[ihc-hide-content ihc_mb_type="show" ihc_mb_who="14,16,20,23,24" ihc_mb_template="1"] The seasonal slowdown has commenced with 10 spreads dropping off across the smaller basins. We will keep seeing a steady decline into year-end as activity slows- all of which is very normal for this time of year. Normally, the period between Thanksgiving and New Year’s sees a drop with a quick bounce in the 2nd/3rd week of January. We believe that we could get as low as 265-270 as we head into the end of the year just based on previous drops. When looking at “rate of change,” it will still be fairly muted when compared to more aggressive drops we saw over the last few years when activity was starting from a MUCH higher level. We also “officially” have the price cap set at $60, but it’s still well above the price of Urals. “After long negotiations, those countries succeeded in securing additional conditions aimed at punishing Moscow, including a mechanism that would allow for revisions of the price every two months, There’s also a provision to make sure any resetting of the cap should leave it at least 5% below average market rates. As Russia is already selling its crude at a discount, the cap is higher than the price of the country’s flagship grade -- known as Urals -- which fell as low as $45.31 a barrel this week at the Baltic Sea port of Primorsk, according to Argus Media, one of the market’s two preeminent pricing companies. It rose to $48.04 on Wednesday. It also introduces a 45-day grace periods for vessels at sea that loaded their cargo before Monday, giving them until Jan. 19 to unload the oil, as well as a 90-day transition period for any future change in the price level. Most G-7 nations will stop importing Russian crude by the end of this year. An EU ban on other refined petroleum products originating in Russia is due next February, alongside a cap on those goods.” As a quick highlight of global data, it dropped again across the board. “November global manufacturing PMI fell lower by 0.6pt to 48.5, remaining below the 50 threshold for the 3rd consecutive month √ The only region with a manufacturing survey above 50 is EM-Asia ex-China.” Falling manufacturing PMI is due to both a decrease in activity components (-0.9pt to 46.7) and a more significant decline in price pressures components (-1.7pt to 53.7) Delivery times have now shortened for 7 months in a row due to fewer distortions on the supply side, but also due to a slowdown in demand √ This is particularly evident in developed markets where delivery times have returned to pre-crisis levels. This will be a continuous pressure point on diesel demand across the shipping, trucking, and more importantly- industrial demand center. We have been experiencing broad “tape bombs” when OPEC+ representatives “leak” information to test the market’s reactions. There was a comment last week that OPEC+ would RAISE production by 500k barrels, and now there is a headline that OPEC+ will discuss new cuts at the next meeting. “Given overall market conditions, OPEC+ will seriously consider a new production cut at its upcoming meeting, particularly if crude prices fall much below their current level in the next week,” analysts at Eurasia Group say in report. “Ultimately, the decision will depend on the trajectory of the oil price when OPEC+ meets and how much disruption is evident in markets because of the EU sanctions” The crude futures curve has started to price in contango, which is going to be a big topic when they meet to discuss next steps. The issue remains demand, which I highlighted as being very soft and has been reflected in the physical market. The futures market caught up with the physical overhang quickly, but just like any movement in the paper markets- it’s overdone and set for a bounce. Even with prices overreacting to the downside, we expect to see more contango creep into the market as crude volumes at sea grow and price in more storage adjustments. Chevron was just given the go ahead to resume oil production in Venezuela, and we should see some additional leniency from some “heavy oil fields” to address some of the U.S. needs. Crude oil in floating storage still remains high, and has risen following many of the ships in transit showing up at their respective destinations. We predicted an increase in floating storage driven by the backlog of ships in transit, and we also correctly saw the increase showing up in Asia. Our view was that floating storage was going to take out the 2021 seasonal adjusted levels, and remain elevated as more ships reach their destination. Global Crude Floating Storage The biggest driver of the increase is Asia with Chinese demand is muted given uncertainty around the zero-COVID policy and potential for reopening. We have been consistent in our views that China’s demand was going to be weak as economic pressure weighs on the consumer and industrial activity. There is still a lot of cargoes signaling China as their final destination, which will put more crude in floating storage and weigh on crude differentials. Asia Crude Oil Floating Storage Even as floating storage rises in Asia, we have more supertankers signaling China as their final location. Some term buyers of Middle East crude from China are struggling to offload some excess, which will result in a slowdown in purchasing into year end. Between the excess in the Middle East, Russian cargoes, and West African volume, we see the physical market being fairly capped in terms of appreciation and broad contango working its way into the system. China Supertanker Crude Imports Another big overhang for OPEC+ in their meeting is the rise in floating storage in the Middle East. Typically, flows from the ME increase at this time of year as crude demand rises due to heating oil demand. Instead, we have seen more crude get left on the water as many buyers limit their purchases. The lack of flows will lead to more discounts, and I believe put more pressure on Saudi Arabia to cut OSPs (official selling prices) further. Middle East Crude Oil Floating Storage Even though West African floating storage fell, it remains very oversupplied. The level of crude in the market is going to keep prices moving lower to find the “right” clearing price- especially to cover the cost of storage and elevated shipping rates. On the physical side, we saw more broad discounts- especially in West Africa that helped attract some additional purchases. “Soaring shipping costs are piling pressure onto physical oil markets that are already being hit by uncertainty surrounding a cap on Russian crude prices and weak Chinese buying. Earnings on the industry’s benchmark trade route breached $100,000 a day on Monday, the highest since early 2020 when Covid-19 caused a surge in tankers storing cargoes. With sanctions on Russia now forcing ships to take longer routes -- drying up the pool of available vessels -- oil companies and traders are having to pay ever-higher prices to transport cargoes. That’s adding to the cost of crude.” The rise in shipping costs and storage is going to be a big driver of contango and additional discounts that could come over the next few weeks. CPC prices fell again as more volume came to market. “CPC Blend price has dropped further with Hellenic Petroleum buying one cargo from Litasco at more than $10 below Dated. This compares with discount of $8-$9 just two days earlier.” We see more pressure on crude blends in Europe as CPC flows increase, Troll and Forties rise, and Libya exports remain stable. We don’t see much additional differential weakness this week, but if some of the volumes don’t clear- we expect to see another round of differential cuts next week. Vitol offered 450k bbl of Gabon’s Rabi Light on CFR Rotterdam basis for Dec. 10-15 arrival to at $4.80/bbl less than Dated Brent Declined from -$4.50/bbl on Nov. 24, -$4/bbl on Nov. 23, -$3.50 on Nov. 22, -$2.30 on Nov. 21, -95c on Nov. 17, -45c on Nov. 16, -20c on Nov. 15, +50c on Nov. 14 Equinor offered 950k bbl of Pazflor crude for Dec. 23-24 loading at $2.55/bbl less than Dated Brent Increased from -$2.80 on Oct. 18; compares with -$2.05 on Oct. 17, -$1.55 on Oct. 16 Nigeria reduced its official selling price for Qua Iboe crude in December to $1.62/bbl more than Dated Brent, according to a price list seen by Bloomberg. That’s the lowest since February Declined from +$2.90/bbl in November Forcados OSP lowered to Dated +$1.73/bbl Decreased from +$2.51/bbl in November That’s also the lowest since February Shipments to China have slowed from about 856k barrels a day in October (already very low) and shifted down to 811k barrels a day in November. India saw some increases from 280k b/d in October to about 352k b/d in November, which is keeping things fairly stable at a lower run rate. The below chart looks at flows of West African crude to China, which remains at decade lows. Even as Brent has weakened, Dubai has followed it down in lockstep given the massive amount of floating storage in the region. We expect it to hold these levels in the near term: Additional WAF cargo flows are going to compete against that Dubai discount and will be the likely driver of additional cuts as we head into December (and realistically next week). We will want to watch if anything comes from the China and Arab Nation summit coming up in December. “China and Arab nations will hold a summit in Saudi Arabia early next month, setting up the possibility that Chinese President Xi Jinping will visit the key energy partner for the first time in nearly seven years. Li Xuhang, China’s consul-general in Dubai, said the gathering would happen in early December, according to a statement posted on the consulate’s website on Tuesday. The statement didn’t provide any other details. The envoy told a newspaper in the United Arab Emirates that the summit would involve face-to-face exchanges between leaders from China and Arab nations, according to a separate Foreign Ministry statement dated Nov. 4.” This could create some additional flows from the Middle East to China, which is something KSA needs to address as more Russian crude hits their typical markets. Another issue remains the global economic slowdown with a lot of weak data coming from China and other global demand centers. Demand has dropped off in China and North America, and I don’t see any near-term recoveries in those regions. At the moment, the zero-COVID policy isn’t going anywhere with a lot of regions doubling down on the enforcement even after protests hit a lot of locations throughout China. A good summary below: The wave of public protests this weekend against China’s strict pandemic controls forced authorities nationwide to respond on Sunday and Monday. Bye-bye, zero-COVID? Nope. Instead, Beijing is doubling down. Central authorities have told local officials they must strictly follow the zero-COVID playbook by implementing the recent 20 policy tweaks aimed at “optimizing” COVID controls and minimizing disruption to people and businesses. The central government’s response came in multiple editorials in Party-state media, calling for more precise COVID restrictions, support for those affected – and adherence to the zero-COVID policy (The Paper 1 & 2). City authorities reiterated the rules that local officials must follow, including: The Beijing government stressed the ban on using chains and other physical barriers to enforce lockdowns that increase the risk of fatalities in case of fire or other emergencies (The Paper 3). Several local governments pledged to keep hospitals accessible for non-COVID patients (Sina 2 and The Paper 5). Guangzhou announced that communities without new positive cases for five consecutive days can request reopening, and certain groups are exempt from frequent COVID testing (Caixin 1 & 2). Hefei (Anhui) released a list of 16 prohibited measures, including hard barricades to enforce lockdowns (Yicai). Most restrictions will remain in place. The protests ramp up pressure on local governments to implement more strictly Beijing’s (now more restrained) zero-COVID playbook. That’s because the fundamental fact remains that if tight controls were abandoned, China’s hospital capacity would be overwhelmed and the likely death rate would be higher than leaders in Beijing could stomach. Get smarter: Increasingly widespread non-compliance with zero-COVID measures will increase case counts to levels that demand prolonged lockdowns. But harsh citywide lockdowns have grown a lot harder to enforce. Get ready: Our bet is the government will lock down hard again, stamping out online and in-person protests, if COVID continues to run wild. At the moment, the government is stuck trying to enforce their rules, but as Omicron and other more virulent strains become dominant- COVID will spread more quickly complicating the policies. Even though this is creating a problem now, it could pose an opportunity come March/April for an accelerated reopening- but that won’t be even hinted at until next year. The pressure within China will keep total demand sluggish and reverberate through the crude markets. We expect to see Shandong utilization rates sitting at around 65%, which is fairly normal for this time of year. If pressure continues to grow, we expect to see some additional cuts in the near term and move us closer to 60% utilization rate into year end. All of the economic data that has come out in October and November show a global economy weakening rapidly. The global trade index fell to new cyclical lows (-6.4% y/y), which should soon be reflected in global exports. They have recently been supported by emerging markets, but we see a lot of downside to trade in the EM regions from year end and well into 2023. This will put more pressure on underlying crude demand as refined products struggle to find buyers. In the near term, we expect to see a bounce in paper markets, but it will be short-lived as differentials weaken in the beginning of December. All the crack spreads in the U.S. are down between 5%-12% depending on the region, which is happening around the world. As we head into December and the cargoes remain stuck in floating storage, we will see another round of physical crude reductions and another cut to OPEC+ production levels. I would saw another 250k-500k will be announced at the new meeting as we head into 2023. On the futures front, we bounced off support- but it’s unlikely to find much traction above $80. Turning to Brent, we also found some support but there is a lot of pressure at the $87 level keeping things fairly range bound into the OPEC+ meeting. We will also get some more “tape bombs” that will keep things volatile but not much movement from these levels once it all settles. China is facing a huge surge in youth unemployment and further unrest is likely to follow. China announced Q3’22 growth of 3% (which is already suspect), but makes the ability to hit the government’s target of 5.5% for the year impossible. “Income gains have suffered. Increases in real household income slowed to 3.2% year on year over the first three quarters of 2022, less than half the average pace of 6.7% in the five years before the pandemic. Meanwhile, savings rates are climbing again this year – a sign of economic anxiety that depresses consumer spending and growth.” The local governments have had to bear the brunt of the widening deficits. As economic activity slumps further, the regional CCP players will have to pick up more of the pieces to fill the gap. Since their main source of income was real estate and taxes, things will continue to get worse and since everything is backed by the CCP and PBoC- stress is only going to grow throughout the region. “Lockdowns have dragged down local tax revenues and driven up government expenses. All 31 of China’s provinces ran deficits in their general budgets in 1H, with some 23 provinces recording deficits that were bigger than their full-year shortfalls in 2021, when measured as a percent of GDP. The longer strict containment measures stay in place, the worse the situation will become.” The PBoC cut the reserve requirements to 11% from 11.25%, but there is already NO DEMAND for leverage so it won’t prompt additional credit. Instead, industrial profits are dropping faster than expected which also hinders the willingness of companies to borrow additional funds. If you income is falling or less stable- why pick up more interest expense? Upstream and Downstream Under Pressure Profits weakened in upstream and downstream industries. Among upstream industries, profit growth of mining industries slowed to 60% in the 10-month period from 76% in the first nine months of 2022. Looking downstream, manufacturing industries’ profits dropped 13.4%, slightly more than a 13.2% fall in the first nine months. By ownership, profit growth of state-owned enterprises slowed to 1.1% from 3.8% in the first nine months. The private sector remained deep in the red, with profits of private enterprises falling 8.1%, the same pace as in the nine-month period to September. The deterioration is accelerating in China and the OECD nations, which is reverberating back up the supply chain into the Emerging Markets. The global economy is facing a big problem that the markets still haven’t wanted to face: a global recession and central banks still raising rates or at least not cutting. The Fed just reiterated again their likelihood of raising rates again AND keeping them higher for longer. We are still a long way away from relief coming to the market by way of stimulus. As we head into winter, different U.S. regions are warning about power prices ripping higher. The New York Grid was the most recent saying power prices may rise 20%-30% this winter. The issue with power for the winter is the reduced efficacy of renewables during these periods. Solar intensity dwindles significantly impacting solar while wind speeds can vary straining natural gas and coal power plants. NYC natural gas prices for January are over 60% higher vs last year and Consolidated Edison expects power bills to climb 22%. “Wholesale electricity prices may be 20% to 30% higher than last winter, the top executive at the state grid operator said at a Monday media briefing. While the New York Independent System Operator doesn’t forecast prices, there is a “very tight correlation” between natural gas and power prices, Chief Executive Officer Richard Dewey said.” State power demand is expected to peak at about 23.9 gigawatts this winter, up 2.8% from last year’s high, New York ISO said. A key fact that is being missed on the assessments are summed up by Aaron Markham, vice president of operations: “Since its summer assessment, about 477 megawatts of fossil fuel generation have permanently shut and 672 megawatts of wind and solar have come online. The intermittency of renewables means “they are not a one-for-one replacement for the fossil fuels being retired,” he said.” We are seeing pressure around the U.S. on the electricity front that have seen prices hold at highs in over a decade. Europe has seen their problems get worse as France struggles to bring back idled nuclear reactors for winter. The below chart puts into context just how far off place France is on bringing back their reactors. The French government has been telling EDF that these reactors were going to be decommissioned for the last decade. This caused EDF to adjust their maintenance schedules, but the government made a huge shift in policy in 2022- pushing EDF to not only keep the reactors operational but to also extend their useful life. This is a MASSIVE about face that the assets can’t handle without some extensive maintenance, which has also been complicated by supply chains and labor shortfalls/strikes. Power prices in Germany and France have turned higher even as natural gas prices have come down. The issue remains availability of power as we just saw in the U.K. that saw wind only generate .4GW down from 16.4GW. To put that into context- the drop of 16GW in production is equivalent to shutting down 14 nuclear power stations. This caused the UK power markets to get exceptional tight today, and their fail safe is to just purchase more directly from France. As France sees their production capacity dwindle, it’s leading to a very difficult period as we head into winter and the likelihood of a polar vortex. We are seeing the same trend all around the world. Dispatchable power is dwindling, and it can drop off quickly due to the intermittent nature of renewables. The variability creates broad issues that only get amplified in the winter months as solar efficacy drops off considerably. Wind flows can adjust abruptly, and the remaining capacity (mainly fossil fuels) is stressed further. The harder you run these assets the more wear and tear and maintenance that will be required to ensure their continuous use. The shift between base load and peaking capacity is only getting worse as more coal is slated to come offline over the next six to twelve months. Essentially- it’s only going to get worse. As an update on China’s Zero Covid Policy- there has been more movement on the ground to adjust the onerous nature of lockdowns. Below are some breakdowns from Trivium- as cases spike- it will create some additional panic and not result in a big spike in near term economic activity. There are a lot of issues the government faces, and it remains all the protests that have occurred over that period of time. In the last 24 hours: Local government-affiliated media has called on people to take “individual responsibilities” to keep healthy – implying that it will no longer be the government’s job to protect people from getting COVID (The Paper 1). Guangdong Party Secretary Huang Kunming held a pandemic control meeting and did not mention the “dynamic zero-COVID” policy (21st Century Biz 1). A number of cities – including Beijing, Tianjin, and Chengdu – stopped or relaxed COVID testing requirements for access to public transport (21st Century Biz 2, Tianjin Government WeChat Account, Sina). Authorities in Guangzhou are calling for residents to use antigen tests at home and minimize nucleic acid testing in public (Yicai, The Paper 2). There’s more. We are hearing that: Even second-tier public hospitals have been ordered to prepare fever clinics for a surge in cases. Construction on unfinished centralized quarantine centers has stopped. Major cities like Beijing, Guangzhou, Shenzhen, and Tianjin are allowing asymptomatic COVID cases and their close contacts to quarantine at home – as opposed to in government facilities. And here is proof positive that zero-COVID is unraveling: Our lead COVID analyst in Shanghai is (finally!) getting vaccinated because he expects an imminent surge in COVID cases. Our bet: In the best case scenario, we expect further changes to COVID policy to be announced around mid December, if not over the weekend. Get smart: Moving away from zero-COVID is not necessarily good news for the economy in the short term. We expect a surge of COVID cases will cause meaningful disruptions to economic activity. This happened quickly: Just three days ago Beijing signaled that it was going to ramp up efforts to enforce its recently “optimized” zero-COVID playbook.So, what changed? Top leadership had already begun to discuss how they might eventually move away from zero-COVID. But the protests last weekend put pressure on central policymakers to figure things out in a hurry. Hence the meaningful signals in recent days that Beijing is moving towards living with COVID. So how will Beijing carry out this shift away from zero-COVID?Based on indications from the top leadership, we believe there could be meaningful zero-COVID relaxation in the next couple of weeks – if not sooner. We expect that the December Politburo meeting, which will be held in the coming days, will signal a meaningful change. Pay special attention to this: If the December Politburo meeting readout does not mention “dynamic zero-COVID” – an omission we’ve noted in other recent top-level meetings – it would mark the effective end of China’s zero-COVID policy in both name and practice. If that happens, China will have effectively adopted a living-with-COVID policy. Heads up: Given that real changes are already happening on the ground at the local level, important COVID policy changes could be announced as soon as this weekend.We think these are the most likely policy changes (in order of likelihood): Allowing some asymptomatic and mild symptom COVID cases to quarantine and recover at home Significantly scaling back mandatory testing and ceasing to require testing results for entrance into most public spaces Further shortening quarantine times for cases and international arrivals Stopping the contact tracing and quarantining of close contacts of COVID cases As we have long said, this will not be a linear process: COVID controls will be relaxed through a series of policy tweaks, not a flashy announcement of a 180 from the top. The path for reopening will be uneven across regions. More developed, richer, and southern cities will see much faster progress than lower-tier, less affluent, and northern cities. Local implementation of any new central government COVID policy will determine the speed of reopening. Local implementation will continue to be complicated by chaotic execution and conservative officials refusing to give up on excessive controls. So here is what to watch in the days and weeks ahead: We could see further loosening of the 20 COVID policy changes announced on November 11 as a temporary stopgap measure to clarify policy direction and warn people to get ready. At some point, health regulators could also update China’s official COVID-19 pandemic control and prevention guide from its current 9th edition to a much more streamlined 10th edition – in order to set up protocols designed to help the public and the healthcare system live with COVID. Medical administrators could also subject COVID-19 – technically a Type B infectious disease under Chinese law – to Type B-level control and prevention measures, as opposed to the elevated Type A-level control measures since the start of the pandemic. That would effectively end COVID-19’s status as a major national concern. A few words of caution: Loosening COVID restrictions too quickly could lead to a sudden surge in cases, overwhelming hospitals and scaring the population into staying home. That could lead to calls for a slower transition out of zero-COVID. And if things really get out of control, the government could revert to much of the zero-COVID playbook. So the risks of economic disruption and volatility are still high. That said, although it may be a long, zig-zagging process, China is abandoning its zero-COVID policy.Finally. [/ihc-hide-content] [ump-visitor] To unlock the content you need a Enterprise Account! 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