MNI Commodity Weekly - UAE/Saudi Spat Dispelled While Russian Imports Show Unity
Officials have dispelled the possibility of the UAE leaving OPEC but the market is watching for any signs of disconent.
Officials Dispel Saudi/UAE Dispute: The market is watching OPEC+ headlines closely for any signs of discontent from the UAE's commitment to being part of the group.
European LNG Imports Surge To Record Levels On Rising Capacity: European LNG imports are on track to rise to record levels this year driven by capacity additions in Germany, France, Italy, Greece, Finland and Poland as Europe aims to wean itself of Russian energy imports. Germany sees itself at the forefront of the LNG market and plans to ship LNG to other European nations.
Oil Market: Crude oil has reversed a bullish trend with focus switching to the impact of future central bank rate hikes on oil demand growth and with modest China growth targets for 2023.
Gas Market: TTF front month reached a low of 41.86€/MWh on 6 Mar but has found some support this week with a combination of cold weather in northern Europe and a halt to French LNG imports due to industrial action.
Officials Dispel Saudi/UAE Dispute:
Headlines on Friday from the WSJ sent oil markets tumbling after suggesting the UAE was considering leaving OPEC, dissatisfied at its inability to raise production while obeying quotas.
- UAE officials quickly doused out the flames in the aftermath, claiming there was no truth in the reports, something the oil markets took solace in, sending crude well above its levels before the headlines.
- Although oil markets are leaning with UAE officials dismissal, the headlines bring about the question of is there smoke without fire.
- A further two senior UAE officials told CNBC this week that the country does not intend to leave OPEC at this time speaking on condition of anonymity.
- There have been murmurings for years that the UAE, the third largest producer in the OPEC subgroup would like to produce more oil. It is one of the few global suppliers with significant spare capacity – circa 1mn bpd – available to tap into. Without spare capacity under its fold, OPEC loses much clout to control markets in the way it would like to.
- Recent exits of Ecuador and Qatar set a precedent for discontent within the group, something the recent UAE headlines have only added to.
- During covid inspired global demand destruction – the UAE dragged its heels on Saudi led production cuts, until it earned a concession that it — alongside Russia, Kuwait, Saudi Arabia and Iraq — should receive a higher production “baseline.”
- The UAE has ambitions to increase its capacity in the medium term to 5mn bpd by 2027. It was only producing 3.23 mn bpd in February according to the IEA. OPEC quota commitments somewhat hamper these ambitions.
- The leak of headlines may be a bid by UAE officials to sew feelings of discontent ahead of the next OPEC meeting to try and push for a greater production quota.
- Despite Russian crude flows muscling in on Asian market share in recent months, sanctioned oil flows from Russia to the UAE and Saudi have been increasing of late, signaling a level of alliance in the group.
- So far OPEC has avoided increasing production levels stating the October deal is here to stay for the rest of 2023. They agreed to a 2mn bpd reduction in production quotas from November 2022 to December 2023. The group is waiting to see how the fall out from Russian sanctions pans out and the bounce back in Chinese demand balances out the market.
- Although production and exports are not the same, recent figures by Kpler show a strong increase in OPEC+ crude exports between October and Feb – (+683kbd), despite production cut commitments.
European LNG Imports Surge To Record Levels On Rising Capacity:
European LNG imports – including Turkey - are forecast to rise by 10% in 2023 year on year to a new record of 190bcm driven by new capacity additions, with Germany at the forefront. European countries have been focusing on ramping up LNG capacity after ceased Russian pipeline gas flows left European gas supplies in a vulnerable position.
- Additional floating storage and regasification units and existing capacity expansion will increase LNG import capacity in the EU and UK by 5.3Bcf/d by the end of 2023 and by 1.5Bcf/d in 2024. In the period between 2012-2021, LNG regasification capacity only increased by 2.8Bcf/d.
- Total European LNG imports last year rose to 121mn tonnes, compared with under 80mn tonnes a year prior.
- Germany is planning to install a total of six FSRUs at four locations, five of them chartered by the government and with regasification capacity of 27bcm/year. Germany’s LNG terminals may not be all fully utilised in the future, according to market sources, however, new import capacity was added to avoid fuel supply squeezes. Germany already commissioned the Wilhelmshaven and Lubmin LNG terminals this winter, while commissioning for Brunsbuttel is underway and the start-up is expected by the end of March.
- Germany plans to become an LNG hub to supply its European neighbouring countries and plans to ship around 5.5bcm of LNG to European nations this year. It sees demand from the Czech Republic, Slovakia, Austria, Ukraine, and Moldova. The country expects to ramp up exports to 6.7bcm in 2026.
- Finland began commercial operations at its new 0.5Bcf/d Inkoo FSRU in mid-January, however, limited gas demand and an inability to share cargoes has so far weighed on demand for terminal slots.
- France is planning to add a 0.4Bcf/day FSRU at Le Havre port by September and Greece will add around 0.5Bcf/day from an FSRU at Alexandroupolis by the end of 2023.
- Italy is planning to install a 5bcm FSRU near Piombino. The FSRU is currently underway and is scheduled for start-up in May.
- Poland is planning a 0.2Bcf/d expansion at the Swinoujscie LNG terminal by the end of 2023.
- European LNG imports into western European terminals – Belgium, France, Germany, Netherlands and UK - have been picking up this year and hit a record high of 356mcm/day on 23 February. Imports averaged 305.5mcm/day so far this month.
- Europe will look to ramp up LNG imports this summer in order to achieve its 90% gas storage target by 1 November. The region’s ability to ramp up imports will depend on the pace of China’s gas demand recovery, which could take away a significant volume of spot LNG cargoes this summer.
source: Timera Energy
Crude has reversed a bullish trend which saw Brent rally from a low of 80.45$/bbl on 22 Feb up to the peak of 86.9$/bbl driven by optimism for China demand and supply risk due to the Russia production cut in March.
- Prices have pulled back this week driven by modest Chinese growth targets announced at the weekend and renewed focus on inflationary pressures as well as future central bank rate hikes with the potential negative impact on oil demand growth. US Fed Chair Powell has suggested that the ultimate level of interest rates is likely to be higher and potentially increasing faster than previously anticipated.
- The recovery in demand in China is still seen as the main driver behind global oil demand growth this year as travel increases in the country following the relaxation of covid restrictions.
- Russia’s plan to cut its oil output by 500kbpd in March isn’t yet affecting crude exports, while there is also no major disruption to diesel flows. The EIA STEO report this week raised the forecast for Russia’s oil production in 2023 and 2024 following signs of robust exports and despite an expected decline of 0.7mb/d in March output.
- The Brent crude curve remains in strong backwardation with Jun23-Dec23 trading in the middle of the 1.6$/bbl to 3.4$/bbl range from this year while the prompt spread is near the highest since November.
- Diesel crack spreads are pulling back due to weak demand, stronger than expected Russian product output and building inventories. The US diesel crack is down to around 40$/bbl from a peak of 43.8$/bbl on 2 Mar. Gasoline cracks however are stronger due to recovering US demand, low inventory levels and a strong US refinery maintenance season ahead of the upcoming US driving season and switch to summer grade gasoline.
European gas markets are finding support with the month ahead ECMWF forecast suggesting temperatures in NW Europe and the Nordic region are expected to remain just below normal until mid-April. EU & GB natural gas demand savings in the first seven days of March were only 2.2% compared to the 2017-21 average according to early ICIS data.
- Four French LNG terminals were blocked on Monday 6 Mar and disruption at three of them could continue until 14 March. The strikes are causing LNG tankers to divert away from France potentially towards the UK.
- Storage levels are on track to end the heating season around 55% full and well above normal despite the cooler weather. Total European storage was at the top of the five-year range at 58.55% full on 6 March.
- Upside risks come from a potential increase in competition for LNG from Asia this summer into next winter and with the potential for increased gas demand from fuel switching. Lower LNG spot prices down into the 13$/mmbtu range have attracted the interest of several price sensitive Asian nations and some small importers in China but the increased demand has so far not been enough to raise prices.
US front month Henry Hub natural gas is unchanged from the start of last week having traded in a wide 2.5$/mmbtu to 3$/mmbtu range. The partial return of Freeport LNG has supported prices but uncertainty remains over the timing of the full restart.
- US regulators sent another list of questions seeking information to Freeport LNG on Monday, as they evaluate its request to restart full commercial operations. Vessel tracking has shown a handful of partial cargoes leaving the facility, while a first full cargo is understood to have left last week. Feedgas deliveries to the facility are up to around two thirds of capacity at around 1.4bcf/d - reflecting supply to two liquefaction trains.
- The latest EIA STEO report suggests US LNG exports are up 14% from last year to about 12 Bcf/d in 2023 and production up to 101.69 bcf/day in 2024. They also forecast US natural gas consumption to fall 5% in 1Q23 from the previous year to boost end of March storage to 23% more than the five-year average.
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