India's Oil Demand Growth Is Set to Slow

1. The Contango in WTI Turns Steep Enough to Make it Lucrative

- All the key Central Bank meetings held this week in the United States, Europe, and Great Britain have kept interest rates unchanged, providing a small boost to oil prices, although they failed to reverse the new trend in futures contracts, contango.

- The M1-M6 time spread in WTI dropped to -$1.20 per barrel, the steepest contango seen in the US futures benchmark since November 2020, the last year to see sustained contango in the markets.

- The European futures benchmark ICE Brent is also in contango, but only on the prompt month, whilst the Middle Eastern Dubai contract remains in backwardation, so arguably market sentiment is the weakest in WTI.

- Net positions held by money managers in WTI futures and options have posted nine consecutive week-on-week declines, as reported by CFTC, reflecting the US benchmark’s weakening outlook.

2. Warm Forecasts Depress US Natgas Outlook

- The US Energy Information Administration slashed its Henry Hub forecast for winter 2023-2024, expecting it to average $2.80 per mmBtu for the November-March period, down 60 cents from its previous estimate.

- A warm start to the winter heating season has prompted a revision of the agency’s demand figures as well, with consumption from the residential and consumer sectors set to average 40 BCf per day, 2% below the 5-year average.

- Reflecting continued improvements in gas output, the Q4 production forecast now stands at 114.78 BCf per day, helping build US gas stocks to 3.77 TCf at the end of November.

- Lower natural gas prices and higher output are paving the way for higher gas utilization in power generation, squeezing out coal and trimming coal-related emissions by 18% this year, improving the US’ emissions statistics.

3. India’s Stellar Demand Growth to Slow Down

- India, the world’s third-largest oil importer and consumer, is set for a slow-down in its stellar oil demand growth that posted a bumper spike in the past three years, dropping to 150,000 b/d in 2024.

- Whilst India’s economy continues to grow well above average global rates, with the IMF expecting both 2023 and 2024 recording a solid 6.3%, oil consumption patterns are slowing down after the post-pandemic lift.

- Indian refiners have profited greatly from vast amounts of discounted Russian barrels that currently account for 40% of the country’s oil requirements, lifting refinery margins in fiscal year 2023 to roughly $20 per barrel.

- Adding another source of discounted crude, India’s oil minister Hardeep Singh Puri promised to buy more Venezuelan oil, arguing that the country’s refiners have the technological capacity to run heavier crudes.

4. US Banks Stick to Fossil Projects as Europe Turns Away

- The world’s largest banks continue to prefer financing of fossil fuel projects over renewables, all the while high interest rates have curbed investors’ appetite for bank financing.

- The energy-supply banking ratio (ESBR), a spread between low-carbon and fossil financing that includes debt and equity underwriting, shrank to 0.73:1 by the end of 2022, slightly lower than the 0.75:1 ratio posted in 2021.

- JPMorgan Chase, the world’s largest underwriter of energy deals, had a renewable-to-fossil ratio of 0.83, with BNP Paribas having the highest renewables ratio amongst the top-10 global banks, at 1.37.

- The top banks in North America have an average ESBR even lower than in China (a country that single-handedly dominates coal financing) whilst Europe seems to be giving up on fossil fuels, tallying an average ESBR of 2.8 across the region.

5. Quotas, Exemptions Fail to Lift Chinese Refining

- Even though the Chinese government allowed independent refineries to use their crude oil import quotas for 2024 in advance to stimulate refinery runs, the next month is set to be painful for China’s teapots.

- Shandong’s independent refiners have mostly forgone the government’s offer and decided to stick with alternative refining options, such as fuel oil and bitumen blend, all the while running their refineries lower, at a mere 60% across the region.

- Crude imports of Chinese independent refiners slumped 25% month-on-month in November, posting the weakest monthly reading in 17 months at 2.85 million b/d, reflecting weaker quota availability and waning domestic demand into the winter months.

- Many refiners also decided to cut down on crude purchases because differentials of Shandong’s preferred ESPO grade became too expensive, with the Russian medium sweet already selling above Brent.

6. Anglo American Struggles to Keep Pace with Mining Peers

- The London-based mining giant Anglo American (LON:AAL) saw its shares decline by 36%, underperforming a market that has seen some upside in Q4 with both BHP and Rio Tinto improving markedly.

- Anglo American has suffered from lower capital expenditures as investors remain wary of decreasing metals production, with iron ore and copper production falling in both Chile and South Africa.

- Spending heavily on a polyhalite project in the United Kingdom that won’t be generating any revenue until 2027, targeting a potassium ore mineral used as a fertilizer, Anglo American might face headwinds over the upcoming years, too.

- Anglo American has promised to cut capital expenditure by $1.8 billion over the next three years, having already started to cut costs on headcount, lowering total capex in 2024 to $5.7 billion, 11% lower than initially planned.

7. Hit by Blistering Cold, China Maximizes Coal Production

- China posted a sizable 6.5% month-on-month increase in coal production last month, mining 414 million metric tonnes and taking this year’s January-November aggregate to 4.24 billion tonnes, a 3% year-on-year jump.

- Daily coal output in November came in at an all-time high pace of 13.8 million tonnes per day, surpassing the previous record from March 2023, with coal power generation also jumping by 8.4% year-on-year.

- Chinese coal miners were incentivized to produce as much as possible as most Chinese regions have been confronted with unusually cold weather, aggravated by the underperformance of renewable and hydro-generating capacities.

- Just as China posted its coal output figures, the IEA issued its Coal 2023 report, reiterating its call that 2023 would see the peak of global coal demand, surpassing 8.5 billion tonnes.