High gasoline prices are starting to hurt demand

1. OPEC exports are disappointing despite high prices

Source: Kpler.

– The Russian-Ukrainian war has taken OPEC heavyweights out of the public eye, somewhat masking the fact that OPEC+’s 400,000 bpd monthly increases consistently end up being underproduced.

– Saudi Arabia is the only major OPEC producer to see a tangible rise in exports in recent months – in February outflows jumped to 7.15m bpd – but with Iraq and troubled Kuwait, the net effect was less than assumed.

– Therefore, OPEC producers could take advantage of high prices with a limited effort to increase production, without risking their spare production capacity – arguably the reason why OPEC told the EU not to ban Russian oil from the markets.

– Iraq is a special case, with its exports which have already stagnated for four months at 3.2 million bpd and production which should fall this month, following a previous monthly drop in February.

2. The resurgence of COVID-19 challenges China’s rebound

– China’s daily COVID-19 count hit nearly 5,000 cases on Friday as the rapid spread of the Omicron variant triggered movement restrictions in cities in 20 provinces.

– Most cases were reported in Shanghai, Shandong and Guangdong, accounting for 27% of China’s oil consumption last year, meaning China is expected to experience weaker than expected demand in 2022.

– S&P Platts expects movement restrictions…

1. OPEC exports are disappointing despite high prices

Source: Kpler.

– The Russian-Ukrainian war has taken OPEC heavyweights out of the public eye, somewhat masking the fact that OPEC+’s 400,000 bpd monthly increases consistently end up being underproduced.

– Saudi Arabia is the only major OPEC producer to see a tangible rise in exports in recent months – in February outflows jumped to 7.15m bpd – but with Iraq and troubled Kuwait, the net effect was less than assumed.

– Therefore, OPEC producers could take advantage of high prices with a limited effort to increase production, without risking their spare production capacity – arguably the reason why OPEC told the EU not to ban Russian oil from the markets.

– Iraq is a special case, with its exports which have already stagnated for four months at 3.2 million bpd and production which should fall this month, following a previous monthly drop in February.

2. The resurgence of COVID-19 challenges China’s rebound

– China’s daily COVID-19 count hit nearly 5,000 cases on Friday as the rapid spread of the Omicron variant triggered movement restrictions in cities in 20 provinces.

– Most cases were reported in Shanghai, Shandong and Guangdong, accounting for 27% of China’s oil consumption last year, meaning China is expected to experience weaker than expected demand in 2022.

– S&P Platts expects movement restrictions to ease in May, with the coronavirus-triggered demand destruction peaking in March at 650,000 bpd.

– As a result, China will experience rather weak demand growth of 200,000 bpd this year, ceding the fastest growing global market to India.

3. The U.S. Gasoline Trend Finally Responds to High Prices

– As gasoline prices have settled comfortably above the $4 per gallon mark in the U.S., fuel demand may finally see behavioral changes, with 37% calling high prices ” very serious problem”.

– The four-week average for gasoline demand nationwide trended sideways at 8.82 million bpd in a period when driving activity is expected to increase seasonally.

– The halt in demand growth coincided with a marked increase in gasoline production, with the latest IEA data indicating gasoline production levels of 9.5 million b/d.

– Meanwhile, gasoline inventories across the country have so far declined for seven consecutive weeks, standing at 238 million barrels in the week ending March 18.

4. Europe’s gas woes face ruble dilemma

– Russian President Vladimir Putin has signaled that long-term gas supply contracts will be converted to rubles, as the West has declared economic war on Moscow, warning the change is just days away.

– While it is still unclear whether Russia would force its contracts in the event of force majeure to adapt to the currency change, Brussels simultaneously asked EU member states to ensure that their underground storages gas stations are filled to at least 80% capacity by November 1.

– With new EU legislation stipulating that EU storage sites should already be 63% full by August 1, the pull on Russian gas could be even stronger in the coming months .

– In the meantime, the US administration has pledged to supply 15 billion cubic meters of liquefied natural gas to Europe, but this is equivalent to only 10% of Gazprom’s European sales.

5. Things can only get worse for aluminum

– After Russia’s aluminum industry was cut off from Australian alumina flows, the second source of supply for the country’s abundant smelters, Russia courted China for the necessary raw material.

– Australian sanctions disrupt usual trade flows as Russia’s Rusal owned 20% of Queensland Aluminum and received 19% of its alumina from Down Under – Chinese companies are rumored to become mediators in the same deal chain.

– Hypothetically, China could also sell its own alumina production, but the marginal benefit would be to re-trade third-party flows to Russia.

– Aluminum prices jumped 10% over the past week, with the 3-month LME contract trading at 3,675 per metric ton, a situation made worse by inventories hitting a 15-year low.

6. Europe is doubling down on green hydrogen

– Soaring natural gas prices and, therefore, lower profitability of gray hydrogen projects are improving the feasibility of green hydrogen plants across Europe, reports Rystad Energy.

– Even though green hydrogen still has a global capacity of less than 1 GW, the spike in green hydrogen costs from $8 per kg to $12-13 per kg, following the Russian- Ukrainian, provided a much-needed boost.

– Even taking into account the ambitious green hydrogen targets of Germany and Spain, Europe would need around 54 million tonnes of hydrogen by 2030 to supplant gas and coal – at today, it is likely to replace only 5% with hydrogen.

– Spain has so far emerged as the most commercially attractive outlet for green hydrogen projects, with production costs as low as $4 per kg.

7. Lithium prices can’t stop skyrocketing

– Lithium prices continue their frantic race, having already quintupled last year, they have already almost doubled in 2022, with the price of Chinese lithium carbonate at 497,500 per metric ton ($78,000/mt).

– This has prompted the Chinese government, which traditionally seeks to add “scientific basis” to commodity trading, to tell electric battery producers that it expects lithium prices to return to sustainable levels.

– For the first time in many years, lithium demand has exceeded supply in 2021 and the short to medium term outlook for lithium production remains uncertain, with many projects delayed or outright canceled (such as the Jadar license of Rio Tinto).

– Lithium prices were also boosted by the announcement by major electric vehicle producer Tesla that it would switch to the LFP (lithium iron phosphate) battery for all cars in the standard range, not just those produced in China.