MNI Commodity Weekly: Chinese Reopening and Russian Sanctions Hold Key to OPEC Production Outlook

Executive Summary:

• Chinese Rebound Remains Paramount to OPEC Production Levels 2023: Demand indicators suggest a Chinese demand rebound is well underway but it will need to hold up for a more sustained period of time before convincing OPEC a production increase is warranted. The impact of sanctions on Russia are also being factored in.
• EU Looks At LNG Supply, Gas Demand Reduction To Achieve Storage Targets: European gas storage levels are comfortably above long-term averages, while strong LNG arrivals continue and gas consumption remains below the seasonal norm, driven by milder weather this heating season. The region is looking to fill its gas reserves by 90% of capacity ahead of next winter but declining Russian gas flows, lower LNG spot prices and the reopening of China’s economy could provide upside market risks.
• OIL MARKET: Oil market focus shifts back to the upside with short term supply outages adding to the potential for higher Chinese oil demand this year. Weak near term demand continues to weigh on product crack spreads and is keeping the front of the WTI curve in contango.
• GAS MARKET: Natural gas markets on both sides of the Atlantic are finding some support after significant price declines. European markets are supported by LNG supply risks and the US is supported by the expected return of Freeport LNG during Q1 2023.

Chinese Rebound Remains Paramount to OPEC Production Levels 2023:

The oil market is keeping signs of Chinese demand recovery firmly in it's spotlight. A return of Chinese oil demand may force OPEC+ to reconsider its output policy this year but key unknowns have forced the group to rollover production targets of late. The OPEC+ Joint Ministerial Monitoring Committee (JMMC) recommended a rollover in the current policy last week citing unknows around the return of Chinese demand as well as fears sanctions will cause Russian oil product flows to fall off the market.

• China’s demand return has been a key supporting factor for oil prices this year. The IEA forecasts that global oil demand is set to rise by 1.9 mb/d in 2023, to a record 101.7 mb/d, with nearly half the gain from China.
• With regards to Russian output, the IEA estimates that Russia’s crude oil production eased from 9.8 million barrels per day in November to 9.77 million barrels per day in December. Crude exports however remain strong with record volumes heading to India in particular.
• Western sanctions on Russian oil products only came about February 5, the impact of which needs to fully unfold. Russia has proven resilient to keeping its crude on the market, albeit at significant discounts, but its ability to find Asian demand for refined products is likely to prove harder. Trafigura warned this week that Russia’s short haul tanker fleet is going to struggle to adapt to the new long haul model for getting oil products to Asia. It warned this inefficiency would likely get worse with time.
• Other than Russia, the key question remains, if Chinese demand returns significantly, will OPEC+ respond by raising output or leave the market to tighten further.
• On the demand front, S&P Global data showed China’s domestic flight activity rising 89% month on month in January, while international flights increased 15%, with signs February will keep progressing.
• Proxies for demand such as traffic congestion, subway ridership (see chart) and data for cinema visits all show a significant upward trend through Jan/Feb.
• Goldman Sachs remains bullish Chinese demand, reiterating in a research note this week expectations its return would boost global oil demand by 1mb/d in 2023, while demand for international travel would add another 0.2mb/d boost. Combined, that is the same as average growth in global demand in the two decades before Covid the bank said.
• After building through the tail end of last year, Chinese crude stocks are drawing in early 2023 according to Kayrros data as refinery runs ramp up. (see chart)
• OPEC+ remains cautiously optimistic around China’s return but expects to see more concrete evidence that Chinese demand is here to stay before the group commit to unwinding cuts to avoid risking another sharp fall in crude prices.
• In regards to Chinese demand, “I will believe it when I see it and then take action,” Prince Abdulaziz bin Salman, energy minister of OPEC leader Saudi Arabia said on Saturday in Riyadh.
• The next OPEC JMMC meeting is scheduled for April 3.

source: Reuters

source: Kayrros

EU Looks At LNG Supply, Gas Demand Reduction To Achieve Storage Targets:

The European Union set itself a 90% gas storage capacity target for the beginning of the 2023/2024 heating period. Current stock levels suggest Europe will end the withdrawal season – usually end-March – well above seasonal norms amid high LNG arrivals and gas demand reductions, which would leave Europe in a comfortable situation this summer.

• European gas consumption is currently 15% below the seasonal average, mostly driven by lower industrial demand.
• Industry experts say, the EU will need to cut gas demand by 13% between Feb-Oct, compared with the five-year average to ensure gas security next winter, amid declining gas imports from Russia. This assumes Russian gas flows remain at current levels and temperatures are around normal levels. The EU-wide voluntary target of 15% gas reduction is set to expire in March.
• European gas storage levels stood at 69.69% of capacity as of 6 Feb. Reserves have been around 20% above the norm and are set to bottom at over 50% at the end of the withdrawal season, usually at the end of March, and well above averages.
• LNG arrivals into NW European terminals have slowed the past three weeks, but overall imports so far this winter have been well above levels seen in the past five years. LNG imports in January averaged 269mcm/d compared with the five-year average of 122mcm/d. So far this month, imports averaged 235mcm/d.
• Europe will need to pick up LNG buying this summer to reach its storage capacity target. The region will likely be competing with increased Asian LNG demand, given the reopening of the Chinese economy.
• LNG spot prices in Asia have fallen to their lowest level in one year which is likely to attract some interest from Asian buyers such as Thailand, India and Bangladesh, increasing competition for European buyers and providing price upside.
• Some downside to Asian LNG demand is expected this summer as Japan and South Korea both ramp up domestic nuclear generation.

source: ENTSO-G, Bloomberg, THE, Eurostat, Barclays Research

OIL MARKET:

• Uncertainty surrounds global oil demand growth with the main central banks still tightening, although they are expected to reach a peak soon. US Fed Chair Powell yesterday said more interest rate increases will be needed. Changing expectations for US oil demand have contributed to the front month WTI-Brent spread varying between -4.88$/bbl and -7.71$/bbl over the last couple of weeks. The spread is currently hovering around -6.2$/bbl.
• Changes in the forward curve backwardation have mostly followed the moves in crude futures with Jun23-De23 recovering to -2.9$/bbl but still down from a peak of 3.5$/bbl from 30 Jan. The upside has been limited due to concern for the global economy and its impact on oil demand growth as well as robust Russia oil output despite the new sanctions starting last weekend on 5 Feb. The WTI prompt spread remains in contango suggesting ample near term supplies against the current weak demand.
• Product crack spreads are still weak despite the new EU and G7 sanctions on Russian products and high refinery outages expected during the US refinery maintenance season. Crack spreads could remain weak if Russia does manage to redirect supplies successfully in the coming weeks but there are plenty of upside risks. Cracks could rally if data starts to show a net loss in global diesel supplies; if inventories start to decline again or if we see a demand recovery from China and there is a more positive outlook for the global economy later this year. Higher freight costs to import middle distillates into Europe from further afield are also likely to support crack spreads.

US Crack Spread Price - source: Bloomberg

GAS MARKET:

TTF front month has seen some support over the last week with the market holding just above the low of 52.75€/MWh seen on 27 Jan. As concern for supplies this winter have eased attention is shifting towards Europe’s ability to attract LNG cargoes to restock storage over the coming summer months. Weather forecasts are currently suggesting a warm February but a cold end to the season is still an upside risk.

• Low demand, healthy LNG supplies and high storage levels have helped to significantly reduce European energy security concerns for this winter. Total European LNG net imports flows have eased back this month with supplies holding well above the seasonal normal but around the same levels as seen this time last year. Global competition for limited LNG supplies is helping to maintain Sum23 and Win23 contracts above the front month. Sum23 is trading about 2€/MWh above March and next Win23 is over 10€/MWh higher.
• Natural gas markets on both sides of the Atlantic await further signs of the US Freeport LNG export terminal restart. Freeport LNG has requested permission from the US regulator to restart some shipping activities, but further approvals will still be required to resume commercial operations. Only very small gas pipeline flows have so far been seen flowing to the terminal, but vessel tracking shows several tankers waiting outside the port. The market expectation is for the terminal to resume operations later this month although some suggestions are that a return to full capacity could take up to about 60 days after the restart.
• The decline in US natural gas prices has halted with front month Henry Hub ticking up from a low of 2.36$/mmbtu on 3 Feb. The potential return of Freeport and some colder weather in the US have offset the ongoing high natural gas production levels and near average storage inventories.

Oil Market Calendar: