• Fears around Russia are mounting with news flashes that countries are warning their citizens to leave Ukraine and a view that a Russian invasion happens next week. This has driven crude to the highs while Ural prices remain “no bid.” Urals are trading at over a $7 discount now after initially coming in at $5. The spread will remain bullish for U.S. flows into Europe.
• Completion activity is maintaining their steady expansion, and we will see 275 spreads within another 1–2-week period. The biggest hurdle remains labor and equipment as the expansion in U.S. operations hits its stride. As we highlighted last week, the majors are starting to get more active in the region, but it takes equipment and manpower to achieve those growth levels. While parts of the supply chain have improved, there are lingering (and in some cases worsening) problems that will still keep lead times extended. This is a long way of saying that we aren’t gapping up to 350 spreads. There is going to be a slow process of getting equipment back to operational standards and higher the people to carry it out. The OFS industry was already hit with big wage inflation in 2021, and we don’t see that changing anytime soon. So if you marry the current problems of wage inflation + diesel + steel + equipment in general- prices will have to go up just as a pass through to the E&P. At crude over $90, NG above $3.50, and NGLs at the highs- there will be enough capital deployed into the space to grow production and see the frac spread count push higher.

• The Permian will remain the biggest growth engine and will breach 150 by the time we get into mid-March. We have been here before, but this time we have the pipeline and export capacity to enable a rise in production without blowing apart differentials. We have seen some pressure on Midland-Light Crude in the last few days, and we will see more benefits placed on heavier crudes vs the lighter ends. The DUC count will also need to increase to accommodate more completion activity, which is why we will keep seeing rig additions to replenish some of the declines. The rig count had a big jump this week, and we expect more growth over the next few weeks. The pull of LNG into the market will keep the South (TX, LA, OK) very busy as product demand remains robust. The demand for NGLs will also provide strong support as ethane exports remain at all time highs, and Asian demand for liquids keeps the light ends flowing into the market.
• The physical market remains massively bifurcated, which we don’t see adjusting anytime soon. We have Urals trading at 2-year lows and near record prices for Forties and European Brent equivalents. This will also support some flows of U.S. and West African crudes into the European markets. The steep premium between WTI and Dubai will keep U.S. crudes limited heading to Asia, but due to the issues in Europe- we will see some increased buying. This will keep us fairly stable at about 2.8M barrels a day of exports.

PLATTS:

• Vitol offered Urals for Feb. 20-24 at Dated – $4.05/bbl: trader monitoring Platts window
  • Price was the lowest since April 2020, according to data compiled by Bloomberg
  • Compares with -$3.50 for its previous offer on Wednesday
• Trafigura offered Urals -$3.90/bbl for Feb. 20-24 and – $3.65 for Feb. 21-25
• All cargoes, in 100k tons each, were for delivery to Rotterdam

Urals has now hit a historic low:

• Trafigura offered 100k tons of Urals for Feb. 21-25 at Dated Brent -$5.20/bbl, CIF Rotterdam
  • That’s the lowest offer price in window since at least 2011, according to data compiled by Bloomberg; drops from – $3.65/bbl for the same loading dates on Feb. 10

Iraq raised crude OSPs for March delivery to Europe

• Basrah Medium Dated -$4.65/bbl in March, vs – $5.15/bbl in Feb.
• Basrah Heavy -$7.00 vs -$7.40
• Kirkuk – $0.30 vs -$0.55
• Also raised OSPs for cargoes to Asia, but cut prices for U.S. and Americas

• The diesel market remains the bright spot with broad shortfalls around the world across middle distillate. This will also support the running of middle to heavier crudes that have a higher distillate cut. We have seen broad builds in gasoline and heavy disty/resid that will create broader problems as we head into April/May. Singapore, U.S., Europe, and Fujairah are all sitting on a growing amount of light distillate.

• COVID has been the broad excuse for bad economic data and inherent slowdowns. The view has been that once COVID is gone everything will go back to normal, but we are already seeing cracks to that logic. We have been at the forefront of the inflation and weak real wage growth for years at this point. This is going to present a much bigger problem as rates head higher and Emerging markets come under even more pressure. The U.S. 10 year sets the stage for global rates and as we surge above 2%- it will put a huge overhang on the global market. Many countries have been forced to maintain underlying diesel/gasoline subsidizes in order to soften some of the inflation blow. But, this comes at a big cost as countries leverage balance sheets further (which was already done during COVID) and drains foreign reserves as broader inflation metrics also push higher (food). I still think there is more pressure on the yield curve, and it will keep global economic growth muted.

This is all happening ahead of the Fed meeting where the market is now pricing in a .50% move higher and the potential for 7 rate hikes. The new inflation data was “devastating” when you factor in what drove us higher and the problems that poses going forward. Of the 250 CPI subcomponents, 87% of them are above the Fed’s 2% target.

When we separate it out between COVID and non-COVID related there is a growing concern on how sticky inflation will prove to be. The issues from COVID are also far from over, so that will remain an underlying problem as wages and OER (owner equivalent rent) keeps inflation firmly elevated.

While inflation pushes higher, the “rate of change” will slow as the comps get harder, but the pressure on real wages only grows. Wages have failed to keep up with inflation, and given the global backdrop of pricing pressure- it isn’t going anywhere quickly. The question turns to- How fast can companies increase wages? We expect to see more wage increases, which will keep prices elevated at the corporate level and pressure margins as companies struggle to pass on more costs. We have already heard warnings from large conglomerate companies- especially ones closely tied to the consumer.

We have already pointed out the problems this poses for retail sales, but the university of Michigan data just confirms our fears. This is a broad reflection of fears around inflation, rising living costs, and wages not keeping pace.

Even as flexible inflation “cools”- we will have a lot of support in sticky inflation. The core inflation will keep accelerating, and put broader pressure on the underlying consumer. The fact that diesel is at $4 and gasoline approaching $3.75 as a national average has huge implications as we approach summer driving season.

Food continues to be a HUGE problem with little in the way of that slowing. This is obviously a big problem in the U.S. but a massive issue for the emerging market and those that rely 100% on imports.

In summary, the issues are expanding as “non-reopening” components contributed 4.2% to the headline number with “reopening” components providing 1.6.%.

On the China front, we are getting some conflicting reports as state players stepped in to buy up stocks and support the indexes. But on the other side, we have seen a pickup in credit impulses as banks increased total activity. There is typically a big push in lending/liquidity inputs in the beginning of the year driven by Lunar New Year and liquidity needs in Q1. “Financial institutions offered 3.98 trillion yuan ($626 billion) of new loans in the month, beating economists’ median estimate of 3.7 trillion yuan and the highest level in data going back to 1992, the People’s Bank of China said Thursday. Aggregate financing, a broad measure of credit to the real economy, also reached a record.” You can see that it normally happens in Jan, but this one happens to be the “biggest” pump but driven more by social loan growth.

The non-banking loan growth was something we discussed over the last few weeks as the government tried to restructure borrowing in the property sector. The 12 month credit impulse remains negative, but you can see the big turn in the 6 month lead time.

The record loan figures weren’t all good news though, masking weakness in the economy, especially among consumers. Short-term household loans recorded a drop from a year ago for the third straight month, reflecting sluggish consumption demand. Medium and long-term loans to households, a proxy for mortgages, also declined for the second month from a year earlier, a sign of ongoing pain in the property market. There are also concerns over companies’ real borrowing demand, with the surge in corporate loans mainly coming from short-term borrowing. Short-term loans to non-financial companies soared to 1 trillion yuan, the highest in data going back to 2006. Corporate bill financing, also a form of short-term credit, continued to rise from a year ago.

The local spending remains deeply depressed with the Lunar New Year holiday missing expectations: People made 2.51 million trips during the 7-day New Year holiday, representing 73.9% during the period in 2019, 2% less y/y. Domestic tourism revenue recorded at 289.2 billion yuan, -3.9% y/y, representing 56.3% of 2019’s, according to Ministry of Culture&Tourism. There remains broad issues with spending and employment. So yes- we are seeing stimulus as new easing metrics are driving some loan activity, but it remains far away from reaching the consumer that continues to struggle. This will also be a big issue for Xi who has been pushing the common prosperity narrative.