MNI Commodity Weekly: Xi and Putin Meeting Further Sign of Shifting Energy Alliances

Executive Summary:

Russia and China Strengthen Ties This Week with Energy on Agenda: China’s Xi Jinping was in Moscow this week to meet with Putin as the international leaders seek to strengthen ties. Talks between the two involved energy but question marks remain around China’s overall appetite for Russian gas which has few alternative markets.

French Industrial Action Within The Energy Sector Enters Its Third Week: Workers at French refineries, oil terminals, LNG terminals and power generation sites have been on strike for a third week, in retaliation to the Senate’s vote for a new pension reform that would raise the retirement age to 64 from 62. The strikes are now resulting in fuel shortages across France.

Oil Market: The crude oil price decline has steadied after falling nearly 17$ since early March with calmer financial markets ahead of the US Feb rate decision. Oil product markets are seeing support with disrupted refining in Europe and tighter US supplies ahead of the summer driving season.

Gas Market: European gas markets are trading at their lowest since July 2021 at around 40€/MWh with a warm end of winter weather forecast, high storage levels and stable LNG supplies.

Russia and China Strengthen Ties This Week with Energy on Agenda:

Russian President Vladimir Putin hosted his Chinese counterpart Xi Jinping in Moscow this week in a move to cement further co-operation within the energy space as the Kremlin makes efforts to try and push further energy volumes east.

• Russia is under pressure to sell surplus energy volumes no longer heading to Europe allowing China to save billions of dollars on purchases of discounted Russian barrels as well as coal.
• Xi has repeated numerous times since the invasion that China intends to forge a closer relationship with Russia on energy issues to ensure global energy security.
• The increased partnership between the nations has been clear in oil imports which jumped 8% y-o-y from Russia into China in 2022 to 1.7mn bpd according to Chinese customs data.
• The move has pushed Saudi volumes out of the Chinese market but they are instead flowing in higher volumes to the west.
• China's seaborne crude imports from Russia are set to hit an all-time high of about 1.4 million bpd in March, according to Vortexa and Kpler.
• Russian oil has proved an easy sell to China but gas raises more question marks with Russia seemingly more interested in selling that China in buying. The Power-of-Siberia-2 pipeline was on the agenda at the meeting between the two leaders this week, a project which would see nearly all the flows sent via Nord Stream in the past to Europe, instead heading to China by 2030.
• Putin said Russia, China and Mongolia had completed "all agreements" on finishing the pipeline to ship Russian gas to China, and that Russia will deliver at least 98 bcm of gas to China by 2030, although a subsequent Russian statement said pipeline details still need to be resolved.
• Official accounts of Xi's statements issued after the meetings do not mention the pipeline, indicating its not high on China’s agenda at present with most of the noise coming from the Russian side. China already receives increased volumes of gas from Russia on the Power-of-Siberia pipeline and is set to receive piped gas from Turkmenistan (circa 25bcm) while long term deals from Qatar and the US will also boost LNG volumes.
• Looking again at Russia, crude flows out of the country have only been marginally hit by the supposed 500,00 bpd production cut in March. In the seven days to March 17, Russia’s shipments were trimmed by 90,000 bpd to 3.23 million bpd on a weekly basis. The less-volatile four-week average dipped by a similar amount.
• Deputy Prime Minister Alexander Novak said Tuesday that the 500,000 bpd production cut will persist until the end of June at present which should start to see Russian exports slip.
• Despite the potential hit to Russian flows, Vortexa's global loadings of crude and products of circa 96mn bbls in March are well above the 7-year average and against global economic jitters displays a well-supplied market at present. Along with the banking crisis, these excess volumes are weighing on the current crude crash.

French Industrial Action Within The Energy Sectors Enters Its Third Week:

Industrial action at France’s oil refineries, depots and ports has led to numerous fuel-shortages forcing the government to release strategic stockpiles of petroleum products to avoid more severe shortfalls. LNG imports into France also remain disrupted with three out of four terminals offline until 28 March – prompting vessels to divert.

• Industrial action at TotalEnergies’ and Exxon Mobil’s sites in France has weighed on refinery throughput and disrupted fuel-deliveries since 7 March.
• Total’s Gonfreville refinery has been shut and operations at the Feyzin site remained reduced, while fuel-deliveries are blocked at both sites. Total’s Donges refinery has been offline since end-February, following a fault, and deliveries remained disrupted. Strike action at the Dunkerque oil depot continued to block deliveries.
• Throughput at Exxon’s Fos refinery has been reduced and strikes continue to disrupt fuel deliveries. Exxon’s Gravenchon site has also reduced throughput due to a lack of crude supply from the port of Le Havre. Industrial action at the site ended on 8 March and operations resumed but strike action picked up over the weekend 18-19 March.
• The French government on 21 March took steps to order workers to unblock fuel shipments from the Fos depot to alleviate a shortage in the south of France to supply the Lyon region by pipeline. The requisition is for three employees per shift and is valid for 48 hours as needed.
• French oil terminals have also been under strike action since 13 March. The Fos and Lavera oil terminals have halted all tanker operations and industrial action is expected to last until 24 March. No crude appears to have discharged at the Le Havre port since 10-11 March, as workers announced several days of industrial action. The scheduled return of port activity remains unclear but several diesel tankers heading to Le Havre have changed course last week.
• Energy consultants FGE expect strike activity to reduce refinery runs by 515kbpd this month, while Energy Aspects estimates runs to be reduced by 400kbpd – including the refinery outage at the Donges site. FGE expects the loss in diesel output this month at 230kbpd, while gasoline supply is forecast to be impacted by 120kbpd.
• From early-March the French authorities have released around 200,000 cubic meters of petroleum products to try and avert a repeat of last year’s walkouts that resulted in filling stations running dry.
• French LNG supplies have also been heavily disrupted by industrial action since 7 March. Elengy’s three LNG import terminals – Fos Cavaou, Fos Tonkin, Montoir-de-Betragne – have been offline since 7 March and are scheduled to be restricted until 28 March. First terminal nominations are scheduled for 29 March.
• Fluxy’s Dunkerque LNG terminal has also been offline since 7 March and returned to operations on 17 March, after workers voted to not resume strike action. Sendouts at Dunkerque have picked up since 17 March and recovered to 544.81 GWh/d on 21 March.
• As a result of French LNG terminal closures, LNG imports into northwest Europe fell to 191.77 mcm/d on 12 March but rebounded to 278.95 mcm/d on 20 March.
• French power supply has also been severely curtailed since 6 March amid striking workers at EdF’s and Engies sites. Industrial action at EdF – who is operating the country’s 61.37GW nuclear power fleet – has been extended until 23 March. Strike action has severely weighed on the country’s nuclear output this month, which stood at an hourly average of 34.84GW on 1-22 March. Output has been also partly lower because of unplanned and scheduled maintenances. Nuclear generation in March averaged 43.02GW in the past five years.

Oil Market:

Crude has seen a small recovery this week after falling nearly 17$ since early March to a low of just over 70$/bbl on 20 March. Crude was already falling, driven by central bank rate tightening and recession fears as well as stronger than expected Russian oil output, but the recent global banking fears pushed it further through several key technical support levels. The options skew has recovered slightly after falling to the most bearish since Dec 2021 but is still well below levels seen at the start of March.

• Russian supply uncertainty remains an upside risk following the plans announced on 21 March to extend the March 500kbpd production cut until the end of June. Russian oil exports have maintained much higher than expected since the introduction of sanctions in December and February.
• Neither OPEC nor US have so far reacted to the falling oil prices. Any changes to future OPEC policy to cut production or US plans to replenish strategic reserves could tighten the supply demand balance however both are probably waiting for financial markets to calm before committing. OPEC are also likely concerned for the potential tightening balance later this year and possible requirement to increase output.
• Several analysts have this week reaffirmed forecasts for bullish fundamentals for oil this year on limited storage, and supply upside to cover for a rebound in China demand. Most price forecasts for H2 2023 range between about 80$/bbl and 100$/bbl.
• Crude forward curve backwardation has weakened significantly over the last couple of weeks with demand concerns overriding the potential tighter fundamentals. The Dec23-Dec24 spreads are trading near the lowest since Dec 2021 and the front of the WTI curve is now in contango until July.

Brent Implied Volatility 25 Delta Call-Put Skew

source: Bloomberg

OIL PRODUCTS:

Gasoline margins are near their highest since Jul 2022 in the run up towards the summer driving season and with the switch to summer grade gasoline. Prices are also supported by a gradual rebound in US gasoline demand, below normal US inventories and the ongoing refinery maintenance season. The US spread has risen from a low of 14.3$/bbl in December up to 39.3$/bbl thi week.

• Diesel margins are more balanced with weak US demand weighed against supply concerns due to refinery strikes in France, missing Russian supplies and lower Chinese exports. The US is unusually exporting diesel to Europe and India supplies have also increase to help cover the near-term shortfall.

Gas Market:

European gas markets are trading at their lowest since July 2021 at around 40€/MWh with a warm end of season weather forecast, high storage levels and stable LNG supplies.

• LNG supply risks could provide upside price risk with supplies needed to restock storage to above 90% before next winter. Risks are from potential competition from Asia buyers, restricted production due to loading issues at Angola LNG this week and extended French LNG disruption with deliveries into three terminals blocked until 28 March.
• French LNG disruptions have resulted in diversions to other European locations, but no significant diversions have yet been seen to Asia. Lower prices this year have increased some buying interest from South Asian nations but the main Asian buyers of Japan, S Korea and China are still showing limited appetite for increase imports. LNG shipments into NW Europe are expected to be higher in March than in January and February with total European LNG sendout back over 400mcm/d.
• European gas storage is still over 20% above the five-year average capacity with warm weather this week even allowing for two days of net injections. The winter season looks set to end with inventories at around 54% of capacity.
• The EU said Europe’s energy security has improved but must prepare for next winter, urging companies to take part in joint gas purchases. The EU has proposed to extend the voluntary 15 % cut in gas demand from the end of March through next winter. Eurostat data shows a 19 % decrease in gas demand in Aug to Jan compared to the five-year average.
• A slow return of Freeport to full operation has combined with high storage levels and strong production to bring US Henry Hub back down to around 2.2$/mmbtu this week from over 2.6$/mmbtu early last week. The US Freeport LNG export terminal has reduced recent planned output with part of a production train damaged during its restart as the export facility struggles to resume full operations. Freeport have previously said that changes in feed gas flows and production rates are to be anticipated. Feedgas flows suggest the facility is running about half capacity with recent pipeline deliveries around 1bcf/d.

source: MNI/TSO/ENTSOG

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