MNI Commodity Weekly: China Helps Sanctioned Barrels Stage Recovery

Executive summary:

• China Increasingly Turning to Discounted Sanctioned Crude: China remains key for global oil demand outlooks but the country is increasingly turning towards sanctioned barrels to achieve discounts and improve refining margins.
• Freeport LNG Terminal Signals Return In February: Signs of a Freeport LNG terminal return in the near term serves further downward pressure on European natural gas supplies.
• OIL Markets: Oil markets ease back after demand optimism and tight supply concerns drive both crude and refined product prices higher.
• Gas Markets: European and US gas markets continue to slide as higher LNG imports and storage withdrawals help Europe cope with the recent cold spell.

China Increasingly Turning to Discounted Sanctioned Crude:

China’s recovering economy is the key demand highlight for oil outlooks in 2023 but the country has shown an increasing trend to turn towards discounted sanctioned barrels rather than more traditional outlets such as the Middle East. In the latest Chinese customs figures out this week, Saudi remained its number one supplier in 2022 but Russian crude volumes jumped 8% from 2021 to 86.25 million tonnes or 1.72mn bpd.

• Despite an economy that is recovering, weak Asian refining margins have pushed Chinese buyers towards sanctioned barrels to boost profits.
• Chinese customs data showed that crude imports from Malaysia almost doubled in 2022 to 35.68 million tonnes. The Southeast Asian country is a transfer point for sanctioned shipments originating from Iran and Venezuela.
• Vortexa, a ship tracking specialist, placed China's December imports of Iranian crude at a record of 1.2 million bpd, up 130% from a year earlier. They put total Iranian sales in December at 1.4 million barrels per day, the highest in 3 1/2 years.
• The Biden Administration said this week they would put pressure on China for being Iran’s main outlet for its sanctioned barrels. Critics have accused the Biden administration of not exerting enough pressure on Beijing to stop imports from Iran, hoping that China will play a positive role in nuclear talks with Tehran.
• Behind closed doors, the US may be pleased sanctioned barrels are making it onto the market – turning a blind eye on the volumes in the hopes of easing global energy prices and their inflationary impact.
• Both Argus and Vortexa tracked a significant uptick in Iranian crude loadings through Q4 fuelled by China (See chart). Argus placed Iranian crude and condensate exports 43% higher in Q4 2022 vs Q3, while Vortexa placed the gain at 56%.
• In production terms, Iran exited 2022 pumping just above 2.7 million barrels a day, compared with 1.9 million barrels a day in July 2020. It is still way down from the 3.8 million barrels per day of 2017-2018.
• Middle Eastern nations may be losing market share to sanctioned barrels in Asia but higher volumes towards both Europe and the US have now opened up as a result of sanctions.

Freeport LNG Terminal Signals Return In February:

US natural gas prices have been facing further downward pressure in recent weeks, partly as the restart of the second-largest US LNG export facility Freeport is likely in the coming months as it now seeks approval from the regulator. The start-up has been delayed several times and was last scheduled for the second half of January. Freeport accounts for around 20% of US LNG exports and the resumption of operations is considered crucial to facilitate a greater level of LNG trade between the US and Europe.

• Market sources expect no LNG cargoes until the end of February the earliest. Official messaging suggested the second half of January which is quickly running out. Repairs at the terminal have been completed as of 23 January. The facility stopped operations on 8 June following a fire. Freeport LNG has filed for approval from the US Federal Energy Regulatory Commission (FERC) “to commence cool down of its Loop 1 transfer piping and reinstate the facility’s boil off gas management compressors and associated piping”. This process usually takes eleven days to complete and further steps will be needed to restart the facility. There have been no significant amounts of gas deliveries to the terminal, also suggesting a swift restart is unlikely.
• U.S. natural gas futures jumped about 9% on Monday from a 19-month low in the prior session on Freeport LNG's request to begin the restart process though overall bearish pressures remain.
• Every week of delayed return for Freeport takes around four LNG cargoes off the market. In mid-January, Freeport cancelled some of its upcoming LNG shipments, one scheduled for the end of January and another for early February.
• In Europe, gas demand reduction measures, an overall mild winter and healthy storage levels have offset the lack of Freeport flows. The European market has coped with the recent cold spell with higher LNG imports. Imports into NW Europe remain steady as North Asian spot prices have been falling on the back of weak Asian demand and high terminal stocks. European TTF prices have been declining as forecasts point to mild weather, lower-than-average storage withdrawals and ample LNG supplies. The return of Freeport LNG is adding further downward pressure on European gas prices.

US LNG Exports

Oil Markets:

• Crude prices have seen a pull back this week after extending the rally driven by the potential for a recovery in oil demand this year. Despite the recent fall Brent prices are still up over 8$/bbl from the low of 77.9$/bbl at the start of the month. The market continues to weigh recession and global economic uncertainty against optimism for Chinese demand and the potential for a drop in Russian output following sanctions from 5 Feb.
• The WTI-Brent spread has seen a gradual widening this week helped by the potential disruption to Russian oil flows and the expectation of another build in Cushing inventories.
• Gasoline and diesel prices are trending higher supported by upcoming French refinery strikes adding to tight market concerns ahead of the EU ban on Russian oil products. The US gasoline crack spread is up from 20.5$/bbl in the first week of Jan to over 31$/bbl and the diesel crack is up from 51$/bbl to 60$/bbl. Refining margins are likely to see further upside pressure with the upcoming US refinery maintenance season and the expected seasonal recovery in gasoline demand. US refinery utilisation is still slowly recovering with facilities only just returning from the winter disruption in December.

US Gasoline and Diesel Crack Spreads

Source: Bloomberg

Gas Markets:

• European gas continues to decline as the return of above normal temperatures to NW Europe is expected to ease demand and take further pressure off import requirements.
• The system has coped with the cold weather and higher heating demand over the last week. Higher LNG import volumes helped but have remained below the record December levels. Storage withdrawals also increased but the rate is below the five-year average rate leaving healthy European gas levels in storage. Temperatures in NW Europe are forecast to return above normal from around 29 Jan.
• Downside pressure also comes from the completion of the repair works at the US Freeport LNG export facility. Europe receives about 60% of LNG imports from the US and demand will remain strong as Europe expands regasification capacity. Germany is expected to start imports from the third new floating terminal at Brunsbuttel next month following the opening of Wilhelmshaven and Lubmin facilities already this winter.
• Supply risks provide some upside support to European gas markets with gas spreads favouring spot LNG deliveries to Asia over Europe. The Feb JKM-TTF spread is trading around +4.5$/mmbtu with JKM above TTF since 19 Dec and US netbacks to Asia are above netbacks to Europe.
• US Natgas continues to drift lower as high production, healthy storage, and limited exports weigh on prices. Some colder weather and the potential for a restart of the Freeport LNG facility has provided some price support but the reaction has been limited with no exports expected until towards the end of February.

Source: Bloomberg

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