India's Booming Coal Demand Drains Inventories

1. US Lifts Sanctions on Venezuela for Six Months

- The US will temporarily lift sanctions on Venezuela’s oil sector as Caracas promised to work with the opposition coalition to ensure free and fair presidential elections in 2024, allowing PDVSA to export oil to any destinations.

- Up until now, it was only Chevron that was allowed to import Venezuelan crude into the United States, with some 150,000 b/d of production coming from the US major’s four JVs with PDVSA.

- China’s independent refineries will from now on face increased competition from US players, with teapots in Shandong province taking some 360,000 b/d of crude and 110,000 b/d of fuel oil from Venezuela in September.

- Traders stopped offering Venezuelan cargoes into China after the announcement, with Venezuela’s bitumen blend expected to strengthen after trading at a discount of $22 per barrel to ICE Brent Futures on a DES Shandong basis.

2. Ongoing Gaza Hostilities Jeopardize Israel’s Gas Production

- The conflict between Israel and Gaza risks endangering gas exploration in the Eastern Mediterranean, potentially having knock-on effects on Europe’s LNG supply into the winter.

- Whilst production at Israel’s largest field Leviathan has so far been unimpacted, the second largest Tamar field, accounting for 38% of gas production, has been shut down since October 9 due to its proximity (25 miles) to the Gaza Strip.

- Tamar generally supplies more than 70% of domestic gas demand, with the surpluses exported to Egypt, however now Israel cannot feed Egypt’s Idku and Damietta LNG sites for lack of natural gas at home.

- The $1.6 billion expansion of the Tamar field, expected to materialize by 2025, is now jeopardized by security risks, even Leviathan Phase 1B which was supposed to involve a FLNG unit for 5 mtpa exports could be postponed or derailed by the war.

3. India’s Robust Coal Consumption Drains Inventories

- Coal inventories at India’s power plants in October to date fell at their fastest rate in two years, with overall economic growth lifting the country’s electricity demand to new record levels.

- September-October is not peak power demand season for India – that usually happens around May – however unusually dry weather and booming economic growth depleted coal inventories held by power plants to 20.58 million tonnes.

- Changing weather patterns have also contributed to a 27% year-on-year decline in hydropower output, aggravated by both solar and wind generation dropping this month by 10-12% compared to September.

- India will be maximizing coal imports over the upcoming weeks, with Kpler data shoring October imports rising to 19.35 million tonnes, the highest monthly level since June 2022, potentially boosting coal prices into the winter.

4. Gas Industry Calls for More Investment as Fields Mature

- Whilst it has become customary for oil industry champions such as OPEC to call for more upstream investment, gas market players are now warning of a production slump in the coming decades without fresh investment.

- The International Gas Union claims that the 58% decrease in gas field investment from 2014 to 2020 has made the task of meeting increasing global demand dynamics much more difficult.

- With the current portfolio of producing fields, gas production globally is set to decline from 4.1 trillion cubic meters this year to 3.1 TCm by 2030 as fields mature, shrinking further to 1 TCm by mid-century.

- Pre-Covid exploration drilling was focusing mostly on gas-rich basins, but higher crude prices have been incentivizing investments into oil-focused plays, hampering the outlook for natural gas even as total hydrocarbon exploration capex moved higher to $55 billion this year.

5. Mexican Refining Collapses Despite Dos Bocas Promise

- Mexican refining should have enjoyed a breakthrough year in 2023, seeing the oft-mooted Dos Bocas refinery coming online and adding some 320,000 b/d in capacity, but it is facing multi-year low utilization rates instead.

- Most recent statistical data points show utilization rates at Pemex’s six refineries at 38% and processing only 655,000 b/d, the lowest level since July 2022, with the country’s diesel supply shrinking to a mere 66,000 b/d.

- Mexico’s national oil company Pemex pledged to invest $9.2 billion this year into its refineries, but repeated fires and force majeure events forced it to run lower than expected.

- The stepping down of Mexico’s energy minister Rocio Nahle Garcia might complicate things further, with the Dos Bocas refinery stuck due to delays and cost overruns despite being inaugurated in July.

6. No Trust in Nickel Futures Markets

- Trading in nickel futures has been illiquid for most of 2022-2023 after the London Metal Exchange controversially decided to cancel $12 billion in trades to halt a price spike, although investors are now slowly coming back.

- Investment funds, however, have amassed a huge net short in nickel contracts, worth $2 billion, with the value of the short being the highest on record and the volume of the short nearing all-time highs from 2019.

- Such a concentration of shorts might trigger another run on LME, potentially testing its credibility once again, should investors decide to unwind bearish positions, even if capped by the maximum 15% day-on-day change rule.

- Nickel has been the most volatile metal on LME for quite some time, although recent months have seen decreasing spreads between bids and offers at the close of trading, so there is hope for things to get better.

7. Lithium Prices Still Yet to Hit Rock Bottom

- The autumn season usually provides a demand uptick for lithium producers as restocking takes center stage before the winter months, but the already depressed 2023 market so far saw none of that materializing.

- Lithium prices continue to decline further, with Chinese benchmark lithium carbonate dropping lower to ¥161,000 per metric tonne ($22,000/mt), whilst lithium hydroxide edged lower to ¥150,000/mt ($20,500/mt).

- Down more than 70% since the beginning of 2023, lithium has been in a downward spiral on the back of increasing supply, with the collapse of the Albemarle-Liontown deal putting a dent in market consolidation.

- The outlook for lithium might not be as dark, with Fitch predicting a lithium shortage as early as 2025 on the back of Chinese EV lithium demand growing more than 20% year-on-year over 2023-2032, ending the current streak of oversupply.