The Only Really Bullish Factor In Oil Markets

1. Chinese Demand Becomes the Only Really Bullish Factor for Oil

- Whilst oil prices were undergoing one of the most spectacular declines in recent months with WTI plunging below the $70 per barrel mark, international organizations have maintained their bullish views on 2023.

- The IEA upped its estimate for global oil demand growth in 2023 by another 100,000 b/d to a net 2 million b/d increase year-on-year, taking the total to 102 million b/d.

- Poised for a 7.5 million b/d year-on-year growth between Q4 2022 and Q4 2023, jet fuel is bound to lead the uptick in terms of products, with Chinese air traffic mobility now already above pre-pandemic levels.

- OPEC's oil demand increase in 2023 is even more ambitious at 2.32 million b/d, with almost a third of it coming from China which is set to grow by 710,000 b/d this year, seeing its year-on-year growth increased for the second straight month.

2. Something's Wrong In the State of California

- California's Public Utilities Commission has launched an investigation to determine whether this winter's natural gas spike in the state was due to factors outside of normal market dynamics.

- The odd thing is that ever since Kinder Morgan's (NYSE:KMI) El Paso Line 2000 exploded in August 2022, flows from the Permian Basin were bound to be constrained to 2.7 BCf/d as repair works are taking months to complete.

- At the peak of the price spike in late December, California gas prices were 7 times higher than a year before and almost 10 times higher than the US benchmark price at Henry Hub.

- Incidentally, Californian consumers also have one of the highest gasoline prices in the country and Gavin Newsom's administration has also authorized the Energy Commission to create a price gouging penalty for refiners.

3. Freight Costs Are on the Rise Again

- As Chinese buyers are mopping up relatively cheap US cargoes and loading them onto VLCC supertankers, freight rates for tankers have been flying high this month.

- The subsequent surge in VLCC fixing demand across the globe has pushed VLCC rates from the Persian Gulf to China to $25 per metric tonne, double what they were in early February.

- Faced with stretched availability of smaller tankers such as Aframaxes, Europe has also been ratcheting up its VLCC imports with 11 VLCCs expected to arrive this month.

- Globally, VLCC rates have topped the $100,000 per day threshold for the first time since the November 2022 spike, quadruple the five-year average for this time of year.

4. China Dominates Global Coal Capacity Build-up

- China is the unequivocal global leader in bringing new coal capacity to market, accounting for a whopping 72% of the world's future projects, according to Bloomberg.

- As new permits for Chinese coal plants reached a 7-year high in 2022 with 50 GW starting construction, there were only seven projects announced outside of China.

- Of the seven non-Chinese projects six were Indian, as the South Asian nation seeks to minimize risks of power shortages, already adding 7 GW of new capacity in fiscal year 2022-2023.

- For the first time in history, there was no new coal generation project proposed in either North America or Europe last year, so coal is increasingly becoming an Asian domain.

5. CCS Projects Still Face Headwinds

- Whilst EU carbon prices have soared above €100 per metric tonne of CO2 earlier this year, developers of carbon capture and storage projects claim they need more state support to get them going.

- CO2 transport and storage costs are between $10 and $40/mt in Europe, depending on the extent of emissions concentration, so projects seem to be commercially viable on paper.

- However, the nascent CCS industry is claiming the government needs to create the regulatory framework for upcoming projects and enforce the involvement of emitters in case they've pledged to cooperate.

- CCS technology is still relatively immature, so the financing side of things is still problematic, leading developers to call for floor pricing and take-or-pay commitments for carbon delivered into those projects.

6. India Lures Upstream Investors to Avoid Plunging Production

- India's state-controlled oil firm ONGC is in talks with TotalEnergies, ExxonMobil, and Equinor to increase exploration activities in the country's frontier areas as legacy output is steadily declining.

- ONGC has allocated a $4 billion budget for exploration in 2022-2025 focusing on seismic surveying in deepwater basins, however the farther out it needs to drill the more it would rely on external know-how.

- The companies involved have been voicing their concerns about India's windfall taxes, in place since July 1 last year, with current taxation cutting some $7-8 per barrel from the income of producers.

- Despite signing several heads of agreements with Western majors, they have still not bid in India's OAPL bidding rounds, meaning their commitments to produce are still not formalized.

7. Supply Surge Set to Depress Cobalt Prices

- The stark increase in cobalt production coming out of the Democratic Republic of Congo is set to depress prices of the ferromagnetic metal, rising 24% year-on-year to 210,000 tonnes.

- As supply is moving into a surplus after several years of tightness, cobalt prices are set for further declines, heading towards $50,000/mt by 2024 from last year's average price of $63,739/mt.

- The increase in cobalt supply coincides with the rise of EV batteries that don't use either cobalt or nickel, such as the lithium iron phosphate battery (LFP) that is gaining traction in China.

- The increase in Congolese cobalt mining is inevitably aggravating the problem of child labor there as one-fifth of all miners are children, some as young as six years old.