Plunging Natural Gas Prices Is Bad News for Drillers

1. Plunging Natural Gas Prices Is Not Good News for US Oilmen

- The once red-hot labor market for oil services and drilling firms has been contracting in recent months, mostly driven by a pronounced decline in natural gas drilling amidst slumping Henry Hub prices.

- According to the Energy Workforce & Technology Council, some 4,680 oilfield jobs have been lost in the past two months, a reversal of a two-year trend that saw almost continuous growth in drilling jobs.

- The soon-to-be largest US natural gas producer Chesapeake announced this week that it would cut production by roughly 30% following a steep 44% drop in natural gas prices, saying the market is clearly oversupplied.

- Haynesville and Marcellus are particularly impacted by the shutdowns, both being overwhelmingly gas-focused, already prompting the merger of hydraulic fracturing firm NexTier with rival Patterson-UTI.

2. China’s 2024 Outlook Gets Murkier Every Month

- Chinese authorities have delivered the biggest ever cut in the 5-year benchmark mortgage rate, by 25 basis points to 3.95%, starting Beijing’s own cycle of cutting interest rates.

- Whilst the services segment has remained relatively healthy, China’s export-focused manufacturing sector has been contractionary since October, trending sideways at 49.2 in January.

- China’s oil demand isn’t impressing either despite plentiful quotas allocated, especially after the Lunar New Year holidays failed to bring about the consumption spree many analysts expected, with nationwide gasoline stocks well above expectations.

- Refiners across China are facing a dilemma of running their refineries higher (the country’s independents ratcheted up capacity utilization rates to 65% in 2024 date, the highest since 2021), as their margins have been wafer-thin.

3. European Carbon Weakness Soon to Plunge Below €50/mtCO2

- European carbon allowance prices are in a freefall as lower electricity generation from fossil fuels and anaemic industrial activity continue to weigh on the ETS market.

- Shedding €10 per metric tonne of CO2 since the beginning of February, European carbon prices fell to €51/mtCO2 on February 22, a 28-month low, with further downside on the horizon as Europe’s PMI has been in contraction for nine consecutive months already.

- Industrial production dropped by 2% year-on-year in the European Union, and the outlook for 2024 isn’t particularly rosy after Germany revised its growth forecast this week from 1.3% to 0.2%.

- Compared to previous years, Europe’s nuclear output is also easing the pressure on carbon prices with France running its plants 15% higher than last year this time around, whilst the continent’s hydro generation went up a whopping 20%.

4. Uranium Prices Skyrocket as France Scrambles for Uranium

- A $1.6 billion uranium mining deal that France was hoping to conclude with Mongolia to develop and operate the Zuuvch-Ovoo mine will be most probably delayed as the Asian country doesn’t want to finalize the deal before June elections and the chief Mongolian negotiator stepped down.

- The unpredictability of uranium mining in Niger after a 2023 coup, lower Kazakh production due to lack of sulphuric acids as well as lower Conoco output forecasts have all buoyed spot uranium prices, doubling year-on-year to $102 per pound.

- Top officials of the military have called on Niger to nationalize the Imouraren mining concession operated by France’s uranium major Orano, saying the worth of exported uranium ($3.8 billion) reveals inconsistencies with the $0.5 billion received back by Niger.

- Mongolia has been becoming increasingly dependent on Russia for petroleum products and electricity imports, with Moscow offering to build a small modular reactor, suggesting Moscow might also pressure Mongolian authorities against the deal.

5. China’s Transition Metal Stockpiling Spree Startles the White House

- Ever since China restricted its exports of gallium and germanium, two key components in military satellite or missile systems, the White House has been seeking to replicate Beijing’s metal strategy, to no avail so far.

- China has been exploiting the volatility in cobalt prices, stockpiling cobalt in quick-fire consecutive deals when prices fell below the $20 per pound threshold, a move that would’ve taken US authorities a year, including a Congress approval.

- The US National Defense Stockpile reached its inflation-adjusted peak in the 1950s, comprising $42 billion worth of material, however by 2023 that inventory value has plunged to a mere $912 million.

- With the US government fearing future supply shocks, the probability that federal authorities would start to replenish depleted key metal stocks is much higher after a new National Defense Authorization Act in December, allowing for strategic purchases without congressional approval.

6. With Nowhere to Export Its Crude, Iraq Squeezes Kurdistan for Oil Revenue

- Ever since the Iraqi Supreme Court declared Kurdish oil exports in avoidance of Baghdad to be unconstitutional, Iraq’s federal authorities have been tightening the noose around Erbil’s oil revenues.

- This week, the Iraqi Supreme Court added insult to injury after it ordered the semi-autonomous Kurdish Regional Government (KRG) to hand over all oil and non-oil revenues to Baghdad, promising to cover Kurdistan’s public sector salaries in return.

- Kurdish oil exports from the Turkish port of Ceyhan were halted in March 2023 after the Paris-based International Chamber of Commerce found that Turkey violated a longstanding agreement with Iraq by allowing independent Kurdish sales.

- With the KRG heavily indebted and strategically weakened by one year of minimal oil revenues, Baghdad is likely to take over all Kurdish exports soon.

7. China Jeopardizes Emission Targets With Vast Coal Buildout

- China approved a total of 114 GW worth of coal-based power generation capacity in 2023, more than quadrupling from the 23 GW greenlighted in 2021 and almost doubling year-on-year.

- Such a rampant buildout of coal capacity stands in stark contrast with China’s emission targets of cutting carbon intensity by 18% from 2020 levels by 2025, with analysts believing CO2 emissions rose by 5% year-on-year in 2023.

- Surging air conditioning has been at the forefront of China’s coal frenzy as repeated heatwaves in 2022 and 2023 required quick fixes and the country’s vast coal production has always been easy to tap into.

- According to Chinese national statistics, China produced a record 4.65 billion metric tonnes of coal last year, whilst its imports of coal went up from 257 million tonnes in 2022 to 386 million tonnes in 2023.