Europe Increasingly Reliant on American Diesel

Numbers Report – July 12, 2024

In the latest edition of the Numbers Report, we will take a look at some of the most interesting figures put out this week in the energy and metals sectors. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Intense Heat Raises Risk of Refinery Upsets Around the World

- Rampant heatwaves across the world are threatening refinery operations as most refineries were designed in the 1960s and 1970s when general temperatures were lower. - Extreme heat could lead to throughput being cut by as much as 15% according to refinery analysts, with the US East Coast and Northwest European plants particularly exposed. - Equipment designed to remove process heat in the cooling towers and air-cooled heat exchangers would come under intense stress in temperatures above 35° C (95° F), the upper ambient temperature for most European refiners. - Ever since Russian oil was sanctioned by the US and EU, Europe’s average refined crude turned much lighter, producing more naphtha – the product that requires the most cooling in a refinery, aggravating refiners’ woes.

2. European Buyers Are Guzzling US Diesel Before Hurricane Impact

- European buyers are increasingly relying on US diesel as American refiners shipped record volumes of the middle distillate in the final week of June, spurred by weaker domestic prices and cheap freight rates. - A total of 39 diesel and gasoil cargoes were shipped to Europe between mid-June and July 3, according to S&P Global, just in time before Hurricane Beryl shut most Gulf Coast ports. - The high diesel exports are unlikely to continue as European diesel futures flipped to contango in early July, a sign of struggling demand, and regional inventories remain some 10% higher than 2023 levels. - The United Kingdom has become the largest buyer of US diesel in Europe, importing 85,000 b/d in the first half of 2024 according to Kpler, with Valero being the most active exporter.

3. Refineries Back to Work After Beryl Wreaks Havoc in Texas

- Hurricane Beryl is believed to have caused material damage of up to 30 billion, leaving millions of homes without access to electricity for days, however, the oil industry escaped large-scale physical damage with most refineries and oil production back to operations this week. - Just before Hurricane Beryl made landfall, US Gulf Coast refiners reached their highest utilization rate since June 2023 at 97%, with the swift rebound in refining lifting the pressure off gasoline and diesel cracks. - The largest refinery in Beryl’s path was the Marathon Petroleum’s 631,000 b/d Galveston Bay refinery which suffered a power outage Monday, however apart from occasional flaring and secondary unit outages damage seems to be limited. - The port of Freeport was the closest to Beryl’s landfall with larger potential for the storm to have blown obstructions into its waters, probably making it the last port to be reopened at some point this weekend.

4. Chile’s Copper Production Woes to Continue in 2024

- Copper production at Chile’s state-controlled mining giant Codelco continues to decline even after hitting a 25-year low in 2023, squeezed by project delays at key mines, recurring accidents and management missteps. - Every single month throughout the first half of this year, Codelco’s output has been lower year-over-year, and it was only in May that the Chilean firm managed to break through the production threshold of 100,000 metric tonnes per month. - Chile is by far the leading copper producer globally, well ahead of Peru and the Democratic Republic of Congo, accounting for a quarter of worldwide output, boosting copper reserves of 190 million tonnes. - A fatal accident at the Radomiro Tomic mine has hampered production at Codelco’s second largest mine this year, whilst the much-anticipated launch of the Rajo Inca project is now believed to take place in 2025.

5. Outflanked by Renewables, Nascent CCS Industry Needs Investment

- The world would need to invest much more into carbon capture if it is to meet net zero by 2050, with Bloomberg assessing that if capacity is to reach 8 gigatons per year by then, investments into CCS would need to expand by a factor of 46. - The cost of carbon capture has been one of the main impediments of large-scale rollouts, with carbon capture on a US gas-fired power plant increasing electricity costs by 54%. - For industrials, carbon capture is deeply loss-making currently as carbon futures prices hover around €75 per tonne of CO₂, yet the steel or cement industries would require at least €100/mtCO₂ to make it work. - Renewables compete directly with CCS development as a lower market share and utilization of thermal power plants raises the cost per tonne of captured carbon, making more commercial sense in industrial processes that cannot do without fossil fuels, such as metals or cement production.

6. Cheap African Iron Ore Supply Set to Depress Prices Soon

- A wave of new African supply is set to depress the iron ore market next year, marking a grave shift in mostly rangebound trading that has kept Asian prices around the $100 per metric tonne mark. - The world’s largest untapped iron ore deposit in Guinea’s Simandou mine could deliver 5 million tonnes in 2025 already, ramping up to a sizable 90 million tonnes per year in 2028. - Low production costs at Simandou, estimated to be around the same $20/tonne that the most efficient iron ore mines of Rio Tinto and BHP operate with, will gradually push out higher-cost production globally. - The price squeeze is aggravated by the lukewarm prospects of Chinese economic growth as Beijing is trying to cap steel production, fights overcapacity across the industry and seeks to expedite its emission-cutting targets.

7. Southeast Asia Doubles Down on Offshore Gas

- Southeast Asia is poised to see a flurry of investment activity as Rystad Energy expects investments into offshore gas production to reach $100 billion over the next five years, more than double the $45 billion investments in 2014-2023. - As Southeast Asian nations seek to reduce gas imports, the region’s gas resources from FIDs are set to rise to 58 trillion cubic feet by 2028, with Indonesia becoming the main driver of new projects. - Given that deepwater offshore fields in the region tend to have a high carbon dioxide content (5% or more), most Indonesian and Malaysian offshore projects would require prices around $6 per mmBtu to be profitable, a problem in case the supply growth of 2025 depresses global pricing. - Both Malaysia and Indonesia have many depleted legacy fields that could be used as potential CO₂ storage sites, carbon capture and storage might become an inevitable part of new developments by creating a new revenue stream.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.