Macro Crude: Understanding Finance and The Global Economy (Oil, Stocks, Commodities, Currencies): Recent Episodes
Macro Crude
The intention of macro crude is to give you a very simple view on key movers of the macro economy, the world of oil, politics. The intersection of what moves currency markets, key themes for stocks, bonds. And really understanding the world of finance - one day at a time - and in punchy audio sessions which are less than five minutes. We will publish charts on our twitter account that cover interesting themes across major markets - whether its a chart on oil inventories in China - or a chart on the unemployment rate in the US, vote counts and we will distill it into a fact based view - while connecting the dots for you in the world of finance.
With the hope that this will be both a learning opportunity, invite a discussion and more importantly be a platform that sparks ideas and debate around key macro crude topics that impact our lives.
The emergence of sovereign carbon credits from forest-rich nations under Article 6 of the Paris Agreement is poised to transform the carbon credit landscape. However, these large-scale issuances may have significant implications for voluntary carbon credits, potentially capping their prices. Here's an overview of how these sovereign credits could reshape the market and why price expectations might need a reality check.Concise Overview Sovereign Carbon Credits on the Rise: Suriname, Honduras, Belize, and the Democratic Republic of Congo (DRC) are gearing up to offer sovereign REDD+ units under Article 6 of the Paris Agreement. This trend signifies a major shift in climate finance. Voluntary Carbon Credits at Risk: The surge in sovereign carbon credits could impact the voluntary carbon market. Many entities buy voluntary credits to meet their net-zero targets. Sovereign issuances might fulfill a significant portion of this demand, potentially lowering prices for voluntary credits. Price Expectations vs. Market Reality: While nations like Suriname aim for a price of at least $30/tonne for their carbon credits, market dynamics might bring these prices down significantly. A more realistic price range could be in the vicinity of $10-$15/tonne.Detailed ReadSovereign Carbon Credits Alter the LandscapeSovereign carbon credits from rainforest nations are becoming a game-changer in the world of climate finance. These countries, including Suriname, Honduras, Belize, and the Democratic Republic of Congo (DRC), are preparing to issue sovereign REDD+ units under Article 6 of the Paris Agreement. These credits are set to be a critical component of global efforts to combat climate change.A Promising New MarketSuriname, the first country to have its REDD+ issuances verified by the UN, is in discussions with corporate and national buyers. The targeted price for its 4.8 million verified units is at least $30 per tonne. The carbon credits will be sold on a new platform, supported by the Coalition for Rainforest Nations (CfRN).Implications for Voluntary Carbon CreditsThe growing issuance of sovereign carbon credits poses challenges for the voluntary carbon market. Many organizations and companies purchase voluntary credits to fulfill their net-zero commitments. These credits are typically sourced from projects that avoid emissions (like renewable energy projects) or remove carbon dioxide from the atmosphere (like reforestation efforts).However, sovereign issuances could provide an alternative supply source for meeting net-zero targets. This may reduce the demand for voluntary credits, potentially capping their prices. While voluntary credits are preferred for their removal attributes, the sheer scale of sovereign issuances could make them a viable substitute.Price Expectations Meet Market RealitiesOne significant aspect to consider is the price expectations surrounding sovereign carbon credits. Nations like Suriname aim to secure a price of at least $30 per tonne for their carbon credits. However, market dynamics may not align with these expectations.It's likely that the market will dictate lower prices for sovereign credits. A more realistic price range could be in the vicinity of $10 to $15 per tonne. This gap between price aspirations and market realities underscores the need for a reassessment of price expectations.In summary, the rise of sovereign carbon credits is poised to reshape the carbon credit landscape. While these issuances could meet substantial demand for net-zero targets, they might also impact the prices of voluntary credits. To ensure a sustainable and effective carbon credit market, stakeholders must adapt to evolving market dynamics and adjust their price expectations accordingly.
Shipping will be incorporated into the EU ETS from 2023, but in its current form will only require shipowners to pay for emissions on a tank-to-wake, or combustion basis, rather than on a well-to-wake, or lifecycle basis
Japan is considering building new nuclear plants (a reversal from the decision made in the after math of the Fukushima incident). Likely to be bearish for hydrogen imports into Japan as the optionality with nuclear power plant for their utilities implies less willingness to sign long term offtake agreements with H2 exporters that are very reliant on them to take FID.
Improved tax incentives for CCUS/DAC in the US. We explore both the tax rebate and the potential for scaling up CCUS facilities and how they compare with the IEA NZE scenario expectation.
A trade deal that encompasses green hydrogen and critical minerals. At the heart of the energy transition and geopolitics that is bringing allies Germany and Canada together with this energy trade deal
Q2 21: Support from LNG Supply outages in the Pacific Basin and nuclear outages in Japan and Korea
·South Korea had to shut its HanulNo.1 and 2 nuclear reactors (1.9 GW) this week after an influx of sea salps(marine organisms) clogged water systems used to cool the nuclear reactors. This is the second time in less than three weeks these units have had to be shut down and could lead to incremental demand for 1-2 spot LNG cargoes.
·Japan’s nuclear regulator has temporarily banned TEPCO from operating its nuclear plant in Niigata – due to safety concerns. TEPCO had originally planned to restart its two nuclear reactors (2.6 GW) over the May-June period and the latest ruling pushes out the chances of TEPCO operating the plant until at least H2 2022. Japanese LNG imports are expected to be up by 0.45 Mt y/y in Q2 21.
·Prelude and Sakhalin are back to full operation after undergoing maintenance in March, the next planned works will likely happen at Gorgon.
·Gorgon T3 will go offline for large-scale maintenance later this month—starting from 26 April according to Chevron’s schedule. If Chevron finds similar issues to those found at its first two trains last year – the total works could last ~14 weeks until early August (based on T1 work timeline).
·Large-scale maintenance works scheduled at Ichthys, GLNG and North West Shelf in May.
Planned maintenance at PNG LNG will reduce exports from Papua New Guinea in May, although the exact timing of these works has not been officially announced
Q3 21 gas balances to weaken relative to Q2 21 – on higher pipeline supplies
Bearish factors
·Strong pipeline imports from Russia and central Asia will limit Chinese LNG demand growth y/y to 1.0 Mt over the same period.
·Nuclear availability is set to improve in Japan - translating to a drop of 1.1 Mt y/y between July–September.
·11.4 Mt y/y growth of global LNG supply in Q3 21—primarily from the US and Egypt—will far outpace the call from Asia-Pacific markets.
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Constructive factors
•European gas inventories replenished.
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•Argentina expected to import 3 Mt (60-65 cargoes) this sumer of which only 1.7 Mt thus far tendered. They will have to secure another ~1.3 Mt of LNG (June-September). Through the Escobar terminal and Bahia Blanca FSRU terminal.
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•India and Pakistan. ~ 1 Mtpa incremental of imports due to FSRU (HoeghGiant) and ExcelerateSequoia)
Update on China’s Emissions Trading Scheme:
When trading starts in June – prices for allowances are now expected to trade sub US$1.5/ton – given the oversupply of allowances. Government officials and market participants had previously expected trading to commence in the US$4.6 – US$7.6/ton range. China’s ETS resembles the first phase of the EU ETS where the program started with ample allowances – with further regulatory reform needed to tighten the market. According to analysis by Transitionzero, China has oversupplied its national emissions trading scheme by as much as 1.56 billion allowances for 2019 and 2020. Regulators will have issued around 10.51 billion allowances to coal-fired power plants for the two years under the benchmark-based scheme, compared to an actual need of some 8.94 billion. The surplus is bigger in 2020 (830 mln) than in 2019 (740 mln). For context: Cumulative oversupply over its first two years of operation is on track to be the equivalent of a year’s worth of EU ETS emissions. Replacing China’s coal fleet with zero carbon alternatives could save $1.6 trillion or incur a net-negative abatement cost of US$20/tCO2 according to analysis by TransitionZero. China will have to halve the carbon intensity of its power generation to 350 gCO2/kWh in 2030 from 672 g currently to be on track to meet its 2060 carbon neutral pledge.
This episode helps you understand the basics of California's carbon cap and trade programme. Its a primer that goes through the basic of the program, some history, the sectors included and some of the defining mechanisms of the programme like the maximum holding limit, minimum auction price.
From Washington and New Delhi to Riyadh. How the voice of the oil consumer led Saudi Arabia and OPEC to bend and increase production
The premium of Asian LNG spot prices (JKM) over the US Henry Hub benchmark has widened to the highest level in nearly two years (spread >US$5/mmbtu). This is partly a function of Pacific basin supply outages coinciding with congestion at the Panama Canal. As a result JKM contracts are pricing in the cost of securing US cargoes through longer transit routes around the Cape of Good Hope (costing an extra US$2.4/mmbtu at current freight rates). Wait times outside the Panama canal have been around nine days recently (Chart of the day), adding almost $0.40/mmbtu to using the route to Northeast Asia without waiting.
Panama Canal congestion is causing delays to LNG deliveries from the US to Asia, driving up freight rates
- Higher than average arrivals, seasonal fog and COVID-19 linked staffing reductions is causing congestion at the Panama Canal.
- Waiting time for vessels with unbooked slots is as long as 10-15 days and some US cargoes are now transiting through the Cape of Good Hope.
- The extra shipping cost associated with a 97-day round trip for a US cargo to Northeast Asia via the COGH relative to delivering to Europe is $2.40/mmbtu at prevailing freight rates and boil-off costs.
- The Panama route costs $1.16/mmbtu extra at current rates. The less time vessels spend holding position, the more tonnage can be freed up and made available to the spot market, in turn reducing spot freight rates.
Below factors could help ease strength in the JKM Feb-21 contract to reflect the cost of securing the marginal cargo through the Panama route, rather than pricing on more longer routes at present:
- A sequential increase in Pacific basin supply equivalent to around 8-14 cargoes per month compared to today will help cut Northeast Asia’s call on US cargoes.
- 3.6 Mtpa Prelude is expected to return by year-end, followed by the return of Gorgon’s 15.6 Mtpa capacity at the end of Jan-21 (assuming no weld faults are found in trains one and three). The restart of production at Qatargas’ 7.8 Mtpa train four at Ras Laffan next week will also boost supply, as will the ramp-up of Egyptian output—particularly from Idku, with some potentially from Damietta.
- Sequential declines in Northeast Asian demand for LNG over the rest of winter is also likely. Japan and Korea are expected to see improving availability in nuclear, and both countries will be drawing down LNG terminal stocks. China will also be partly relying on drawing down their undergrounds gas inventories – which have been boosted y/y by heavy injections.
Per the below LHS chart, the JKM-TTF spread is incentivising transit through the Cape of Good Hope (green line). Costs of using the Panama canal have risen. With higher transit times through the Panama Canal – ships are using the route through the Cape
Henry Hub prices at the prompt have weakened in November. Four key drivers
Warmer than expected weather in the US (Temperatures are 24% higher than normal this month). As Henry Hub prices increased above US$3/mmbtu level in October – this has incentivised more coal fired generation in the US (Exhibit 2 below) Reduced power demand due to COVID restrictions cutting load by 2.7 GW nationwide. Finally, US gas production has improved (chart of the day) – but they remain below pre-COVID levels of activity will be supportive for HH from re-visiting Q1 lows (at least until WTI remains below US$45/bbl). Prospects for US gas balances improving from here hinges on temperatures normalising for the rest of the winter and COVID lockdowns easing in Q1 21.
As rig counts continue to fall. Producers are high grading ie. Shifting to tight oil areas with higher well productivity. High grading is more pronounced thus far in the current price downturn compared to 15/16.
- This has largely resulted in shale companies reporting higher efficiencies (charts below). Lower activity, concentrated on best assets with service cost reductions helping companies to guide for more efficiency gains.
- As of Friday’s data active oil rig counts are now at the lowest levels since before the shale revolution started, implying despite the efficiency gains being reported below – depletion rates will catch up.
As a result of high grading, well cost reductions expected in both Delaware and Midland Basins, more moderate reductions expected elsewhere.
- Producers across the Permian have realized or anticipate achieving ~20% reductions in normalized well costs relative to 2019 levels.
- While sharply lower activity levels and concomitant service price reductions are surely at play, durable process oriented drivers and “creative destruction” from an unprecedented (and virus-driven) downturn also appear to be contributing to this improvement.
- Above improvements partly linked with cyclical service cost reductions and impact from high grading.
- Beyond expected drivers of efficiency gains associated with downturns and through-cycle learning curve effects, more meaningful operational changes also appear to be occurring, with simultaneous hydraulic fracturing (Simul-Fracs) and increased automation/remote operations recently in focus.
- With respect to the former, multiple Midland basin producers have reported utilizing Simul-Fracs, which may be helping that side of the basin keep pace with the relatively less mature Delaware side this year.
Energy demand is 4% lower than it would have been without efficiency gains. Between 2015-2018 energy efficiency improvements helped reduce 3.5 Gt of Co2 – roughly equivalent to the energy-related emissions of Japan over the same period.
Why has energy efficiency fallen:
- Consumers preferring larger cars – vehicle occupancy rates have fallen
- Residential buildings – increased device ownership and use, growth in per capita residential floor area in all economies.
- China and the US increased their share of industrial production - pushing up demand for primary energy fuels
- Coal power generation increased in 2017 (3%) and 2018 (2.5%)
But with COVID-19 oil intensity is likely to go higher - although overall consumption faces a cyclical headwind due to the economy. The per user oil intensity is likely to be higher. Especially with demand for PPE , Face Masks and more protection for packaging food.
Impact of reshoring and localisation on China’s consumption •Chinese consumers spent ~ US$260 billion overseas over 2015-19 •As a result of reshoring. Domestic consumption is expected to amount to US$140-65 billion in 2020 and US$70 – 130 billion annually over 2021-23.2/2 This has the potential to lift consumption growth by 1-2 ppts in 2021-23. •Re-shored consumption will be mostly driven by high-income consumers, accelerating a shift from goods-related consumption to service-related consumption in China. https://t.co/Y49yRuWyYa https://t.co/8J84RmiXnV
Oil Market Outlook. Oil (Brent crude) has managed to stay above US$40/bbl over the second week of July, despite a choppy macro environment and looming risks. We explore the key reasons for this and highlight some of the key risks.
Japan may need as much as 13 Mt of additional LNG by 2030 to help fill the gap left by the closure of the ~100 less-efficient coal-fired power plants
- Japan’s METI released a formal update to its energy policy. Of note is that although they are focusing on decarbonising energy within Japan with the old coal plant shutdowns, outside Japan – they have yielded to their high-tech and bank lobby groups. Ie. Japanese banks can continue funding coal projects abroad. Japanese companies can keep exporting their advanced coal tech as well.
- This is a setback for Japan’s environment minister Koizumi who has been a critic of Japan’s support for coal power abroad (more details below chart).
A few nuances to Japan’s coal support abroad:
- Japan will only supply coal plants to countries that have no other choice than to build these plants
- METI also said that they would make it a requirement for countries to have plans to decarbonize (But they also added an “in principle” after that point, which gives them a bit of wiggle room for exemptions)
- Japan will only provide support for coal plants that use USC tech with an efficiency of 43% or above, lGCC tech, or plants that use tech to drastically cut emissions (Japan only export plants that are this efficient)
The impact of US export turndowns this summer is one of the main reasons why spot freight rates have held so low over the past couple of months.
- Spot freight rates averaged US$31,000/d in May–June, which was down from US$52,000/d in the period a year earlier and US$57,000/d in the period in 2018.
- Freight rates have managed to stay low despite vessels being tied up as floating storage (FS) or slow-sailed to destinations in recent months, increasing tonnage demand.
- Per satellite tracking there are 20 floating storage vessels as of this week, climbing from a low in recent weeks of 13 on 30 June, while there were no floating storage. vessels at this point last year. The floating storage vessels likely constitute a split between vessels struggling to unload because of terminal congestion, distressed cargoes and some because of firms having hedged intra-summer spreads.
US export facilities have an outsized impact on global shipping demand owing to their long distances from the main global demand centres of Europe and Northeast Asia
- The average sailing time for a return voyage—assuming a ballast journey at the same speed as the outward leg and a cargo unloading time of 1.5 days—from US export plants in 2019 was 47 days. The average for non-US facilities was 30 days.
- The speed of the global fleet has already dropped below the lowest point last year in recent months, with the Q2 20 average of 13 knots for outbound journeys compared to 13.6 knots over the whole of 2019. A drop in the sailing speed from last year’s average meant that global average cargo deliveries needed an extra 1.2 sailing days to complete a round trip voyage in Q2 20. This in turn would have required an additional 16 vessels (403 in total) to provide enough shipping capacity for the 29.6 Mt/m of global exports in Q2 20. This helped offset some of the impact of low US LNG shipping demand.
Impact of slow sailing on freight markets.
The speed of the global fleet has already dropped below the lowest point last year in recent months, with the Q2 20 average of 13 knots for outbound journeys compared to 13.6 knots over the whole of 2019. A drop in the sailing speed from last year’s average meant that global average cargo deliveries needed an extra 1.2 sailing days to complete a round trip voyage in Q2 20. This in turn would have required an additional 16 vessels (403 in total) to provide enough shipping capacity for the 29.6 Mt/m of global exports in Q2 20. This helped offset some of the impact of low US LNG shipping demand.
Charts on twitter.com/macrocrude 8th of July 2020
In this podcast, we help you understand the carbon math we face as humanity trying to keep temperatures from rising below 1.5 degrees.
- Globally our remaining cumulative carbon budget available is less than 500 Giga Tonnes by 2050 if we need to maintain temperatures below 1.5 degrees.
- Annual carbon emissions are around 41 billion tonnes – and unchecked green house gas emissions could rise annually by 50 - 60 billion tonnes/year to 2050. Contributing to a cumulative ~1700 Giga tonnes – putting us to a path of 5 degrees per current climate models. As the carbon goes above certain thresholds, it triggers climate feedback loops through glacier melts etc.
- Ongoing efficiency improvements and growth of renewable power could help lower emissions to ~35 billion tonnes/year. Still giving us a total of 1300 Giga Tonnes by 2050 – and raising the temperature by well over 3 degrees.
- To really meet Paris, transportation sector will have to reduce emissions by 32%, industry by 41% and the power sector by 73%. By 2050, ideally we need negative 5 giga tonnes.
As a result of COVID, daily wage earners, labourers in megacities in Asia, South America, Middle East have been impacted. As their daily stream of income came to a halt, their remittances to their families back home in their villages and small towns were cut. With no wages to support their own living expenses (food, rent) they were forced to flee as well, at a time when there was no public transportation (no rail, no buses) which meant they had to trek 500 to 900 kilometres by foot carrying their belongings and families with them.
Many migrants are unlikely to return given the semi-state of lockdowns that exist. Given the experience they had to go through while returning, and also balancing out the low probability of finding a job given the slow easing of restrictions and also the health dangers - they may choose to remain in their homelands. Politically there is motivation in their local areas to make them stay by getting government funds.
This changes the demographics in mega cities, it changes economics for small businesses and for construction industries emerging after the lockdown. For central banks in emerging markets - inflation may be a concern.
At the moment, the skew of investor and activist pressure on decarbonisation is highly towards energy producers (oil and gas). You rarely see climate protests in front of residential developers, airlines, agricultural companies. In this context, European airlines – some of the European Union’s biggest polluters – have sought an unprecedented €32.9 billion in government bailouts since the beginning of the Covid-19 crisis, without binding environmental conditions.
There needs to be more pressure on consumers of energy (airlines, building operators, real estate agents, company's travel policies and operational aspects).
We go through the key drivers behind the Brent Crude oil price falling below US$40/bbl. A shift in sentiment from just days ago when prices were about to test US$45/bbl. The Dallas Fed Survey results we tweeted are of importance here too, as it gives guidance on how US shale producers are responding to the current price and demand environment.
· The six major US LNG terminals reported a utilisation rate of 40% in late June as the marginal LNG supply source adjusts to lower gas prices. Since April, when the market impact from the virus began to take shape, ~130 cargoes have been cancelled for loading in the US.
· US LNG cargo cancellations for August currently estimated at 40-45 (similar to July levels). More than half of the cancelled US cargo loadings for August are tied to Cheniere's Sabine Pass terminal in Louisiana (16 – 23 cargoes) and Corpus Christi terminal in Texas. The Gulf Coast Marker (GCM) to Henry Hub spread has been negative since the end of March and has reached differentials as wide as negative US$0.7/MMBtu, implying very negative export economics.
· Gas prices in the US are likely to come under further pressure this summer as US natural gas production has recovered this month – partly to do with the resilience of dry gas plays and reflecting reversal of US oil field shut-ins at wet gas plays. Production is recovering at a time of weak domestic demand, limited export availability to exports as well as lower feedgas deliveries to US LNG export facilities (down 38% compared to May levels).
· In Europe, gas storage capacity has reached 77% by late-June compared with the five-year average of 53% for the same period. Storage is expected to be full by August and is likely to place further pressure on gas prices over the next few months until demand picks up.
Shocked by BP's $13 - $17 billion charge? Well, Deloitte expects the shale industry to impair/write-down the value of their assets by as much as $300 billion—with significant impairments expected in Q2 2020. One may argue against reading too much into this “noncash” impairment figure of companies. Yes, it is just an accounting adjustment. But it translates into writing off the invested shareholder’s equity and carrying a debt that may have been taken to develop or acquire the impaired asset. The result: an immediate increase in the industry’s #Leverage ratio from 40 to 54 % which can trigger many negative sequences of events, including bankruptcy bankruptcy.
- OPEC+ compliance monitoring meeting ended this week with no press conference.
- The group is increasingly trying to target $50/bbl for benchmarks by taking crude off the market and incentivising stock draws just as demand is recovering.
- Iraq and Kazakhstan (compliance laggards) submitted plans detailing how they would attain compliance going forward and also make up for recent over-production.
- However, Nigeria and Angola failed to provide similar plans at Thursday's meeting – resulting in the Saudis cancelling the press conference.
- Nigeria and Angola were given until Monday, June 22 to present their compliance plans - without disclosing what penalties might be imposed if they fail to do so.
- Next OPEC+ compliance meeting is scheduled for July 15th when recently delivered plans by Iraq will be checked. Tanker tracking and Iraq’s communication to refineries currently show the country improving its compliance for now – which is thus far giving comfort to markets.
The Australian economy is recovering at full steam. Solid retail sales show the resilience of the Australian consumer. And the GDP estimates are a lot better despite the twin shocks of the bush fire and COVID. This episode goes through some of the positives for the Australian economy as well as some of the headwinds it still faces. Ending with a view on the Australian dollar.
Making carbon relatable. How much carbon do we generate by using electricity on a household level. What's the capacity of trees to absorb the carbon.
Calpers pension fund announcing diverting ita assets to private equity as the need for returns as suppressed bond yields have an impact. While BP writes down the value of ita oil and gas assets, reducing their long term oil price from $70/bbl (2015 real) to $55/bbl. What this means for the future of investing in oil and gas. We connect the dots
A difference in the COVID case trajectory and how mobility is improving in each of these markets. Sparks a concern on the future for oil demand and macro economics recovery.
Stock prices have recovered although turbulent but more importantly oil prices are showing relative resilience in the back of higher volatility in macro markets and also in the face of almost consensus bearish view.
A sharp correction in global stock markets. This episode explores the recent drivers and the state of play in financial markets
Episode goes through chart of the day on our twitter account which shows refinery margins weak and refinery utilisation rates low. A big reason why physical oil markets are softening.