Oil Traders Hedge Geopolitical Risk With Record Options

1. Venezuela Braces for Impact After US Reimposes Sanctions

-  The Biden administration reimposed sanctions on Venezuela’s oil industry after its six-month waiver expired on 18 April, with the White House providing oil firms with a 45-day grace period to wind down operations.

- The US waiver was linked to President Maduro’s agreement to hold a free and fair presidential election in July and to allow opposition politicians to participate, but both Maria Corina Machado and her proxy replacement Corina Yoris were barred from running.

- Thanks to the temporary respite in sanctions, Venezuela’s state oil firm PDVSA ramped up production by some 150,000 b/d, with oil production last month rising above 870,000 b/d.

- Heavy sour might come under pressure in Latin America, though the Biden administration hinted at a potential reinstatement of the waiver in case Maduro allows opposition candidates to run.

2. Traders Hedge Geopolitical Risks with Record Options

- Oil prices have slid lower this week with ICE Brent shedding some $3 per barrel and moving within the $88-89 per barrel range, but the oil market’s interest is increasingly geared towards options.

- Call options are currently trading at their widest premium to bearish put options since October, with the call skew some 5% above puts, as traders start to hedge their exposure against price rallies.

- The volume of options trading is surpassing record levels, with last week seeing more than 1 million calls traded on the global Brent crude benchmark, mostly focusing on the $95 and $100 per barrel thresholds.

- Oil traders currently held more than 3 million barrels worth of options contracts on prices breaking through the $250 per barrel mark by June, attesting to the depth of hedging out there.

3. US Coal Production Plunges on High Inventories and Weak Demand

- US weekly coal production fell to its lowest figure in 22 years for the week ending April 13, according to EIA data, driven by high inventories, lower consumption, and continued pressure from cheap natural gas.

- National coal production dropped to roughly 7.5 million short tonnes, down about 1.3 million st or 15% from two weeks earlier, with output declines recorded in all the leading production basins in Appalachia, Illinois Basin, and Powder River.

- With the US’ second-largest coal export hub in Baltimore debilitated after the Francis Scott Key Bridge collapse, weekly export data have been disappointing, too – according to Kpler, the average pace of loadings at 1.4 million tonnes per week is the lowest since July 2023.

- Despite notable coal-to-gas displacement leading to a 17% year-over-year drop in US coal consumption, coal inventories were the highest in three years by the end of 2023, totaling 154 million short tonnes.

4. China Pulls Ahead as World’s Wind Power Leader

- Cementing Beijing’s dominance in renewable energy, Chinese wind farms produced more than 100 TWh of electricity in March, as much as all of Europe and North America combined and the highest monthly total ever by a single country.

- Chinese wind generation is up by more than 25% year-over-year; however, the upcoming months should see growth decline as wind speeds in the summer months usually slow down. 

- China still overwhelmingly relies on coal, accounting for 62% of national power output, but wind’s 11.4% might soon overtake hydro and become the second-largest source of electricity.

- Beijing controls some 60% of the world’s turbine production capacity and almost 50% of wind generation capacity, prompting the European Union to investigate Chinese wind companies and potentially slap tariffs on them.

5. LNG Gains Traction as Shipping Fuel

- LNG-fuelled ships remain the top choice for lower-carbon shipping, Rystad Energy writes, despite the emergence of new dual-fuel methanol and ammonia ship engines.

- There are more than 2,400 vessels equipped to operate on LNG globally with another 1,000 carriers in global order books, but most of them are still LNG carriers that use boil-off gas as shipping fuel.

- Container ships and car carriers have emerged as a leading drive in LNG’s adoption as a shipping fuel, with 75% of new orders going towards dual-fuel LNG engines last year, whilst passenger carriers and general cargo ships are still lagging.

- Ship-to-ship bunkering in LNG remains unequally distributed across the globe, with Europe boasting 85 LNG bunkering ports whilst Asia has only 26 ports and Africa barely any LNG bunkering capacity.

6. Russia Metals Ban Set to Bring More Volumes to Chinese Markets

- As the London Metal Exchange and CME banned trading of Russian aluminum, copper, and nickel, China is poised to cement its position as Moscow’s buyer of last resort for key commodities.

- Russian aluminum already accounted for 76% of all Chinese imports, with volumes doubling year-over-year to 1.54 million tonnes of primary metal, whilst China’s share in Rusal aluminum revenues rose from 8% in 2022 to 23% in 2023.

- According to Bloomberg, Russia accounted for 91% of LME aluminum inventories at the end of March, whilst for copper and nickel their share in total stocks stood at 62% and 36%, respectively.

- The metal ban is set to boost liquidity at the Shanghai Futures Exchange, just as Beijing has been trying to get greater pricing power over global commodities.

7. Panama Canal Struggles to Get Its Mojo Back

- Despite improving water conditions at the Panama Canal’s Gatun Lake and the Panama Canal Authority adding an extra daily slot for transits from June 1 onwards, US LNG shippers still avoid the waterway.

- The Cape of Good Hope emerged as the preferred route for US LNG supplies, also overtaking the Suez Canal with as many as 27 transits last month, driven by shippers’ concerns about Red Sea missile attacks.

- Daily transits through the Panama Canal’s Neopanamax locks are set to increase from seven to eight, however cheap LNG freight with day charter rates in the Atlantic Basin around $33,000 per day makes the Cape of Good Hope “cheap enough” and delay-free.

- The Panama Canal restrictions should gradually ease into 2024 as late April should bring steady rainfall and continue for some months, with the Canal Authority eyeing a full normalization of transits by 2025.