by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Oil prices are rising back into their earlier trading range of $73 to $82 per barrel.

(Source: Barchart.com)

Commercial crude oil inventories fell a whopping 12.5 mb when compared to the forecast build of 1.5 mb.  The SPR fell 1.6 mb, putting the total draw at 14.1 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 12.3 mbpd.  Exports rose 0.2 mbpd, while imports fell 1.0 mbpd.  Refining activity declined 0.3% to 91.7% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and then declined.  This week’s unexpected drop in stockpiles has put inventories well below seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $60.59.  Although OPEC+ is trying to stabilize the market, recession worries are clearly pressuring crude oil prices.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2002.  Using total stocks since 2015, fair value is $94.88.

Market News:

• Despite promises to cut greenhouse emissions, the G-7 disappointed climate activists by avoiding the setting of deadlines for reducing fossil fuel use. In general, maintaining economic growth usually trumps environmental concerns.
• Left-wing legislators in Congress are pushing for a ban on U.S. oil and gas exports. Although we doubt this will get through the GOP-controlled House, such bans do occasionally come up in Congress.  Curtailing these exports would be devastating for Europe and may not necessarily lead to more domestic supply.
• Russia has admitted that discounting, in part caused by the price cap, has led to lower revenues from oil sales. Russia is also receiving less for natural gas when selling it to China.  China appears to be focusing more on Central Asia for obtaining its natural gas.
• The IMF has a blog report about the growing integration of the global natural gas market. Such integration would be bullish for U.S. natural gas producers.
• There is a growing consensus that this summer will be a hot one. We note that Canadian wildfires have led to lower Alberta oil production.  Unusually hot weather in Southeast Asia has led nations to boost energy consumption, lifting the demand for Russian energy.
  • Russia claims that lower domestic consumption accounts for its higher levels of exports and its promised production cuts.
  • New research suggests that warming temperatures will lead to depopulation in the areas most affected.
• India is looking to refill its SPR; the reserve capacity is 39.8 mb and it is looking to buy about 10 mb.
• Nigeria is opening a large refinery. Its goal is to meet domestic demand for oil products in order to curtail imports.

 Geopolitical News:

• Iran and Russia are negotiating to build a rail/shipping line from Moscow through Iran to the Indian Ocean. Shipping facilities to India are also a part of this plan.  Not only would this transportation facility bring Russia and Iran closer, but it would also make India more likely to align with the emerging China-led bloc.
  • Iran and Russia are also increasing cooperation in energy.
  • Iran’s liquid assets in its sovereign wealth fund are reportedly down to $10 billion; the fund is said to hold other assets of $140 billion. The low level of cash suggests there is little available in the fund to meet possible funding issues.
  • Iran’s religious government is facing a potential threat from within the Shiite movement. Religion and government don’t always mix very well, even in theocracies.  Religion has differing goals to governance, and even authoritarian regimes have to make compromises that don’t often sit well with zealots.  Is this development a threat to the current regime?  As with all such issues, it is hard to say, but its mere existence does raise concerns.
  • Iran dismissed Ali Shamkhani, the secretary for the Supreme National Council, which is the body that steers Iran’s security and foreign policy. He had ties to Alireza Akbari, who was deemed to be a spy.
  • In response to recent vessel seizures by Iran, the U.S. Navy is increasing patrols in the Persian Gulf.
• Iran has put its nuclear development facilities underground, and recent reports suggest that it has tunneled deeper to the point where U.S. conventional “bunker-buster” weapons would not be able to destroy these facilities. Although this may prompt Iran’s enemies to use sabotage and cyberattacks, it also could lead to the use of nuclear bunker-busters instead.

 Alternative Energy/Policy News:

• An industry report shows that one of the key factors holding back the energy transition is the lack of profitability. Although we expect this factor to improve with expansion, it also highlights the need for government subsidies until scale can be achieved.
• Another important issue was noted by David Calhoun, the CEO of Boeing (BA, $2007.00), who indicated that there is no cheap way to decarbonize air travel and doing so would likely lead to much higher prices and less air travel.
• As lithium demand soars due to EVs, Latin American nations are trying to manage the potential boom to benefit their societies. As we have noted recently, a couple of countries are considering nationalizing lithium mining.  We could also see them follow the Indonesian model with nickel—force firms to build fabrication and refining plants within their country to prevent these nations from being mere suppliers of raw material.  Chile has announced new taxes on copper miners.
  • We note that China has been aggressively buying into lithium mines worldwide to secure the metal for EVs.
• JP Morgan (JPM, $138.40) announced $200 million in support for carbon removal. Direct carbon capture will likely be necessary to maintain temperatures, and the support by this bank is a good sign for the industry.
• In the scramble to secure metals for EVs, even oil companies are looking to buy into production. Meanwhile, Ford (F, $11.82) is aggressively working to gain access to lithium.
• One of the problems with EVs is the time required to recharge batteries. At best, it’s a 20-minute process but often requires hours to fully charge a vehicle.  For EVs used in normal commuting, recharging at home usually addresses this issue.  However, for road trips, EVs are simply less convenient when compared to internal combustion engine vehicles.  One idea that has been around for a while is battery swapping.  If an EV is built to have removable batteries, it is then possible to build facilities that will house charged batteries where drivers can swap their discharged batteries for charged ones.  If such infrastructure is built, it would shorten the downtime of getting a recharged battery to that of buying gasoline.  There is renewed interest in this idea, but the problem is that if solid-state-battery technology evolves, recharging times should decline to rival gasoline refilling.
• We have been closely watching the evolution of China’s EV manufacturing. Increasingly, it looks like China has developed world-class quality vehicles at low prices.  We recommend this Sinocism podcast for details.  Chinese cars represent a serious threat to European and U.S. automakers.  Essentially, Western governments are facing a dilemma.  If they open up their markets to Chinese EVs, the energy transition will move faster and doing so will likely contain inflation, but the cost would be losing this market to China.  Or they could use tariffs and quotas to ban Chinese vehicles, slow the energy transition, and face higher inflation.  Our expectation is that the second outcome is most likely.
  • On a related note, Honda’s (HMC, $28.48) Chinese joint venture is starting to export EVs and plug-in hybrids abroad. The first sales are going to Europe.
  • Although we have been reporting on the world’s dependence on China for energy transition materials, this link has an attractive graphic that highlights China’s dominance.
  • An important element of China’s dominance is in the processing of energy transition metals. Other nations are trying to build more processing outside of China, but one of the reasons China leads the industry is that it has lower costs.  China’s processing superiority has led to vertical integration in components.  On a related note, Indonesia is trying to build a nickel processing industry to complement its preeminence in nickel mining; it’s not as easy as it looks.
• Europe was hoping to get access to U.S. subsidies for EV production. It looks like negotiations have stalled, leaving the EU at a disadvantage.
• As EVs become more prevalent in the West, ICE vehicles are ending up in the developing world.
• China is also rapidly expanding into nuclear power.
• Although fixed solar-panel arrays are the most typical deployment of these generating devices, floating panels in bays or lakes are common in Asia. We are starting to see such arrays in the U.S. as well.
• One of the problems with solar and wind power is its intermittency. Because the power doesn’t flow regularly, utilities must keep traditional power backups to meet conditions where wind or sun power isn’t available.  Obviously, batteries would solve this problem, but sadly, “metal” batteries are expensive.  We are seeing increasing reports, though, of creative ways of storing energy by either heating water or salt in the earth and using it to push a turbine or by using pumped storage.
• The EU’s joint purchasing program for natural gas is being seen as a success. By combining buying power, the Europeans have been able to purchase natural gas at lower prices than they otherwise would have been able.  Now the EU wants to branch out by using that same buying power to purchase hydrogen and other “green” materials.
• Last week, we commented on U.S. funding for carbon capture projects. One of the downsides is that if the CO₂ escapes, it can be deadly.  It is this fear that drives the permitting delays.
• California has approved 45 new transmission projects worth a total of $7.3 billion.
• In Europe, refiners are experimenting with using cow manure processed into methane to provide the energy needed for refining crude oil.
• There are constant tensions between those who aim to streamline permitting and the parties that want to prevent any sort of disruption. Interestingly enough, this opposition is not just against fossil-fuel development.  A recent example involves the Burning Man festival in Nevada, which is tangling with a geothermal development.
• Although lithium, rare earths, and cobalt dominate the headlines regarding the energy transition, aluminum is also a key metal. It is an important component for solar power and it reduces weight in vehicles which in turn improves fuel efficiency.  Despite this importance, it has been mostly neglected by policymakers.  Aluminum is sometimes called “molten electricity” due to the large amount of electricity needed to smelt the metal.  Because it takes so much electricity to make, production in the West has been falling.  This neglect may sadly lead to yet another supply problem in the future.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Oil prices were mostly steady over the past week.  Recession fears continue to stifle price movements.

(Source: Barchart.com)

Commercial crude oil inventories rose 5.0 mb compared to the forecast draw of 2.0 mb.  The SPR fell 2.4 mb, putting the total build at 2.6 mb.

In the details, U.S. crude oil production fell 0.1 mbpd to 12.2 mbpd.  Exports rose 1.4 mbpd, while imports increased 1.3 mbpd.  Refining activity rose 1.0% to 92.0% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and then declined.  For the past two weeks, stock have increased, putting the current level near average.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $56.42.  Although OPEC+ is trying to stabilize the market, recession worries are clearly pressuring crude oil prices.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2002.  Using total stocks since 2015, fair value is $93.20.

Gasoline markets are tight.

The previous chart shows the number of days the current level of inventory could cover based on current demand.  The latest reading is 24 days, a level we usually see in late October, well after the summer driving season has ended.  As the five-year average shows, we usually have about six more days of inventory available as we swing toward Memorial Day.  Barring a sharp decline in demand, we are going into the summer with unusually tight gasoline supplies, which may boost prices.

Market News:

• The IEA projects that the oil market will tighten rather dramatically in the second half of this year. The forecast assumes strong Chinese demand.
• Although we continue to harbor doubts this will ever occur, the DOE has issued parameters to add 3.0 mb to the SPR in August. If prices are above $70 per barrel, we doubt the order will be executed; in addition, this is a very small amount given the fact that 231 mb have been drained since the start of 2022.
• There is growing evidence that the shale boom is fading. Rig counts have stalled, and some new rigs are being auctioned off at low prices.  The bargain prices on rigs may simply reflect overbuilding, although rig count growth has clearly slowed.
• The DOE is projecting higher natural gas prices this year.

• Kazakhstan oil exports jumped 24% in March when compared to last year. The sharp rise reflects the disruptions caused by the war in Ukraine.  We also note that Russian oil exports hit a post-invasion high in April, although the price for Russian oil has declined, leading to less revenue.  To some extent, this was the goal of the U.S. from the outset—to maintain global supply levels for crude oil (to avoid high prices) but reduce Russia’s revenue—which it seems to have achieved.  Thus, supply has remained elevated, which has kept prices lower than expected.
• An El Niño event is forming quickly and the NOAA says it will be significant. This will likely mean a warm winter.  So far, 2023 is setting up to be the fourth warmest April on record over the past 174 years, and heat advisories have been issued for the Pacific Northwest.  This El Niño is expected to boost global temperatures past the 1.5 C mark in the next few years, which has been a target for some environmental actions.
• With the EU outlawing the sales of internal combustion engine (ICE) cars by 2035, and the U.S. taking steps to advance the conversion, there is some concern that gasoline demand will decline. However, it’s important to remember that ICE vehicles have an ever-expanding lifespan, with the current average light vehicle lifespan being 12.5 years and it can be even longer for cars.  That means that most ICE vehicles sold today will still be running into the mid-2030s.
  • The EIA projects that EV new car sales will reach a 15% market share by 2030 but could flatten after that. If this prediction is correct, it suggests that oil will be needed well into this century.
• At the same time, we note that French President Macron has called for a time out on EU environmental regulations. He is worried that European firms won’t be able to compete against foreign companies less encumbered by environmental rules.
• Canadian oil prices often trade at a discount to U.S. prices due to the lack of transportation. However, as bottlenecks ease, we are seeing spreads narrow.
• Argentina is preparing to use natural gas from the Vaca Muerta (“dead cow”) shale fields to offset imported gas from Bolivia.

 Geopolitical News:

• Iran’s economic minister is visiting the Kingdom of Saudi Arabia, providing further evidence of the diplomatic thaw between the two countries.
• Iraq and Shell (SHEL, $60.13) are in a joint venture to supply gas to an electric utility that is mostly owned by an Iranian company.
• The EU and G-7 have barred states in both groups from accepting natural gas from Russian pipelines. The goal is to take away any idea that Russian piped gas could return at some point, because if that hope was available, it might curtail the investment necessary to transition away from Russian gas.
• Venezuela is issuing export licenses to European oil companies. The two companies, ENI (ENI, $29.02) and Repsol (REP.MC, EUR, 13.30), already plan to export LNG and other natural gas liquids.  The goal now is to export oil as well.  Gradually, Venezuela has seen the sanctions regime ease.
• As we have noted in recent weeks, Russian oil is being processed into products and sold around the world. The EU is being pressed to stop buying these refined products to maintain sanctions on Russian oil.
• One way the EU is trying to protect their industrial base from environmental rules is with a carbon tariff. The idea is that if Europe has strict environmental restrictions, then foreign nations that don’t deploy similar policies will undercut EU prices.  Foreign nations often view such measures as protectionist; we note India is taking its case to the WTO with regard to these carbon tariffs.

 Alternative Energy/Policy News:

• The Biden administration has proposed sweeping new rules on electric utilities designed to reduce carbon emissions. As we noted last week, the Supreme Court may limit the ability of agencies to make such shifts, but regardless, the White House is moving ahead despite the risks.  We do note that the rules may support carbon capture, which is controversial among environmentalists.  Most carbon capture activity is occurring in the natural gas processing industry.  The Biden administration is boosting funding for various carbon storage projects.  Politically, these projects make sense as they allow for the continued use of fossil fuels but mitigate the carbon impact.  Of course, most of these carbon storage methods are untested, but if they work, they will offer a “middle of the road” approach to deal with carbon emissions.
  • The White House is also trying to ease permitting regulations, which has support from both fossil fuel proponents and environmentalists. However, streamlining permitting will remove one of the key tools used by environmentalists to thwart the expansion of pipelines.  In the debt-ceiling talks, the GOP is trying to streamline oil and gas permitting while thwarting the expansion of power lines, which would be needed to make wind and solar more efficient.  We suspect this stance is for bargaining purposes.
  • Even in oil country, there is concern about carbon capture, since safely storing tons of CO₂ underground is a new industry.
  • Recent climate laws have around $11 billion in funding for rural low and zero emissions power projects. This money is designed to help co-ops deploy  renewables, capture carbon, and execute other projects.
• One of the conundrums that we have been watching is that the conversion from fossil fuels will require lots of mining, some of which is environmentally disruptive. As environmental groups oppose mining projects, they are creating supply issues on critical metals needed for renewable energy technologies.
• Distributed power will raise costs for consumers who remain with traditional electric utilities. It may be necessary to tax those who install solar panels on their homes and businesses for equity reasons, but doing so will reduce the impact of distributed power.
• As the Biden administration unveils its rules for solar power subsidies and credits, the domestic solar panel industry is disappointed in the level of Chinese content that is still allowed for subsidies and credits. A number of companies in this area saw stock gains on the news.  Still, there is fear that the rules will allow China to dominate solar power.
  • On the EV side, Lithium Americas (LAC, $21.80) is splitting from China’s Ganfeng Lithium Group to develop a project in Nevada. The affiliation with China was becoming an issue.
  • The president has vetoed a resolution that would have prevented the Commerce Department from suspending tariffs on Chinese solar panels. The panel manufacturing industry wanted the tariffs to remain in place, while the installers wanted access to cheap Chinese solar panels.
• As we have noted in recent weeks, there is interest in using less costly materials in EV batteries. One being considered is a lithium-iron-phosphate battery, which uses less nickel compared to other battery formulations.  This battery tends to lose power in cold temperatures, but new developments suggest this downside could be limited.
• The Inflation Reduction Act upset the Europeans as it created subsidies to build out the EV infrastructure. European firms in this industry, including automakers, are considering investments in the U.S. to take advantage of these incentives.  European nations are trying to figure out if and how they can match the support of the U.S. act.  Recently, Germany offered Northvolt, a private Swedish battery maker, subsidies to build a battery factory in Germany.  The EU has been trying to craft a broad European response, but individual nations have started to move independently.
• EV sales in Asia are rising rapidly. China is positioned to dominate the global EV market.
  • China is the majority supplier of key EV components. This dominance includes both raw materials and processing.  Through industrial policy, China has steered its economy toward creating the industrial structure needed for this transition.
  • Other automakers are giving up on the Chinese market due to the growing prowess of Chinese firms. And it’s not just foreign firms.  Chinese firms, as well,  are locked in stiff competition with each other.  The competition is leading to rapidly falling prices.
  • For the rest of the world, there is a growing possibility that nations will either (a) import Chinese EVs at low cost to expand EV usage, or (b) exclude Chinese EVs to protect domestic industry. The consequence to the first choice is low inflation (imagine $15k new cars) and expanded EV adoption at the cost of harming domestic industry.  The second choice supports domestic industry and jobs but slows the adoption of EVs and likely triggers higher inflation.
  • Increasingly, automakers are being forced to buy mines to secure key metals for batteries.  This vertical integration is similar to the early days of ICE vehicles.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Although prices have bounced to return to the lower end of the $84/$72 trading range, recession fears continue to dominate sentiment.

(Source: Barchart.com)

Commercial crude oil inventories rose 3.0 mb compared to the forecast draw of 2.5 mb.  The SPR fell 2.9 mb, putting the total draw at 0.1 mb.

In the details, U.S. crude oil production was unchanged at 12.3 mbpd.  Exports fell 1.9 mbpd, while imports declined 0.8 mbpd.  Refining activity rose 0.3% to 91.0% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and then declined.  This week there was an increase, although storage levels remain below seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $58.00.  Although OPEC+ is trying to stabilize the market, recession worries are clearly pressuring crude oil prices.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2002.  Using total stocks since 2015, fair value is $93.53.

Market News:

• Shale oil has been mothering short of a revolution, but there are worries that we may already be past the peak in production. If so, the impact on the world economy could be profound.
• The U.S. Chamber of Commerce has come out in support of streamlining the permitting process.
• As oil company earnings have risen, so has talk of a windfall profits tax.
• We live in divided times and there are very few topics that unite groups in America. Opposing China is one such issue that has become bipartisan, as is the recognition that local opposition to energy projects is slowing buildouts, whether they be tied to the fossil fuel industry or renewables.  Congress has tried to address the issue of “red tape,” but we don’t expect this issue to be resolved anytime soon.
• Usually, the focus on temperature-related energy consumption is focused on winter when cold temperatures drive the demand for heating. Increasingly, though, summer cooling demand is becoming significant as well.  Last week, we noted that Southeast Asia is suffering from extreme temperatures early in the season, and hot, dry weather is triggering wildfires in Alberta, Canada.  We also note that China is warning that a hot summer could lead to power shortages.
• Iraqi policymakers are renewing their focus on energy with a major goal being self-sufficiency in natural gas. Iraq probably does have the resources as its associated gas flaring is the world’s second largest.
• The Biden administration is floating the idea of imposing an energy tax on crypto mining. Data suggests the activity is the fourth largest consumer of household electricity.
• Russian natural gas production has declined 10% so far this year.

 Geopolitical News:

• As China and the Kingdom of Saudi Arabia (KSA) have agreed to price oil sales in CNY, there has been a notable uptick in Chinese investment into the KSA.
  • We note that National Security Advisor Jake Sullivan is in Saudi Arabia this week as part of a trip to the UAE and India. It appears that part of this visit will include a discussion on a possible U.S./KSA railway project, perhaps to compete with China’s Belt and Road Initiative.
• As is often the case when sanctions are applied, firms willing to violate the sanctions (and bear the risk) can be rewarded with unusual profits. In the case of Russia, Greek firms appear to be the most active.  Indian shippers are also involved.
• The G-7 price cap has led the Kremlin to boost taxes on energy companies. Falling production and sales have crimped tax revenue and the state has decided to raise taxes to maintain revenues.  Of course, this action will also reduce revenue for investment.
• There is a raging debate underway surrounding the USD’s reserve currency status. Our take is that U.S. financial sanctions are encouraging nations that are fearful of sanctions to develop alternative international trade and financing arrangements.  We doubt these arrangements will totally supplant the dollar’s deeply entrenched status.  We note that Russia and India suspended talks on settling trade in INR, most likely for the simple reason that Russia has realized it would accumulate the Indian currency without a clear way to recycle the INR.
  • At the same time, Pakistan says it wants to buy Russian oil with CNY. Pakistan is a major recipient of Chinese aid and investment, and thus, is likely to find it easier to secure CNY instead of USD.

 Alternative Energy/Policy News:

• The UAW has refrained from endorsing Biden for reelection. The union is worried about the EV movement.  Since EVs have fewer parts than an ICE vehicle, job losses will be inevitable.  We don’t doubt that an endorsement will eventually arrive, but it’s a warning to Biden that he may have to support the UAW which will likely mean higher prices for EVs.
• The IEA notes that 15% of energy-related emissions come from oil and gas operations. Fortunately, the agency notes that existing technology exists to curb these emissions at affordable costs.
• Although controversial, this graphic shows the allure of atomic power due to the fact that the energy density of uranium dwarfs all other forms of energy.
  • Microsoft (MSFT, $310.52) has agreed to purchase nuclear fusion energy beginning in 2028 from a privately held firm called Helion. Although we are not sure anyone will have commercially available fusion power at scale, the fact that a large company like Microsoft is willing to forward purchase power can help boost investment and research.
• Toyota (TM, $138.18) announced it will supply hydrogen fuel cells for semi-trailer trucks. Although battery technology dominates light vehicles, the batteries are too heavy to be practical for over-the-road trucks.  Hydrogen offers an alternative to diesel-powered trucks.  Toyota has lagged in the EV space, in part, because it has been more focused on fuel cells.  In this application, hydrogen may pay off.
• The GOP and nine Senate Democrats have passed a measure to overturn President Biden’s pause on solar tariffs; Biden has signaled he will veto the resolution. There has been a constant state of tension between those who want to source alternative energy production domestically (at higher costs) or leave the possibility open to import solar panels from China (the world’s low-cost producer).
  • Lawmakers are also displeased with the administration’s easing of local content rules for critical minerals.
• Israel unveiled a massive thermal storage operation which is expected to open by year’s end.
• There is growing alarm over recent moves by nations in South America to nationalize various mineral mining operations. Moves to nationalize lithium, specifically, have raised concerns.
• Eighty percent of new cars sold in Norway are EVs. The good news, so far, is that the grid has handled the change well, the cars are quieter, and pollution is much lower.  The bad news is that it has hurt the established car makers and lines have developed at charging stations.
• There is growing concern about the U.S.’s deficits in rare earths, which are critical for the energy transition. We note that a large rare earths deposit has been found in Wyoming.
  • The Biden administration is moving to expedite a manganese and zinc mine in southern Arizona but is running into environmental opposition.
• Direct carbon renewal projects are starting to operate. These are being helped by carbon-credit exchange markets.  However, environmentalists are increasingly opposing these efforts, fearing that they will reduce the incentive to reduce fossil fuel usage.
• Direct lithium extraction technology promises to boost production of the key mineral significantly.
• China’s outbound foreign direct investment has been declining over the past decade. One bright spot, though, is China’s investment in European EV battery factories.  This development could be problematic and is similar to the issues regarding solar panels.  China is the low-cost producer of EV batteries, so having China build factories in Europe accelerates the energy transition.  However, allowing China to build these factories makes European EV producers more dependent on and vulnerable to China.
  • Glencore (GLNCY, $11.24) is planning to build Europe’s largest EV battery recycling plant.

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by Bill O’Grady, Thomas Wash, and Patrick Fearon-Hernandez, CFA | PDF

Recession fears are gripping the oil market, sending prices toward lows last seen in March.

(Source: Barchart.com)

Commercial crude oil inventories fell 1.3 mb compared to the forecast draw of 1.5 mb.  The SPR fell 2.0 mb, putting the total draw at 3.3 mb.

In the details, U.S. crude oil production rose 0.1 mbpd to 12.3 mbpd.  Exports fell 0.1 mbpd, while imports were unchanged.  Refining activity fell 0.6% to 90.7% of capacity.

(Sources: DOE, CIM)

The above chart shows the seasonal pattern for crude oil inventories.  After accumulating oil inventory at a rapid pace into mid-February, injections first slowed and have since declined, putting storage levels below seasonal norms.

Fair value, using commercial inventories and the EUR for independent variables, yields a price of $58.88.  Although OPEC+ is trying to stabilize the market, recession worries are clearly pressuring crude oil prices.

Since the SPR is being used, to some extent, as a buffer stock, we have constructed oil inventory charts incorporating both the SPR and commercial inventories.  With another round of SPR sales set to happen, the combined storage data will again be important.

Total stockpiles peaked in 2017 and are now at levels last seen in 2002.  Using total stocks since 2015, fair value is $95.17.

Market News:

• OPEC+ is warning the IEA that it should be careful about discouraging oil investments as doing so could lead to higher prices and shortages. We are still seeing considerable pressure being put on banks to avoid oil and gas funding.
• China lost its crude oil self-sufficiency in the mid-1990s. Since then, it has become an increasingly important oil importer.  As we noted in a recent Bi-Weekly Geopolitical Report, China has been deeply worried about energy security for some time.  It has taken numerous steps to address this issue, including building alternative pipelines that avoid the Straits of Malacca, a key chokepoint in Asia, and increasing supplies from Russia and Central Asia.  China is also increasing domestic production.  Although it seems likely that China will again become self-sufficient, it is clearly taking aggressive steps to reduce supply risk.
• In the wake of the recent approval of the Willow oil project in Alaska, the Biden administration is revisiting a major LNG project also located in Alaska. The drive for energy security conflicts with the president’s coalition that wants to curtail fossil fuel use and production.  Most presidents, at some point, are forced to disappoint elements of their coalition.  This decision will help with the energy shortfall but could weaken his re-election chances.
• For years, Iraq has wasted associated natural gas from its oil production. The Halfaya oil field is about to begin processing this gas for use in firing the Iraqi electrical grid (and consequently import less electricity from Iran), and perhaps at some point, it can export the natural gas to other parts of the region.  French and Chinese oil firms are involved in the project.
• As part of China’s stimulus to recover from COVID-19 lockdowns, it may boost its coal consumption.
• The Biden administration is granting a waiver that will allow refiners to continue to blend ethanol at 15% even though it will violate clean air regulations. Because the evaporation of ethanol speeds up in warm weather, the EPA usually lowers the allowable amount of ethanol to be blended with gasoline in the summer.  Keeping the winter standard in place could please the farm belt.
  • Although the U.S. hasn’t built a greenfield oil refiner since 1977, the industry has increased capacity through expansions of existing facilities. Exxon (XOM, $108.52) announced that a 250 kbpd expansion of its Beaumont, TX, facility has become operational.

 Geopolitical News:

• China may be building military installations, or at least intelligence-gathering platforms, in the UAE. The emirate is home to the Al Dhafra Air Base which is used by the USAF.
• In the debate over the “petrodollar v. petroyuan,” the reserve asset is a key issue. There is an argument that the petroyuan can’t work because China won’t create a reserve asset.  If an oil exporter accepts CNY, what will they do with it if they can’t buy Chinese financial assets?  One solution is to use the funds for investment.  We note that China is building a steel factory in the Kingdom of Saudi Arabia (KSA).  The KSA has indicated that it will accept CNY for payment, so using the currency to fund Chinese investment in the country is one solution.
  • We also note that TotalEnergies (TTEF.PA, EUR, 54.57) and Sinopec (SNPMF, $0.65) have both bid on a KSA natural gas project.
• Iran seized two oil tankers this week that held crude oil destined for the U.S. One of the tankers is leased by a Chinese shipper but sailed under the flag of the Marshall Islands, and the second carried a Panamanian flag.  These actions may have been in retaliation for the U.S. redirecting an Iranian vessel bound for China, which was carrying crude oil.
  • A senior Iranian cleric was assassinated, and it is unclear who was behind the killing. Ayatollah Abbas Ali Soleimani was a former envoy to the troubled region of Baluchistan.  The assassination of religious figures is not common in Iran, but unrest has been elevated recently over hijab rules.
  • Iran has not released inflation data for two months, likely because it doesn’t want to reveal bad news.
  • Indian and Iranian officials met this week, and Tehran is encouraging India to use local currencies in the oil trade to reduce contact with the U.S. dollar system. India should welcome that development.
• Russia considers Armenia and Azerbaijan to be included in its sphere of influence. These two powers have been in some sort of conflict for decades, however, which complicates matters for Moscow.  In an interesting twist, the U.S. is holding talks between the two nations to moderate tensions, a move that will be seen by the Kremlin as meddling.  We note that the natural gas supply line from Russia to Armenia has been temporarily suspended for repairs just as the discussions appear to be getting underway.
• In a recent Bi-Weekly Geopolitical Report, we noted that the KSA has indicated what it would require in order to normalize relations with Israel. Reports suggest the U.S. is considering its options.
• Iranian officials fleeing the violence in Sudan were evacuated by the KSA military. These officials arrived in Jeddah this week.  The news adds to evidence of the thaw between the KSA and Iran.
• The impact of sanctions has mostly been to disrupt oil flows. Although Russia is still exporting significant levels of oil and natural gas, it is earning less due to the increased cost of transportation.  India, it appears, is a prime beneficiary since it is taking Russian crude oil and processing it into products to be sold to Europe.
• Resource nationalism is becoming increasingly common. Last week, we noted that Chile has moved to nationalize its lithium industry.  We discuss this in further detail in the Alternative Energy section below.
• We continue to monitor updates on the Nord Stream I and II attacks. Denmark reports that Russian vessels that carry small submarines were seen in the area just before the blast.
• Turkmenistan has started exporting natural gas to Pakistan for its eventual sale to Afghanistan. Turkmenistan wants to build pipelines to South Asia to boost its exports but is finding it hard to secure routes through Afghanistan.
• A German firm’s investment in Siberian natural gas fields may be supporting Russia’s war effort.
• Iran is looking to swap oil for Chinese cars.
• Cuba was unable to hold May Day parades due to a lack of fuel.

 Alternative Energy/Policy News:

• Every so often, we come across something that we didn’t expect. Oliver Stone, the movie director, has produced a documentary that makes the case that the only way to address decarbonization is through nuclear power. Although we agree with this position, it’s still a shock to see someone who generally leans “left” come out so strongly in support of nuclear power.  Here is the movie trailer.
  • China is expected to have the world’s largest installed nuclear power capacity by 2030. Currently, the U.S. has the world’s largest.
• California has unveiled new rules on trucking that will force the industry into zero-emissions vehicles, but there are numerous loopholes that will give the industry some leeway. We do note that the state can’t implement the rule without EPA approval, although it is expected to get it.  These new rules are coming at a time when the industry is struggling.
  • Apparently, other states are also looking to eliminate internal combustion engine (ICE) vehicles.
  • At the same time, the Supreme Court is looking at cases that may restrict the power of regulatory bodies. This concept has been a concern of conservatives who worry that regulators could become overly powerful.  Specifically, the court will hear litigation surrounding the “Chevron (CVX, $158.65) deference,” which gives regulators leeway when legislation isn’t clear.  We expect the court to impose limits on this deference.
• New York is looking to ban natural gas heating and stoves. Germany wants to ban all gas and oil home heating.
• One of the major hurdles to alternative energy is scalability. Vaclav Smil’s work on energy concentration raises strong objections to alternatives.  The history of modern society is one where energy sources become increasingly concentrated, e.g., coal had more embedded power than wood, petroleum more than coal, uranium more than petroleum, etc.  Although it is possible to get energy from sun, wind, and biofuels, the scale required to match current consumption isn’t yet possible.  This op-ed discusses the issue with great clarity.
• Pumped storage is making a comeback. This process pumps water uphill to a reservoir when electricity demand is low (and cheap) and allows it to run downhill through turbines when demand is higher (and prices are, too).  Although this “battery” is somewhat limited by geography, there are apparently enough sites to trigger an expansion of the method.
• Chile’s decision to nationalize its lithium industry is roiling the market and sending shares of Chilean companies lower while lifting shares of those that produce the metal outside of Chile. Still, Chile is the world’s largest producer, and state interference will almost certainly lift prices.
  • There is growing concern that other mining nations may take similar steps. Mexico has passed legislation that shortens mining concessions, tightens regulations on mining waste, and requires that local areas share in the profits.  The Obrador administration has not approved any new concessions since he took office.  It is unclear if (a) he will approve new projects with this new law, and (b) if mining firms will be interested in investing.
  • Although there will be environmental concerns, Germany is reopening mines to secure important minerals.
  • We note that EU “rewilding laws” are starting to conflict with wind and solar farms.
• Although the Biden administration continues to claim it doesn’t want to “decouple” from China, and instead wants to “de-risk,” it may be a distinction without a difference. However, if the U.S. tries to avoid China in the solar energy market, it may find it difficult to overcome China’s dominance.
  • India and China want to avoid “hard targets” for cutting carbon emissions.
• EVs are much heavier than ICE cars. The battery is the issue, and the overall vehicle weight is becoming a problem for traffic safety.
• Ford’s (F, $11.92) earnings this week highlighted the large investment costs needed to transition to EVs. The electric division reported losses of $722 million.
• Occidental Petroleum (OXY, $61.17) hopes to sell the CO₂ it captures for industrial use.
• Geothermal projects are being developed in Africa.
• Researchers are testing to see if aquifers can be used for long-term energy storage.
• The EPA will allow companies in Louisiana to begin storing CO₂ in injection wells. Notwithstanding the scaling issue, having a place for the gas is necessary if carbon capture has any hope of working.
  • Major banks are increasing their support for carbon capture projects.
  • There are a number of “clean ammonia” projects underway which will need a place to store the CO₂ generated during the process.

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