Europe could abandon natural gas as a bridge fuel | OilPrice.com
Posted on October 28, 2022
1. There’s no good way to solve the US fuel shortage
– When Valero (NYSE:VLO) issued the U.S. refiners’ third-quarter earnings call with net income of $2.82 billion, it said margins were boosted by levels of gasoline demand and diesel above pre-pandemic levels.
– Despite all the talk of demand destruction amid still-high gasoline prices, stocks continue to falter as the US finally comes to grips with its lack of refining capacity.
– Even with average refinery utilization trending towards 94-95%, US petroleum product supply was a solid 1m bpd below October 2019 levels, mainly due to a lack of capacity .
– All of this increases the likelihood of a ban on US product exports – a move that could save US consumers some $5 billion and wipe out $30 billion in revenue from US refiners, according to Wood Mackenzie forecasts.
2. Europe could ditch natural gas as a bridge fuel
– While TTF natural gas spot prices in Europe have tripled this year, from an average of 46 per MWh in 2021 to 134/MWh this year so far, the long-term sustainability of gas demand is questioned.
– According to Rystad, with recent gas prices, it would be 10 times more expensive to operate gas-fired power plants in the long term than to build new solar photovoltaic capacity in Europe.
– For gas-fired power plants to become competitive with renewables by 2030, spot prices would have to fall to at least 17/MWh…
1. There’s no good way to solve the US fuel shortage
– When Valero (NYSE: VLO) issued the call on U.S. refiners’ third-quarter results with net income of $2.82 billion, he said margins were boosted by levels of demand for gasoline and diesel above levels of before the pandemic.
– Despite all the talk of demand destruction amid still-high gasoline prices, stocks continue to falter as the US finally comes to grips with its lack of refining capacity.
– Even with average refinery utilization trending towards 94-95%, US petroleum product supply was a solid 1m bpd below October 2019 levels, mainly due to a lack of capacity .
– All of this increases the likelihood of a ban on US product exports – a move that could save US consumers some $5 billion and wipe out $30 billion in revenue from US refiners, according to Wood Mackenzie forecasts.
2. Europe could ditch natural gas as a bridge fuel
– While TTF natural gas spot prices in Europe have tripled this year, from an average of 46 per MWh in 2021 to 134/MWh this year so far, the long-term sustainability of gas demand is questioned.
– According to Rystad, with recent gas prices, it would be 10 times more expensive to operate gas-fired power plants in the long term than to build new solar photovoltaic capacity in Europe.
– For gas-fired power plants to become competitive with renewables by 2030, spot prices would need to fall to at least 17/MWh and carbon prices would need to drop to 10/mtCO2, a very unrealistic prospect.
– Therefore, Rystad expects the share of natural gas in electricity generation in Europe to fall to 3% by 2045, from 19% currently.
3. Russian diesel still flows to Europe
– Even though the European Union’s ban on Russian products is due to come into effect on February 5, diesel deliveries from Russia have actually started to rise again this month, to around 500,000 bpd.
– With European diesel fuel production curbed by strikes in France and Germany’s takeover of the Schwedt refinery, reducing import dependence on Russia will not be easy.
– According to Euroilstock figures, distillate stocks in the 16 main European countries are this time 11% lower than last year, as storage constructions are impossible with this level of offset.
– The EU was expected to replace Russian diesel with deliveries from the Middle East, although delays in commissioning refineries in Saudi Arabia and Kuwait could complicate those plans.
4. As banks pull out of oil, industry finds new ways to finance
– As big banks are increasingly reluctant to finance fossil fuel extraction, the industry is turning to more creative and innovative ways of financing, offering their reserves as collateral.
– So-called “proven in development productive” (PDP) securitizations have grown rapidly this year, with some $4 billion in funds already raised, mostly from small and medium-sized companies.
– These bonds are backed by companies’ oil and gas reserves, which means that producers pledge a portion of their future revenues in exchange for upfront cash, at a lower cost than banks.
– PDP securitisations have an additional advantage: collateral is not re-priced when prices rise, as seen this year when borrowing bases remained stagnant.
5. When will the Lithium Bull Run end?
– Lithium prices continue to hit all-time highs, with battery-grade lithium carbonate and hydroxide rising 180% this year alone, with Chinese DDP prices around ¥550,000/mt ($76,000 /tm).
– Lithium mines have project lead times of at least 5 years and with demand for lithium expected to increase sixfold by 2030, the market has been caught in a supply trap.
– Lithium mining from salt lake producers is expected to slow as winter sets in, but production of battery-grade metal will continue to fire on all cylinders.
– This creates another loop of inadequate supply, implying that lithium prices could rise even more than they currently are, potentially hitting the 600,000/mt threshold by the end of 2022.
6. Base metals suffer even when stocks run out
– As Europe’s manufacturing sector shrinks and faces deindustrialisation, the US should soon follow, things don’t look very rosy for industrial metals at the moment.
– Industry groups have triggered a wave of demand cuts, with zinc use in 2022 expected to see a 2% year-over-year decline instead of previously assumed growth, while Nickel demand will only be 4%, half of what was expected. in May 2022.
– The future of Russian metal supply could tip the market balance even further – aluminum producers such as Alcoa (NYSE:AA) openly advocate a ban, while European consumers warn of destruction if it happens.
– The current price drop is all the more peculiar as it combines a low price environment, aggravated by the risks of a 2023 recession, with extremely low inventories which would become even more acute if the LME banned the delivery of Russian metal .
7. Extremely hot October facilitates the use of coal and raises gas
– European power producers have resumed flaring natural gas as its spot prices continue to fall amid a continent-wide glut of gas, a product of regular LNG deliveries and warm weather.
– Gas-fired generation in the Netherlands this week was up 45% from the monthly average, with coal use falling, while in Germany the same measure was 33%.
– Meanwhile, gas futures in Europe are in steep contango, with February futures trading at a 45% premium to November at nearly 150/MWh, meaning the market is still expecting a difficult winter.
– Throughout October, European coal prices remained stable and are trading around $250/mt, encouraging a return to gas-fired generation.