Oil & Energy

Date Issued – 19th April 2024

Courtesy of Steve Alain Lawrence, Chief Investment Officer

Janis Urste, Chief Market Strategist

U.S. Reinstates Sanctions on Venezuela

The Biden administration has reinstated sanctions on Venezuela's oil industry after a six-month waiver expired on April 18, allowing oil companies a 45-day period to wind down operations. The reinstatement follows President Maduro's breach of an agreement to enable free and fair elections, including barring opposition candidates Maria Corina Machado and Corina Yoris from running. During the waiver period, Venezuela's PDVSA increased oil production by 150,000 barrels per day, reaching over 870,000 barrels daily. The U.S. may reconsider the waiver if Maduro allows opposition participation in elections.

Traders Options

This week, ICE Brent oil prices fell by about $3, settling in the $88-89 per barrel range, while the oil market's attention has shifted towards options trading. Call options are now trading at a 5% premium over put options, the largest since October, indicating a hedge against potential price rallies. Record levels of options trading were noted last week, with over 1 million calls focused on the $95 and $100 per barrel marks. Additionally, there is significant hedging activity, with traders holding options on over 3 million barrels priced to exceed $250 per barrel by June.

U.S. Coal Output Falls Due to Surplus and Low Demand

U.S. coal production has hit a 22-year low, falling to about 7.5 million short tonnes in the week ending April 13, impacted by high inventories, reduced consumption, and competition from cheaper natural gas. This represents a 15% decrease from two weeks earlier, with declines across major coal basins including Appalachia, the Illinois Basin, and the Powder River Basin. Additionally, disruptions at Baltimore's major coal export hub have led to the lowest export rates since July 2023, averaging 1.4 million tonnes per week. Despite a shift from coal to gas reducing consumption by 17% year-over-year, U.S. coal inventories ended 2023 at a three-year high of 154 million short tonnes.

China Dominates Global Wind Power Sector

China achieved a record in renewable energy by generating over 100 terawatt-hours (TWh) from wind farms in March, equaling the combined output of Europe and North America, and marking the highest monthly production by any country. Despite a 25% increase in wind power generation year-over-year, growth is expected to slow due to reduced wind speeds in summer.

Coal remains the dominant power source in China, comprising 62% of its energy output, but wind power, which now accounts for 11.4%, is set to overtake hydroelectricity as the second-largest electricity source. Beijing's dominance extends globally, controlling 60% of the world’s turbine production and almost half of the wind generation capacity, prompting the EU to consider tariffs on Chinese wind companies.

LNG Becomes Preferred Marine Fuel

LNG-fueled ships continue to lead in low-carbon maritime options, according to Rystad Energy, with over 2,400 vessels globally and an additional 1,000 on order, primarily as LNG carriers. Container and car carriers are increasingly adopting LNG, with 75% of new orders for dual-fuel LNG engines last year. However, adoption is slower among passenger and general cargo ships. Bunkering infrastructure is also uneven, with Europe having 85 LNG bunkering ports compared to only 26 in Asia and very few in Africa.

Chinese Markets Benefit from Russian Metals Ban

With the London Metal Exchange and CME banning Russian aluminum, copper, and nickel, China is set to become the primary market for these commodities. Russian aluminum already represents 76% of China's imports, with volumes doubling to 1.54 million tonnes and China's share of Rusal's revenues increasing from 8% in 2022 to 23% in 2023. Russian metals account for a significant portion of LME inventories: 91% for aluminum, 62% for copper, and 36% for nickel. This shift is likely to boost activity at the Shanghai Futures Exchange as Beijing seeks greater control over global commodity prices.

Panama Canal

Despite improvements at Gatun Lake allowing more daily transits starting June 1, U.S. LNG shippers continue to favor the Cape of Good Hope over the Panama Canal due to safety concerns about the Red Sea and cost-effectiveness. The Cape saw 27 U.S. LNG transits last month, surpassing even the Suez Canal. With current Atlantic Basin freight rates at about $33,000 per day, this longer route remains economically viable and free of delays. The Panama Canal is expected to return to full normalcy by 2025, following a gradual easing of restrictions and steady rainfall anticipated into 2024.

[Disclaimer: This article provides financial insights & developments for informational purposes only. It does not constitute financial advice or recommendations for investment decisions.]

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