Artificial Intelligence and Electric Vehicles Will Send U.S. Power Demand Soarin

1. Brazil Fails to Bring the Oil Bonanza into 2024

- Brazil has been one of the fastest-growing oil producers of the 2020s, reaching a crude production all-time high of 3.73 million b/d in early 2024, but production woes have hampered its performance since.

- Oil production has plunged almost 25% since the beginning of this year, mostly caused by unnamed technical problems encountered at the Mero and Tupi pre-salt fields.

- Simultaneously to the string of technical issues, the environmental agency that should approve new production equipment and related work has been on strike in a wage dispute, limiting the speed with which Petrobras can repair damage.

- The production travails are expected to continue into the summer months as production at Tupi could fall by as much as 300,000 b/d because of issues at two producing FPSOs.

2. Scorching Heat Boosts Middle Eastern Fuel Oil Imports

- Middle East nations have been battling scorching heat waves over the past two months, opening the usual summer arbitrage for fuel oil that is widely used for incremental power generation across the region.

- As freight costs for European exporters have become prohibitive because of the Red Sea risks, Russia has become the largest supplier of fuel oil to the Middle East, with exports averaging 215,000 b/d in May.

- According to Kpler data, Saudi Arabia is set to import the highest volume of fuel oil in three years, as heatwaves keep temperatures above 110° F, resulting in more than 1300 deaths during this year’s hajj.

- Attesting how strong demand for high sulfur fuel oil (HSFO) has been, the spread between HSFO and VLSFO dropped to its lowest level since early 2020, as low as $65-70 per metric tonne.

3. US Power Demand Growth Wakes Up From Decade-Long Slumber

- For some 15 years, US electricity demand has remained stable at around 4,000 TWh, but the increasing power needs of artificial intelligence and EV penetration will add another 290 TWh of consumption in the country over the next 6-7 years.

- Rystad Energy expects that data center demand coming from both traditional storage needs and AI will more than double from the 130 TWh seen in 2023 to 307 TWh by 2030.

- An increased EV adoption rate would make the transportation sector the second largest catalyst of higher power demand, with power consumption in the sector expected to soar almost tenfold from 18 TWh in 2023 to 131 TWh in 2030.

- Whilst the power demand of the US commercial sector is set to decline over time, there is still room for growth in the residential segment thanks to the electrification of home appliances.

4. Soaring Freight Limits Exodus of US LNG to Asia

- The arbitrage for LNG cargoes moving from the Atlantic Basin to Asia has opened as prices in Europe remain some $1.5-2 per mmBtu lower than in Asian markets, however soaring freight costs are jeopardizing those flows.

- Freight from the US Gulf Coast to Japan via the Cape of Good Hope gained more than $1 per mmBtu since early May, rising to $3.1 per mmBtu, more than triple the cost of sending US LNG to Europe.

- Considering Europe’s storage levels are set to be 76% full by the end of June, the East-West arbitrage might become even wider, especially given that further heatwaves are expected in Northeast Asia over the course of July-August.

- At the same time, the US hurricane season could lead to protracted shut-ins for US Gulf Coast infrastructure, providing a notable upside for prices in the summer, potentially even happening concurrently with Norwegian gas field maintenance in August-September.

5. Higher Water Levels in Panama Canal to Ease Shipping Tightness

- The Panama Canal’s annus horribilis that saw water levels at Gatun Lake plunge to their lowest on record (since 1965) seems to be coming to an end, thanks to higher rainfall.

- Water levels should increase even further due to the rainy season that usually lasts from May to December and this summer’s La Niña pattern overtakes the past seasons’ El Niño.

- The Panama Canal authority increased the maximum ship depth to 47 feet thanks to plentiful precipitation seen over the past weeks, all the while opening up another transit slot for Neopanamax ships from August 5 onwards.

- Bouncing back from extreme drought in 2023 when the total number of available slots dropped to a mere 18, the number of slots on offer in August is almost double, rising to 35 slots. 

6. BP Is Turning the Page on Its Renewables Investment Spree

- Consistently underperforming its US and even its European peers, UK oil major BP has launched a revamp of its ambitious clean energy policy, imposing a hiring freeze and pausing new offshore wind projects under new CEO Murray Auchincloss.

- Auchincloss has been wary of investing billions into wind projects that are not expected to generate cash for years, reassigning dozens of employees tasked to work on European renewables projects elsewhere.

- According to market reports, the new top managers of BP have prioritized investing in and even purchasing new oil and gas assets, especially in the Gulf of Mexico and in US onshore shale basins.

- As of now, BP is the only oil major to have oil and gas output reduction targets, pledging to cut production between 2019 and 2030 by 25%, and has increasingly become a target of potential takeovers (ADNOC was rumored to be interested).

7. Booming Inventories Depress Copper Sentiment

- Copper prices have lost almost 15% since reaching all-time highs in May, declining even as soft Chinese sentiment is gradually moving towards a more constructive picture into H2 2024.

- The short squeeze on Comex copper futures has also eased notably, with July-delivery contracts trading at the widest discount to September futures in two months, indicating that prompt demand is weak.

- High inventories have been arguably the largest dampener of copper sentiment, with inventories registered with LME, ShFE and COMEX rising above 500,000 metric tonnes for the first time since August 2021.

- The contango in copper futures incentivizes commercial storage plays, with Chinese smelters making no secret of their plans to deliver up to 100,000 tonnes of copper to LME warehouses, potentially pushing the 3-month price below the $9,500/mt mark.