India's Oil Demand Is Soaring

1. Indian Oil Demand Impresses as Other Asian Giants Falter

- India’s demand for oil has been one of the main success stories of this year, rising 5% on the year (or by some 240,000 b/d according to S&P Platts) as refineries churned out more than 100% of their capacity in January-June.

- Government-sponsored infrastructure projects and a booming Indian economy have been boosting diesel sales, the most consumed fuel in the country and equivalent to 40% of India’s 5.1 million b/d oil demand.

- Whilst this quarter is set to see some structural weakness due to the monsoon season, the winter months are expected to roar back to strength amidst strong agricultural demand, robust industrial activity, and new construction.

- India’s share of newly emerging oil demand growth will double over the next decade to 24-25%, whilst China’s share will drop to 15% from its current 45-50%, with India overtaking China as the largest source of new demand by 2027.

2. Influx of US LNG Curb Asia’s Russian Purchases

- Russian LNG supplies were one of the first victims of Asian buyers’ recent recalibration of purchasing patterns, due to a weaker Chinese pull and lower supplies in general as the Yamal LNG plant is in summer maintenance.

- Asian importers are set to import almost 12 million tonnes of LNG in July, the highest monthly tally in 2023 so far, as the LNG JKM marker remains slightly above $10 per mmBtu, tempting some sleeping giants such as China to buy more.

- With Henry Hub still at a comfortable $2.7 per mmBtu, US LNG is making inroads into Asian markets again as this month is set to see the strongest import readings since December 2021 – according to Kpler, there is 2.5 million tonnes of LNG heading to the Asian continent.

- The relative weakness of Asian demand did not impact Russian exports much as Europe remains an important buyer, in fact, the 1.65 million tonnes of LNG sailed from Russia to Europe in May is the highest total on record.

3. Collapse of Black Sea Grain Deal Raises Risks of Food Inflation

- Russia suspended its participation in the Black Sea grain deal signed in July 2022, citing a lack of traction with its own agricultural export demands, followed by several days of bombardments and the removal of guarantees for safe navigation in the Black Sea area.

- Wheat prices saw a whopping 8.5% increase on Wednesday this week, taking the most actively traded CBOT wheat futures contract to $7.37 per bushel and seeing the biggest daily traded volume in almost a year.

- Deliveries to Africa have amounted to some 13% of all Ukrainian grain exports, with Europe becoming the main continent of deliveries (44%) as droughts have been affecting supply in Spain or Turkey.

- According to Kpler data, China and Spain have been the largest buyers of Ukrainian grain in 2023 so far, dominating the corn and wheat markets with a 40% and 30% market share, respectively.

4. Tesla Inventory Build-Up Sparks Investor Fears

- Tesla stocks fell 4% on the day as the Western world’s EV pioneer warned of shrinking profit margins, with the company’s 1.8-million-vehicle production target for 2023 largely hinging on the discounts it offers.

- Complicating Tesla’s outlook, the Austin-based firm now has 16 days’ worth of global EV supply, up from 15 days last quarter and up from just 4 days a year ago, indicating that vehicle inventories are growing despite better sales.

- Tesla’s quarterly margin fell to 18.1% in Q2, down from 19% in the first quarter and tangibly lower than the 26% recorded a year ago, attesting to sharpening competition between EV producers.

- Tesla cut US prices of its long-range Model Y vehicle by some 25% since the beginning of the year to $50,490, with CEO Elon Musk saying that it made sense to “sacrifice margins in favor” of more vehicles.

5. The Renaissance of Oilfield Firms Contradicts Recessionary Gloom

- Despite lower oil prices in 2023, oilfield service companies have been beating market expectations as a renaissance in offshore drilling, especially in Latin American countries, as well as a Middle Eastern drilling bonanza are keeping their order books full.

- Baker Hughes (NASDAQ:BKR) beat analyst estimates with its Q2 earnings, with orders and revenues both increasing by double digits year-on-year, to $7.5 billion and $6.3 billion, respectively.

- One key trend that all of the Big Three service companies – Schlumberger, Baker Hughes, and Halliburton - highlighted is the market softness in North America, with Halliburton even seeing a 2% quarter-on-quarter decline in North American operations.

- However, with offshore drilling globally set for the highest growth rate since 2013 over the upcoming years, new projects in Guyana, Suriname, Brazil, Namibia and others will more than offset the slackness of US drilling.

6. The World’s Wind Pioneer, The UK Still Falls Short Of Its Ambition

- Whilst former UK Prime Minister Boris Johnson promised that his country would become the Saudi Arabia of wind, the wind of change has been blowing too slowly so far as the country runs the risk of severely underperforming its own policy objectives.

- Installed capacity in the UK currently stands at 13.8 GW, a little less than a quarter of London’s 50 GW target by 2050, and falling auction volumes as well as soaring costs are putting pressure on the British government.

- Swedish power developer Vattenfall has decided to halt its 1.4 GW Norfolk Boreas project, citing runaway costs that soared by 40% over the past year, the $540 million impairment might not be the last project to be axed.

- The Sunak government could help wind developers out by allowing them to charge more for electricity, but this would only buttress skeptics that renewable energy cannot be fully competitive without government subsidies.

7. Plunging Lithium Prices a Boon for EV Producers

- The second-quarter earnings calls of key EV carmakers highlighted the deflationary pressures taking place in battery metals as cobalt, lithium, and nickel are all down by double digits since the beginning of this year.

- Global Li2CO3 prices peaked in November 2022 at some $82-83,000 per metric tonne, moving into a tailspin thereafter and currently assessed around $40,000/mt, having slightly rebounded from the demand trough of April-May.

- Weaker-than-expected demand in China, by far the largest consumer market for lithium, has been keeping prices capped as consumers want to see the full extent of Beijing’s stimulus measures and remain wary of overstocking amidst weak sentiment.

- With battery metals still expected to remain physically tight markets, EV carmakers are tempted to lock in lower feedstock costs by extending fixed-price contracts with some suppliers until 2030 as Tesla has done already.