oil prices are in fact even higher than most of us might think, because the specific kind of crude that Saudi Arabia produces is priced even higher than the benchmarks most of us watch – that is, Brent crude and WTI (the US benchmark).

So, the supply side is tight. As for the demand side – well, for all that everyone seems to expect a recession to kick in at any moment, we’re still not seeing one.

And bear in mind that this is happening while China’s economy is widely regarded as having sat the global recovery out. Yet Chinese economic data actually surprised to the upside this morning (which is one reason the FTSE 100 is having a good day today).

So, I’d say the risks are quite finely balanced there. Say we don’t have a recession and say it turns out that China was just taking longer to get back on its feet, rather than sinking into depression. The idea of a return to $100 a barrel fairly quickly is by no means radical.

Expect a period of inflation scares

So, what would that mean for the rest of us?

There are two big problems with a rising oil price. One is that — speaking purely in terms of what it does to the consumer prices index — it’s inflationary. That in turn makes it harder to justify cutting interest rates. It might even end up putting more hikes on the table at some point, depending on what happens from here.

The other big problem is that even as a rising oil price makes life harder for central banks, it’s also acting as a tax on consumption. As I’ve mentioned many times before, if you spend more money on filling up your car, you’ve less money available for that microwave pasty or terrible bunch of flowers to go with it. Higher oil prices mean less consumption, and for a consumer economy like that of the US or India, that’s bad news.

Of course, these things should, in theory, work against each other. If oil prices rise to the point where it hurts the wider global economy, then what should happen is that we get a slowdown, and then oil prices fall again, because demand is curbed.

But as we all know, theory and practice often don’t entirely reflect each other, particularly given the lags involved. It’s probably safer to say that this is one reason not to assume that inflation will revert to being well-behaved in the near future. Instead, I rather suspect a series of inflation scares is a more likely outcome over the next few years. But we’ll see.

On the upside, it does mean that the commodity and oil-heavy FTSE 100 will quite possibly do better than anyone expects, which does make it look like an appealing hedge for your portfolio. 

By The Business Standard, September 29, 2023

Dutch tank storage company Vopak (VOPA.AS) said on Tuesday it had reached an agreement with M&G Plc’s (MNG.L) infrastructure equity investment arm Infracapital for the sale of its chemical terminals in Rotterdam.

The total purchase price for the three chemical terminals is 407 million euros ($434.72 million) including a conditional deferred payment of 19.5 million euros.

“The divestment of the three chemical terminals in Rotterdam is in line with our strategic goals to improve the financial performance of the portfolio,” chief financial Michiel Gilsing said in a statement.

Vopak launched a strategic review of the terminals in February, opening the door to a possible divestment.

The company said it expects the transaction to partially reverse an impairment charge recorded in 2022 by around 54 million euros, which will be reported as an exceptional item.

By Reuters, September 29, 2023

CF Industries announced Thursday it’s proposing a new $2 billion low-carbon ammonia production facility in Ascension Parish.

According to a Louisiana Economic Development agency (LED) press release, CF Industries is evaluating the feasibility of constructing a low-carbon clean ammonia production plant at its Blue Point Complex. The company is already the world’s largest producer of ammonia.

The proposed facility would be developed jointly by CF Industries and Posco Holdings, South Korea’s largest steel manufacturer.

If the project moves forward as outlined, CF Industries expects to create 50 jobs with average annual salaries of more than $106,000, LED said. 

The companies are exploring the use of autothermal reforming (ATR) ammonia production technology for the proposed facility. ATR is a process that mixes steam with natural gas or other chemicals to create a synthetic gas rich in hydrogen. Combined with carbon capture and sequestration, the technology is expected to reduce carbon dioxide emissions by more than 90% compared to conventional ammonia production plants, the press release said.

Ascension Parish sits within the so-called Cancer Alley industrial corridor and is already home to large petrochemical plants. According to the U.S. Environmental Protection Agency’s annual Toxics Release Inventory, plants in Ascension Parish emit greater quantities of toxic chemicals from industrial stacks than anywhere else in the country.

CF Industries is currently the largest pollution emitter in the parish and third largest in the state, according to the EPA. 

CF Industries and Posco expect to complete an initial engineering design study on the proposed site in the second half of 2024 and make a final investment decision for the project shortly thereafter. Construction and commissioning of the plant is expected to take approximately four years from that point. 

The state has offered the company a $3 million performance-based grant for infrastructure and project development contingent upon meeting capital investment and payroll targets. The company is also expected to participate in the state’s Quality Jobs tax credit program and Industrial Tax Exemption Program (ITEP) if the project moves forward as planned.

“We believe that low-carbon ammonia will play a critical role in accelerating the world’s transition to clean energy, and this proposed new project confirms the global impact we can have in decarbonizing hard-to-abate industries,” CF Industries President Tony Will said in the press release.

“We appreciate the partnership we have had with the state of Louisiana and Ascension Parish over the years as we have expanded our operations, taken industry-leading steps to decarbonize our existing assets and now as we explore new, low-carbon ammonia production capacity. We look forward to working with them further as we evaluate this proposed facility that could further the growth of decarbonized industry in the state.”

Louisiana Illuminator by Wesley Muller, September 29, 2023

A barrel of Brent crude for November delivery rose 0.24% to $93.93. Previously, it was approaching the symbolic threshold of $95 at $94.63.

Meanwhile, the price of October-expiring West Texas Intermediate (WTI) rose 0.67% to $90.77.

Since the end of August, WTI has experienced 13 positive sessions in 16 trading days and its price has increased by 15%.

For Edward Moya of Oanda, black gold continued to rise on Friday on the back of American and Chinese indicators.

In China, industrial production and retail sales exceeded economists’ expectations in August.

In the United States, the Federal Reserve said industrial production rose 0.4% in a month in August, more than the 0.1% expected by economists.

A barrel of Brent crude for November delivery rose 1.98% to close at $93.70, while U.S. West Texas Intermediate (WTI) due in October rose 1.85% to $90.16.

WTI had not exceeded the $90 mark since the beginning of November 2022.

“The trend continues,” said Andy Lipow of Lipow Oil Associates, with WTI up 14% and Brent up nearly 13% in three weeks.

The Organization of the Petroleum Exporting Countries (OPEC) estimates published on Tuesday of a supply deficit of 3.3 million barrels compared to demand in the fourth quarter have added some tension to the already tense market.

“The market is watching the decline in reserves with concern,” said Lipow.

In this regard, analysts at ANZ Bank expect Brent to reach $100 by the end of the year.

In the USA, according to the AAA association, the price of gasoline is once again approaching the threshold of an average of 4 US dollars per gallon (3.78 liters) and was at 3.85 US dollars on Thursday.

The black gold is the main cause of the rise in inflation in this country, as shown by the CPI consumer price index and the PPI producer price index released on Wednesday and Thursday.

By Nation World News, September 29, 2023

Brent and WTI oil futures are trading at 10-month highs and nearing $100 on tighter supply expectations and improved market fundamentals. But will the bullishness last?

Crude oil prices are on the up as the fourth quarter of 2023 approaches.

Global oil benchmarks Brent and WTI are both currently trading above $90 per barrel hitting 10-month highs on tighter supply expectations and improved market fundamentals. The question on every crude market commentators’ mind is whether a return to $100 oil prices is imminent?

At 10:49am EDT on Friday (September 15, 2023), the Brent front month futures contract was up $0.088 or 0.09% to 93.78 per barrel, having briefly risen above $94, while the WTI was at $90.72 per barrel, up $0.56 or 0.62%.

Intraday levels on Friday follow a week of strengthening prices and are a marked contrast from the largely rangebound activity seen in August. After several weeks of oil prices oscillating around mid-$80 levels last month and searching for a break out either way, bullishness returned in September as Saudi Arabia and Russia extended their combined oil production cuts of 1.3 million barrels per day (bpd) to the end of the year.

It prompted the International Energy Agency and other observers to predict a significant supply deficit for the fourth quarter of 2023. The agency expects global demand to be in the region of 2.2 million bpd in 2023 followed by a sharp decline to a growth rate of 1 million bpd in 2024.

But the Organization Of Petroleum Exporting Countries (OPEC) has offered much higher demand growth estimates of 2.44 million bpd and 2.25 million bpd for 2023 and 2024 respectively.

Much of the market sentiment last month was leaning in favour of rising crude supplies from Brazil, Guyana, Iran and the U.S. largely offsetting production cuts Saudi Arabia and Russia to meet existing demand, at a time of wider macroeconomic uncertainty, higher interest rates and the lukewarm performance of China’s economy.

However, the rollover of Saudi-Russian cuts till the end of 2023 has materially altered market sentiment in the face of rising distillate demand, especially that of gasoline, diesel and jet fuel, as the Northern Hemisphere’s winter approaches.

So is crude oil heading towards $100 barring a massive deterioration in economic data? The quick and short answer is yes, especially for Brent, deemed to be the global proxy benchmark in the eyes of many.

However, on current trading volumes both Brent and WTI appear to be overbought, i.e. trading at levels above what many believe to be their fair value. Therefore a market correction is likely, but not before Brent at the very least caps the $100 per barrel mark.

Furthermore, the Saudi-Russian production cuts are unlikely to overspill into 2024. It is why prices for Brent futures contracts 6 months (out and beyond) are at $90 and lower at the moment, or in backwardation, a position wherein the current price is higher than prices trading in the futures market further down the road.

So while higher prices – including a return to $100 per barrel levels for Brent for the first time since Jul 2022 – may be likely, don’t bet on them staying there in 2024.

Forbes by Gaurav Sharma, September 29, 2023

Major institutional oil and gas investors would be open to receiving lower dividends and fewer share buybacks in favor of more spending on some energy transition projects, consultancy Deloitte said in a study published on Tuesday.

Energy firms have sharply increased shareholder returns on the back of high energy prices after years of overspending on production growth. Oil and gas companies led all industries in cash distribution to shareholders in 2022, with a combined 8% dividend and buyback yield, Deloitte said.

Oil majors Exxon Mobil (XOM.N), Chevron (CVX.N), BP (BP.L), Equinor (EQNR.OL), Shell (SHEL.L) and TotalEnergies (TTEF.PA) collectively paid out a record $110 billion in dividends and share repurchases to investors last year.

But investors holding $2.3 trillion of equity in the global oil and gas industry are changing their expectations about growth markets faster than energy company executives, Deloitte said.

About 75% of surveyed investors stated that they would continue holding shares to accelerate investments in lower-carbon technologies, even if yields shrank to as little as 3%.

“There are divergent views,” Deloitte research director Kate Hardin said. “Probably depending on where you are, with your dividends and share buybacks, you might be able to reduce that a bit.”

The study also showed a divergence in spending preferences. About 40% of the 150 C-suite company executives surveyed cited hydrogen and carbon capture and storage technologies as critical for their strategy.

Investors preferred “more transformational technologies” such as electrification of transportation and electric charging stations, Hardin said. About 43% of surveyed investors emphasized battery storage as their key area for investment.

“There’s a little bit of a difference there in terms of that longer-term view of what the energy transition may ultimately look like,” Hardin said.

Executives and investors converged on critical minerals as a key area for investments.

Global upstream oil and gas firms are expected to generate $2.5 trillion to $4.6 trillion in free cash flows between 2023 and 2030, but less than 2% of total spending is going to clean energy, according to Deloitte.

While a majority of the institutional investors expect more action, 60% of surveyed executives indicated they would invest in low-carbon projects only if the internal rate of return exceeded 12% to 15%, compared with an average of 8% in 2022, the study showed.

By Reuters, September 29, 2023

Global loadings of crude and condensate plunged in August to the lowest level since June 2022, led by a slump in Saudi Arabia’s cargo loadings, Vortexa said in a note this week.

Global supply is tightening, while China’s crude imports are recovering, according to Vortexa.

“This combination of tighter supply and rising demand is likely to continue through to the end of this year and support pricing, especially given the recent extension to voluntary Saudi production cuts amid a general pick up in global refinery runs,” Jay Maroo, Head of Market Intelligence & Analysis (MENA) at Vortexa, wrote.

Saudi Arabia extended last week its voluntary production cut 1 million barrels per day (bpd) through December.

The move pushed both Brent and WTI oil prices above the $90 a barrel mark this week, with front-month futures on track for a third consecutive weekly gain.

According to Vortexa data, global crude and condensate loadings dropped to around 47 million bpd in August, the lowest level since June 2022, as loadings from Saudi Arabia fell by nearly 1.1 million bpd.

“The drop in Saudi loadings means that the Kingdom’s contribution to total global seaborne flows is at a multiyear low,” Vortexa’s Maroo said.

“This drop underpins Saudi Arabia’s commitment to voluntarily cut production, but the key question is how sustainable this is.”

In terms of global crude arrivals, China, after a slump in July, received almost 1.3 million bpd more crude month-on-month in August to a total of nearly 13 million bpd, according to Vortexa’s analysis.

The market hasn’t seen the full impact of Saudi Arabia’s extra production cut, which could lead to a drastically tighter market if the world’s top crude oil exporter keeps export levels low, Vortexa said last week.

This week, Vortexa’s Maroo warned that if China continues to export more and more fuels amid a global pickup in post-maintenance refinery runs, Saudi Arabia may unwind some of the cuts if crude oil prices rise further.

“In such a scenario, it may be possible that the full 1mbd amount isn’t maintained for the full balance of the year, especially if prices climb further from current levels,” Maroo said.

By OilPrice.com, September 29, 2023

Shell Energy UK Limited (“Shell”) has signed an agreement with Norsk Hydro ASA (“Hydro”), a global leader in aluminium and renewable energy, to help decarbonise its UK operations. The three-year agreement will cover the annual supply of 144 gigawatt hours of natural gas and 56 gigawatt hours of renewable electricity to the company’s UK sites.

As part of the deal, Shell Energy will supply electricity backed by Renewable Energy Guarantees of Origin (REGO) certificates* generated from the Rhyl Flats Windfarm.Situated 8km off the coast of Llandudno, the 25-turbine site has 90MW of installed capacity. The ability to provide 100% renewable electricity demonstrates Shell Energy’s ability to help its customers decarbonise their operations and accelerate their transition towards net-zero emissions.

Hydro is headquartered in Norway, with operations around the world in a broad range of markets including aluminium production, energy, metal recycling, renewables and battery manufacturing. In the UK, its primary activities include extrusion, fabrication, recycling, die manufacturing, surface treatment and thermal break.

Hydro is intent on leading the way towards a more sustainable future and creating more viable societies by turning natural resources into products and solutions in innovative and efficient ways. Its product portfolio continues to evolve, with sustainable offerings that are significantly less carbon intensive (per kg) to produce than the primary global average of virgin aluminium, while the company is also working hard to accelerate its transition to net-zero emissions.

Lars Lysbakken, Energy Portfolio Manager at Hydro, commented: “While extensive research and development is helping to significantly lower the carbon intensity of our products, looking for new and innovative solutions to help decarbonise our wider operations is considered a board-level priority.

“When it came to finding the perfect energy partner, we wanted to identify a long-term collaborator that could support our transition to net-zero. Shell Energy demonstrated extensive understanding of our business, our sector, and our ambitious decarbonisation roadmap.

“The ability to provide REGO certificates from the Rhyl Flats Offshore Wind Farm was another important part of the agreement. While we’re committed to using less energy, it’s positive to know that our operations will now be powered entirely by asset-specific renewable electricity.”

In 2022 alone, Shell invested $4.3 billion in low-carbon energy solutions,and has already reduced its own Scope 1 and 2 absolute emissions by 30%.To help to transform the energy system, the company is focused on driving a shift towards renewable electricity;developing low and zero-carbon alternatives to traditional fuels (including biofuels, hydrogen, and other low- and zero-carbon gases); working with its customers to decarbonise their use of energy; and addressing any remaining emissions from conventional fuels with solutions such as carbon capture and storage and carbon credits.

Greg Kavanagh, Head of Industrial and Commercial Sales at Shell Energy added: “Rather than a transactional agreement, we see our contracts as long-term strategic collaborations that provide Shell Energy with the opportunity to accelerate customer progress in reaching net-zero emissions.

“In the case of Hydro, we were able to offer a solution that perfectly aligned to its sustainability ambitions. We’re looking forward to working closely with the company to offer our knowledge, guidance and support over the longer term.”

By BDC Magazine, September 29, 2023