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The Diesel Crunch Is Finally Causing Demand Destruction

The Diesel Crunch Is Finally Causing Demand Destruction

  • Diesel inventories slumped to their lowest level for the time of the year since 1951.
  • signs have emerged that weaker demand in the past weeks may have slowly started to rebuild diesel inventories.
  • Refiners are processing more crude oil to capture the still high refining margins.

High prices seem to have started to weigh on diesel demand in the United States, where distillate inventories – comprising diesel and heating oil – have been slowly rising over the past few weeks.    American distillate inventories are still below the five-year average, but the gap in stocks compared to previous years has slowly started to narrow, suggesting that high prices are hitting demand, while encouraging more refinery output thanks to solid refining margins.

In this week’s inventory report, the U.S. Energy Information Administration said that distillate stocks rose by 1.7 million barrels in the week to November 18, with production rising to an average of 5.1 million barrels per day (bpd). Distillate fuel inventories are still about 13% below the five-year average for this time of year, but two months ago, they were more than 20% below the five-year average for that time of the year.

Earlier this autumn, U.S. distillate stocks slumped to their lowest level for this time of the year since 1951, just as the heating season started and a few months ahead of the EU embargo on Russian oil product imports, which goes into effect in February.

Now signs have emerged that weaker demand in the past weeks may have slowly started to rebuild diesel inventories, contrary to seasonal trends. Distillate inventories in the U.S. rose by 3 million barrels in the six weeks to November 18, according to estimates by Reuters’ senior market analyst John Kemp based on EIA data.

 

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Can Europe Avoid A Worst-Case Energy Scenario This Winter?

Can Europe Avoid A Worst-Case Energy Scenario This Winter?

  • European countries have done most things they feasibly could to fill gas storage units.
  • Overall in the EU, gas storage was 92.37% full as of October 17.
  • Weather will be the determining factor in how fast gas in storage would be depleted, so Europe hopes for the best and prays for a milder winter.

Europe’s gas prices fell at the start of this week to the lowest level in three months as storage is fuller than initially expected, LNG cargoes are coming in, and the weather is mild.   But European governments have been preparing for the worst-case scenario in which a colder-than-usual winter could quickly sap gas in storage, send gas prices soaring again, intensify competition for costly LNG with Asia, break consumers’ resolve to conserve energy in freezing temperatures, and force more businesses and industrial processes to halt operations.

Europe has done all it can to ensure the heating and lights will be on this winter, analysts say. Yet this may not be enough—a long cold, windless spell this winter would threaten to unravel all the efforts and lead to mandatory energy-saving targets, rationing, or rolling outages.

The Good News

All that can be feasibly done to ensure alternative gas supply after the Russian invasion of Ukraine and the Russian halt of gas flows to nearly all EU member states has been done. Floating storage regasification units (FSRUs) are being set up in Germany, the Netherlands, and Finland. Eemshaven in the Netherlands and Wilhelmshaven and Brunsbüttel in Germany are expected to begin operations as early as the end of this year. Europe is paying a lot for LNG supply, outbidding Asia, which was the top buyer of spot cargoes before the war.

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Europe’s Fuel Supply Fears Worsen As Major Refinery Malfunctions

Europe’s Fuel Supply Fears Worsen As Major Refinery Malfunctions

The biggest refinery in Europe, Shell’s Pernis in the Netherlands, suffered a malfunction late on Wednesday, which could exacerbate an already worsening fuel supply situation in northwest Europe due to the strikes in France.

Shell Pernis said late on Wednesday that “Due to a malfunction on one of our installations, we are forced to flare.”

Shell is investigating the cause of the malfunction and is doing everything it can to solve the problem as soon as possible, and to limit the nuisance for the residents in the vicinity of the refinery near Rotterdam, the company said.

Governments have been informed about the malfunction at Europe’s largest refinery, Shell said in a statement carried by Bloomberg, but didn’t go into details about potential losses of fuel supply.

Fuel supply is already tight in Europe amid an ongoing strike at most of France’s refineries, and if the Dutch refinery malfunction leads to further supply losses, the European diesel market will find itself even shorter on supply, less than four months before the EU embargo on imports of Russian fuels by sea.

France’s fuel distribution continues to be disrupted by the ongoing strikes at refineries, with no end in sight to the industrial action that has left more than 60% of French refining capacity offline. Earlier this week, France said that it would requisition essential workers to staff Exxon’s French oil depot, and threatened to do the same for Total’s French refineries if talks failed to progress. But workers at Total’s Donges refinery decided on Tuesday to strike beginning on Wednesday, French union CGT said.

French ministers said today that TotalEnergies should raise the salaries of the workers, who have been on strike for two weeks now.

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Angry Customers Demand Explanation As German Energy Bills Soar

Angry Customers Demand Explanation As German Energy Bills Soar

Utilities in Germany have had to handle a surge in customer service calls in recent weeks from clients angry or desperate about their sky-rocketing energy bills, Reuters reports.

The biggest utility, E.ON, has ramped up its capacity to handle calls from consumers who are shocked to find just how much their energy bills have surged in recent months.

Gas prices in Europe are very high and power prices in many countries, including Germany, have hit record levels this summer after Russia choked pipeline gas supply to Europe and shut down indefinitely the key gas export pipeline to Germany, Nord Stream, at the beginning of this month.

“Some become aggressive out of frustration, others are in tears and need psychological support,” Ingbert Liebing, head of local utilities organization VKU, told Reuters, commenting on the spike in customer calls to utilities’ service centers.

Apart from already high energy bills, German customers will have a surcharge as of October, as part of a government plan to implement a so-called gas levy on consumers in order to help struggling energy firms.

Germany has recently announced it would impose a gas levy on consumers from October 1 through March 2024 as it aims to help energy providers and importers of natural gas, which are struggling with low Russian gas supply and very expensive alternatives to Russian gas. The new natural gas tax is set to cost German families, who will have to foot the bill for the tax, an extra $500 a year.

Meanwhile, the German government is in talks with the biggest German importer of natural gas, Uniper, to potentially lift its 30% stake in the company to majority participation or to nationalize the firm…

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Finland Braces For Rolling Blackouts This Winter

Finland Braces For Rolling Blackouts This Winter

  • Finnish grid operator warns of rolling blackouts this winter.
  • Gazprom stopped in May all gas deliveries to Finland.
  • Norway is considering limiting its electricity exports.

Finland should be prepared for possible power outages this winter in case of shortfalls in electricity supply, the Finnish grid operator said on Tuesday, in yet another warning of an energy crunch in Europe after gas supply from Russia was severely reduced.

In Finland’s case, Gazprom stopped in May all gas deliveries to Russia’s neighbor to the West, making Finland the third EU member state with Russian pipeline supply cut off after Poland and Bulgaria. The halt of Russian supply to Finland took place days after Finland—together with its Scandinavian neighbor Sweden—formally applied to join NATO in the wake of the Russian invasion of Ukraine. Russia has warned both countries against applying to become NATO members.

Finland gets up to 70 percent of the gas it uses from Russia, but gas doesn’t have a large share in the overall energy mix and accounts for 5 percent of total energy consumption.

“The war in Europe and the exceptional situation on the energy market have increased uncertainties related to the availability of electricity. As a result of the great uncertainties, Finns should be prepared for power outages caused by possible electricity shortages this coming winter,” Finnish grid operator Fingrid said today.

According to Fingrid, the Olkiluoto 3 nuclear power plant would compensate for the missing Russian imports.

“In practice, in the event of an electricity shortage, Fingrid will inform the local distribution network companies of the total amount of power to be disconnected from each distribution network company’s area, and after this, power outages will be recycled as two-hour outages until the electricity shortage has ended,” said Tuomas Rauhala, Senior Vice President, Power System Operation, at Fingrid.

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Refinery Shuts Down Due To Lack Of Crude

Refinery Shuts Down Due To Lack Of Crude

A South African refinery has shut down operations and declared force majeure on the supply of petroleum products due to a delay in the shipment of crude, which highlights the fact that the physical market for crude is tight these days despite a slump in paper-traded oil futures.

Sasol, the biggest fuel producer in South Africa, was forced to declare force majeure on refined product deliveries because of delays in the crude oil supplied to its 108,000 barrels per day (bpd) refinery Natref, a company spokesperson told South Africa-based financial news outlet Fin24 on Saturday.

“These delays have impacted availability of crude oil feedstock for processing at Natref, which necessitates the shutdown of its Natref refinery,” the spokesperson said.

“In the circumstances, Sasol Oil will not be in a position to fully meet its commitments on the supply of all petroleum products from July 2022,” said the company, adding that it hopes the issue would be resolved soon and the refinery could resume production at full capacity by the end of this month.

The stoppage at Sasol’s Natref refinery now means that South Africa’s entire oil refining capacity is currently out of service, according to Bloomberg’s estimates. Other refineries have closed down production since COVID erupted, either because they would be converted to terminals or because of operational issues. Only Sasol’s synthetic fuel output using coal as a feedstock, of which South Africa has huge amounts, remains fully operational.

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Record UK Gasoline Prices See Biggest Daily Surge In 17 Years

Record UK Gasoline Prices See Biggest Daily Surge In 17 Years

UK gasoline prices continue to set records, with the daily price jump between Monday and Tuesday at its highest in 17 years, RAC, the UK’s longest-serving motoring organization, says.

“The average price of petrol endured its biggest daily jump in 17 years by going more than 2p (2.23p) a litre on Tuesday (7 June), taking it to nearly 181p a litre (180.73p),” RAC fuel spokesperson Simon Williams said as carried by Auto Express.

Gasoline prices were at a record high of $2.27 (£1.81) per liter, or around $8.60 per U.S. gallon, on Tuesday, according to data from RAC Fuel Watch, which expects prices to continue rising in the near term.

“These are unprecedented times in terms of the accelerating cost of forecourt fuel. Sadly, it seems we are still some way from the peak,” RAC’s Williams said.

A full tank of gasoline for a typical family car has now jumped to $125 (£99.40), up from $120 (£95.16) at the start of last week. The £100 per full tank mark could be reached as soon as on Thursday, analysts say.

“With analysts predicting that oil will average $135 a barrel for the rest of this year drivers need to brace themselves for average fuel prices rocketing to £2 a litre which would mean a fill-up would rise to an unbelievable £110,” RAC said earlier this week.

The new record highs in gasoline prices add to the cost-of-living crisis in the UK where energy bills are set to surge this autumn.

Gasoline prices are soaring in the United States, too. The average gasoline price in America was $4.955 a gallon on June 8, up by a massive $0.30 jump in one week.

Gasoline prices set a new record for the 10th straight day and Americans are now spending over $700 million more per day on gasoline versus a year ago, Patrick De Haan, head of petroleum analysis for fuel-savings app GasBuddy, said on Wednesday.

Turkey Hit By Unprecedented Power Outages As Iran Halts Gas Flows

Turkey Hit By Unprecedented Power Outages As Iran Halts Gas Flows

  • A disruption to natural gas imports from Iran has caused an unprecedented level of power cuts in Turkey.
  • The power cuts have largely impacted major industrial zones, with some companies forced to halt production as a result.
  • Iran claims that its natural gas flows have been restored but Turkey has said its supplies and gas pressure remain very low.

Turkey is undergoing massive power cuts to industrial customers this week at an unprecedented level never seen before after the country’s natural gas supplies dipped following a disruption of imports from Iran. Major industrial zones and clusters and major production sites, including those of foreign car manufacturers, are being hit by power outages after Iran said at the end of last week it would halt natural gas exports to Turkey for ten days, due to technical issues.

On Friday, Iran announced that gas flows were restored, but Turkey said supplies were very low and at low pressure.

“The system is being disrupted due to the low amount and pressure. The compressor stations on the Turkey side are ready, operational, and there are no technical issues on the Turkish side,” a Turkish official told Reuters on Friday.

Gas supply from Iran to Turkey has yet to fully resume, which puts major industries under power cuts this week, according to Turkey’s main electricity distribution company TEIAS, cited by Bloomberg.

As of Monday, Turkey’s industrial production will stop completely for at least three days, Daily Sabah reported on Sunday.

Gas accounts for more than half of the country’s electricity generation, and Iran’s halting of flows comes at a time of surging gas imports for Turkey, which have become much more expensive due to the crumbling Turkish currency, the lira.

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China Set To Release Crude From Strategic Reserve In Early February

China Set To Release Crude From Strategic Reserve In Early February

  • China has agreed with the United States to release crude from its SPR around the Lunar New Year holiday on February 1
  • The volume of the release may depend on actual crude prices

China has agreed with the United States to release crude from its strategic reserves around the Lunar New Year holiday on February 1, as part of the broader U.S.-led effort for strategic releases to bring oil prices down, sources with knowledge of the talks told Reuters on Friday.

“China agreed to release a relatively bigger amount if oil is above $85 a barrel, and a smaller volume if oil stays near the $75 level,” one of the sources told Reuters, without offering additional details about the amount to be released.

China will be celebrating the Lunar New Year with an official holiday between January 31 and February 6, and the crude oil release is set to take place around that time, Reuters’ sources said.

U.S. President Joe Biden said at the end of November that the Department of Energy would release 50 million barrels of oil from the Strategic Petroleum Reserve (SPR) in a bid to lower high gasoline prices in a coordinated effort with other major oil-consuming nations. The SPR release from the United States will be carried out in parallel with other major energy-consuming nations, including China, India, Japan, South Korea, and the UK, the White House said at the time.

A day later, China said that the volume of the expected Chinese release of crude from its state reserves would be decided according to the country’s actual needs, and declined to comment if it would be releasing crude in the coordinated effort led by the United States.

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Germany To Become Net Power Importer For The First Time Since 2002

Germany To Become Net Power Importer For The First Time Since 2002

Europe’s largest economy, Germany, is expected to become a net importer of electricity in 2023 for the first time since 2002 due to retiring coal plants and the nuclear phase-out, the International Energy Agency (IEA) said on Friday.

Germany plans to switch off all its remaining nuclear power generators by the end of 2022, while it will also retire a large portion of its coal-fired capacity fleet between 2022 and 2024.

Recently, the country has said it would aim to phase out coal by 2030 – eight years ahead of earlier plans. The coal exit for Germany could be more difficult than in other European economies, because the country plans to phase out nuclear power generation by the end of this year.

The new coalition’s agreement in Germany includes, for example, the accelerated phase-out of coal—if possible by 2030—and the faster expansion of renewable energy, the IEA said in its Electricity Market Report – January 2022 published today.

Germany’s remaining nuclear capacity, which provided about 12 percent of total generation in 2021, is due to be phased out by the end of 2022. At the same time, some coal capacity is due to be retired according to the approved coal phase-out plans. Coal capacity is set to decline from 35 GW at the end of 2020 to 30 GW in 2022 and less than 26 GW in 2024, the IEA noted.

The timing of Germany’s nuclear phase-out and accelerated coal phase-out coincides with the ongoing energy crisis in Europe, where natural gas and power prices have jumped to record amid insufficient supply of gas and uneven wind power generation in northwest Europe, including in Germany.

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Gas Prices In Europe Are Soaring Again Amid New Cold Snap

Gas Prices In Europe Are Soaring Again Amid New Cold Snap

European benchmark natural gas prices rose on Wednesday for the third day in a row, as gas deliveries from Russia via Ukraine and Poland continue to be low while another cold snap is headed to Europe.

On Wednesday, natural gas prices at the Dutch TTF hub, the benchmark for European gas, rose by 6 percent by mid-day, following a 30-percent jump on Tuesday.

European gas prices reflect growing concerns that Russian natural gas flows to Europe via Ukraine and Poland have been abnormally low in recent days.

Russian gas supply to Europe via Ukraine dropped earlier this week to the lowest daily volume since January 2020. Daily gas transit flows from Russia westward to Europe via Ukraine on Monday were half the amount Russia had booked for that day, Sergiy Makogon, chief executive officer at Ukraine’s transmission system operator Gas TSO wrote on Facebook on Tuesday, adding that the drop in transit gas volumes was expected to continue. This is the lowest transit volume of gas Russia has sent via Ukraine since January 2020, Makogon said.

Ukraine has accused Russia of deliberately withholding gas supplies to Europe during the winter months to try to force an approval of the controversial Gazprom-led gas pipeline project Nord Stream 2.

At the end of December, Ukraine’s transmission system operator sent a letter to the German Ministry of Economy, in which it says, “we firmly believe that Nord Stream 2 endangers the security of the European Union’s gas supply.”

Nord Stream 2 awaits approval in Germany and then a review from the EU, which will likely push the in-service date of the pipeline well beyond the current winter heating season in Europe.

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Russia Puts The Blame On Europe As Energy Crisis Worsens

Russia Puts The Blame On Europe As Energy Crisis Worsens

  • The EU is reconsidering its position on extending long-term natural gas contracts.
  • Russia has maintained that the contracts are beneficial for Europe and moving away from them would be a mistake.
  • Russia even went as far as suggesting that Europe’s current energy crisis is its own fault.

The European Union (EU) is reportedly reconsidering its position on extending long-term natural gas contracts beyond 2049 as part of reforms in its natural gas market to meet the net-zero by 2050 goal.   Should the European Commission’s proposal be endorsed by EU heads of state and government this week, putting a timeline to the end of long-term gas contracts would open another rift with Russia, which provides one-third of Europe’s gas supply via pipelines under long-term deals.

The measure, if approved by the EU, would run against Russia’s position that long-term deals are beneficial for Europe and moving away from them and increasing reliance on liquefied natural gas (LNG) was and will be a mistake.

Some EU member states are wary of what they perceive as Moscow using gas as a political tool to influence geopolitics.

However, as it stands, especially with the low levels of gas in storage and surging gas and energy prices, supply from Russia and Russia’s willingness to provide additional volumes to Europe on top of its contractual commitments has been and will be a key driver of the gas market and prices at European hubs this winter.

Despite the current crisis, the EU’s executive branch, the European Commission, is reportedly drafting plans to quit long-term gas supply contracts by 2049. At the same time, it plans to enhance the security of its gas supply, Bloomberg reported this week, citing a draft document prepared by the Commission.

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BP: Oil Demand Has Already Topped 100 Million Bpd

BP: Oil Demand Has Already Topped 100 Million Bpd

  • BP: Global oil demand has already exceeded the threshold of 100 million barrels per day
  • Demand will continue to increase and reach pre-COVID levels at some point in 2022

Global oil demand has already exceeded the threshold of 100 million barrels per day (bpd) last seen before the pandemic, supermajor BP estimates.

Demand will continue to increase and reach pre-COVID levels at some point in 2022, BP’s chief financial officer Murray Auchincloss said on Tuesday at a conference call following the release of the Q3 results.

“Somewhere next year we will be above pre-Covid levels,” Auchincloss said on the call, as carried by Bloomberg.

“OPEC+ is doing a good job managing the balance, so we remain constructive on oil prices,” BP’s CFO added on the call about BP’s third-quarter results, which beat analyst estimates.

Brent Crude prices rose by 7 percent to average $74 per barrel in the third quarter and moved above $80 per barrel in recent weeks, Auchincloss said at the Q3 results presentation.

“This reflects the strong rebound in oil demand as the impact of COVID eases as well as the measured increases in OPEC+ supply. As a result, inventories have reduced back toward pre-pandemic levels. As we look ahead to the end of the year, we expect oil prices to be supported by continued inventory draw-down, with the potential for additional demand from gas to oil switching,” BP’s executive added.

BP’s view about global oil demand is generally in line with most analyst and industry estimates pointing to consumption returning to pre-pandemic levels as soon as this quarter or early next year.

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Oil Prices Will Remain High For Years To Come

Oil Prices Will Remain High For Years To Come

  • A growing number of major investment banks are turning bullish on oil in the medium to long term.
  • A lack of investment is leading to supply deficits as demand rebounds to pre-COVID levels.
  • Rebounding consumption and tight supply could push oil prices even higher.

Six years after former BP chief executive Bob Dudley said that “the industry needs to prepare for lower for longer,” a growing number of major investment banks now expect “higher for longer” oil prices.

Rebounding global oil consumption amid tight supply—contrary to some forecasts last year that indicate demand may have peaked or was close to its peak—as well as years of underinvestment in new supply following the 2015 crash, have prompted Wall Street banks to raise significantly their projections for oil prices in the short and medium term.

Oil prices have hit multi-year highs in recent days, with WTI Crude at its highest since 2014 and Brent Crude at the highest level since October 2018.

Even after the latest rally, prices still have headroom to rise further, many major investment banks believe.

Goldman Sachs, for example, sees Brent hitting $90 per barrel at the end of this year, up from $80 expected earlier. The key driver of Goldman’s higher forecast is global oil demand recovery amid still a weaker supply response from non-OPEC+ oil producers.

The investment bank also sees sustained higher oil prices in the coming years.

Fundamentals warrant higher oil prices, and the bank’s forecast for the next several years is $85 a barrel, Damien Courvalin, Head of Energy Research & Senior Commodity Strategist at Goldman Sachs, told CNBC earlier this month.

Oil demand will set record highs next year and the year after that, and we need to see a ramp-up in investment, he said.

“We’re facing potential multi-year deficits and the risk of significantly higher prices,” Courvalin told CNBC.

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Forget $100, Options Traders Now Betting On Oil Prices Hitting $200

Forget $100, Options Traders Now Betting On Oil Prices Hitting $200

  • $100 Oil is no longer an ‘outrageous’ bet in the call-options market
  • Some speculative traders are now betting on $200 oil in December 2022
  • For those betting on $100 oil, the leader of the OPEC+ alliance, Saudi Arabia, has a message: look beyond the end of this year; an oversupply is coming next year

As oil prices hit multi-year highs, some speculative traders are betting on the options market that oil could exceed $100 a barrel by the end of this year and even reach a record $200 per barrel by the end of 2022.

Call options give traders the right—but not the obligation—to buy assets at a certain price, the so-called strike price, by a certain date.

The amounts of call options at triple-digit strikes have soared in recent weeks, suggesting that more speculative traders are attracted by potential quick profits from options trades, which are relatively low-cost ways to speculate on the direction of an asset.

Some “wild” bets such as call options at a $100 per barrel WTI Crude strike by December 2021 or $200 per barrel Brent Crude by December 2022 have been placed in recent weeks, The Wall Street Journal reports, citing data from provider QuikStrike.

For example, at the end of September, call options at Brent at $200 a barrel for December 2022 traded 1,300 times in one day, amid a worsening energy crunch in Europe and Asia ahead of the winter heating season in the northern hemisphere.

In WTI, the number of outstanding call options with $100 per barrel strike price with different expiry dates has surged five times since early February 2021 to more than 141,000 contracts as of the middle of October, according to data from CME quoted by the Journal.

Other popular call options for WTI included strikes at $95 or $180, QuikStrike data reported by the Journal showed.

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