U.S. Crude Exports Are Increasingly Competitive

1. WTI-Brent Gap Makes US Crude Exports Attractive

- With US crude benchmark dropping to a mid-$80/barrel environment lately, the continuous discrepancy between ICE Brent and WTI is incentivizing crude exports out of the Gulf Coast.

- With no hurricane to disrupt loadings so far this year, the robust transatlantic flows have been taking place in spite of soaring freight costs, to the tune of $5-6 per barrel, tripling year-on-year.

- The ICE Brent-WTI spread rose to almost $7 per barrel lately so the temptation to move barrels into more expensive European markets has been guiding US crude exporters lately.

- If there is no disruption to the pace of loading this month, September 2022 is set to witness the highest monthly rate of crude exports, maybe even reaching 3.7 million b/d.

2. European Carmakers Want Slower EV Rollout

- European fuel producers have started urging EU authorities to reconsider their recently introduced 2035 ban on selling new internal combustion engines, Platts reports.

- Rising costs of battery materials, exacerbated by the Russia-Ukraine war, will slow down the pace of fleet turnover and ramp up the overall price of new EVs.

- Western European gasoline and diesel demand peaked in 1992 and 2006, respectively, and have been declining since currently assessed at 1.8 million b/d and 5.6 million b/d.

- Thanks to strong growth last year China has become the largest global market for EVs, though forecasts are suggesting that Europe will account for 37% of new purchases by 2025.

3. Germany Ready to Live Without Russian Oil

- Germany has placed subsidiaries of Russian oil company Rosneft, comprising minority stakes in two Bavarian refineries and a controlling 54% stake in the Schwedt refinery near Berlin, under its trust administration.

- With the Russian side already vowing to take the issue to court, Germany might stop Russian crude imports even before the December 05 deadline set by the European Union.

- Europe’s largest oil consumer, Germany has more than doubled its sources of imported crude recently, with non-Russian imports now making up two-thirds of its total intake.

- Before the Russia-Ukraine war, Germany was the world’s second-largest buyer of Russian crude after China, importing almost 700,000 b/d last year.

4. Europe’s Energy Woes Fuel Coal Bonanza

- Europe’s ongoing energy crisis has reinvigorated the long-declining coal industry, adding a new impetus to coal production around the world as fuel-strapped European buyers are ready to pay up.

- With sanctions on Russian coal kicking in in early August, EU thermal coal imports from Australia, South Africa, and Indonesia rose more than 11-fold in the months since Russia invaded Ukraine.

- Global seaborne thermal coal imports reached 97.8 million tons in July, the highest level on record and a 9% increase year-on-year, driven by European buying.

- Even though August imports were lower, due to rainfall disruptions in Australia, Q4 coal deliveries are expected to remain strong as coal prices trend at $420-430/mt.

5. Chinese Output Constraints Send Lithium Flying

- Lithium prices have risen to record highs as robust demand from growing EV sales has been amplified by lower Chinese metal production as heatwave-induced power cuts hit lithium-rich regions.

- The price of lithium carbonate in China surpassed the ¥500,000 mark (equivalent to $71,500), tripling year-on-year, though analysts expect it to fall off once supply constraints subside.

- Lithium was tangibly boosted by exceptional EV sales this year, with 4.2 million battery electric vehicles sold globally in H1 2022, a 63% increase year-on-year.

- Chinese demand remains a key factor in the lithium markets, accounting for almost 60% of EVs sold and more than 16% of global lithium production.

6. US Ethanol Production Hamstrung by Weak Crops and Strikes

- US corn-based ethanol output has plummeted to 901,000 b/d in the week ended September 16, the week’s lowest output in eight years and the weakest for any week in 20 months.

- Whilst the mid-September drop could have been triggered by prospects of a nationwide railway strike, poor crop prospects and meager gasoline demand will hinder ethanol production further ahead.

- Agricultural forecasts are seeing this year’s corn yields to be the weakest in 10 years amidst poor weather in western states, though the USDA expects a more modest 3% year-on-year drop.

- US corn prices have been on the increase since mid-July, currently trading slightly below the $7 per bushel threshold.

7. Bearish Sentiments Weighs on Copper Despite Thin Stocks

- Global inventories of copper have dropped to unprecedentedly low levels, with the current LME inventory of 118,000 tons representing only two days’ worth of global consumption.

- The markets seem to be shrugging this off, betting on Europe falling into a prolonged demand-hindering recession and China failing to rebound swiftly from its lockdowns.

- Despite tight stocks and backwardation in the futures curve, the LME three-month copper contract is still trading at $7,710 per metric ton, a 20% decrease since the start of 2022.

- Seeing that there has been no price upswing on the inventory news, it seems that the market anticipates ample “shadow stocks” stored off-market and in Shanghai bonded storage.