The perfect storm is brewing in US diesel markets

1. Stike’s threat to rail highlights US energy weakness

The possibility of a nationwide rail strike has pushed US natural gas futures above 9 per million British thermal units, amid fears of rail disruptions to coal, underlining the importance of gas in power generation.

– According to the US Energy Information Administration, US natural gas consumption is set to rise to an all-time high of 86.6 billion cubic feet per day in 2022, amid the retirement of coal-fired power plants.

Given that the rail union agreement is still temporary, the emergence of strike risks would lift Henry Hub futures again as 70% of all coal shipments to US power plants are handled by rail.

– September is usually the month when you see some of the biggest weekly increase in gas stocks before winter starts – ramping up emergency gas generation could disrupt gas injection rates, adding another layer of pressure on prices.

2. The Middle East demands the diesel market in Europe

– According to Reuters, the Middle East is poised to become Europe’s largest diesel supplier as regional buyers prepare to start EU sanctions on Russian products in February 2022.

A combination of ultra-low mid-distillate stocks and remarkably healthy diesel cracks, which are still around $50 per barrel despite the recent price drop, makes Europe a desirable destination.

– Europe’s diesel imports increased in September so far, reaching 1.65 million…

1. Stike’s threat to rail highlights US energy weakness

Gas

– The prospect of a nationwide rail strike has pushed US natural gas futures above 9 per million British thermal units, amid fears of a rail coal disruption, confirmation The importance of gas in power generation.

– According to the US Energy Information Administration, US natural gas consumption is set to rise to an all-time high of 86.6 billion cubic feet per day in 2022, amid the retirement of coal-fired power plants.

Given that the rail union agreement is still temporary, the emergence of strike risks would lift Henry Hub futures again as 70% of all coal shipments to US power plants are handled by rail.

– September is usually the month when you see some of the biggest weekly increase in gas stocks before winter starts – ramping up emergency gas generation could disrupt gas injection rates, adding another layer of pressure on prices.

2. The Middle East demands the diesel market in Europe

The Middle East

– According to Reuters, Middle East balanced To become the largest diesel supplier to Europe as regional buyers prepare to start EU sanctions on Russian products in February 2022.

A combination of ultra-low mid-distillate stocks and remarkably healthy diesel cracks, which are still around $50 per barrel despite the recent price drop, makes Europe a desirable destination.

– Europe’s diesel imports have increased in September so far, reaching 1.65 million barrels per day, with the Middle East controlling an increasingly larger share of the market.

Russia used to be the main exporter of diesel to Europe but has seen its share drop from 60% three months ago to 44% in September so far.

3. We need to talk about gas

natural gas

– Europe’s natural gas futures found some relief around the €200-per-megawatt-hour mark as fears of insufficient supply were partly eased by the EU’s new plan to cut consumption.

Some market optimism came from Goldman Sachs’ forecast that European wholesale prices will halve to less than €100 per megawatt-hour by the end of the first quarter of 2023, assuming a normal winter.

On the other hand, the deliberate nationalization of Germany’s leading gas suppliers Uniper and VNG has sparked fears across Europe, raising fears that more may be on the way.

– The European Commission has pledged to work on a more “representative” standard than the Dutch TTF, citing the persistent discrepancy between delivered LNG prices and the TTF.

4. India’s growth trajectory soon makes it the number one buyer of coal

India

– According to India’s Central Electricity Authority, the Asian country will see the addition of 43-53 gigawatts of coal-fired power generation capacity as it attempts sate The explosive growth in demand.

As such, India is catching up with China in its thermal coal imports and ramping up deliveries from Russia and Indonesia, just as ICE Newcastle futures trade around 430-440 metric tons.

– According to Wood Mackenzie, India’s imports of thermal coal will rise by 7% this year to 158 million tons and will continue to rise in 2023, reaching 163 million tons.

On the other hand, China is reducing its imports and is expected to buy only 182 million tons this year, down 64 million tons annually, indicating that India may become the largest selling market globally by mid-2020.

5. EU windfall scheme raises lower motives

European Union

– European Commission a statement A new plan that will cap the profits of energy and fossil fuel companies, with the aim of reaping 142 billion euros in windfall profits while committing to a 5% reduction in peak-hour energy demand.

While electricity demand so far is somewhat in line with 2021 figures, August recorded a 1% year-on-year decline, Brussels has targeted a 10% reduction in total electricity demand through the end of March 2023.

– Non-gas-fired power generation companies will see a cap on their profits at 180 per megawatt-hour and the surplus will become public revenue, i.e. the EU will reallocate.

– With this, the idea of ​​creating an energy price cap appears to have been removed from the agenda as the authorities questioned the demand-cutting effect of such a measure.

6. US diesel stocks are low at the worst possible moment

diesel

– Unprecedented a little Middle distillate stocks may create the perfect storm for diesel prices in the US as the country heads first into the harvest season and then into the winter heating oil season.

– Continued defaults are hindering the rebuilding of diesel stocks, leaving stocks on the US Atlantic coast 41% below the 5-year average, just as refineries head into fall maintenance.

– Despite the strong cracks, shipping fuel along the Colonial pipeline is not attractive to suppliers because the two-week travel time creates unnecessary risks to hedge the lagging curve.

Likewise, in the Midwest, where diesel stocks typically peak in August before peak demand begins with the harvest season, stocks are now below the average post-harvest level.

7. Russian aluminum profits are the trend of sanctions

Russia

The United States and the European Union ramped up imports of Russian industrial minerals in 2022, despite logistical constraints and talks about depriving Moscow of revenue.

– According to data compiled by Reuters, imports of aluminum and nickel are up 70% across the Atlantic Basin, with sanctions so far to spare the industrial metals sector.

European smelters such as Norsk Hydro and Novelis have pledged not to buy any Russian product in 2023, as supply agreements for next year are being negotiated right now in what is generally called the industry’s mating season.

– But without US/EU sanctions, so are Russian aluminum and nickel is expected To maintain market share thanks to marginal discounts, in fact, US suppliers are preparing to increase their purchases as mineral exports from China shrink.

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