Asian Buyers Look To The Spot Market For Oil

1. Asian Buyers Seeking Spot Options Amidst Expensive OSPs

- Several Asian refineries surveyed by S&P Platts admitted they would try to tap into the spot market more extensively in 2022 as termed Middle Eastern OSPs remain too expensive.

- Currently, some 12 million b/d of crude is moving every month from Middle Eastern producers to the Asia Pacific and roughly two-thirds of it takes place under OSP-priced term contracts.

- The steep Dubai backwardation curve that persisted throughout 2021 compelled Middle Eastern producers to keep on ramping up official selling prices, effectively penalizing buyers in times of sudden forward structure changes.

- Partially, the drive to buy more cargoes on the spot market also comes from the increasing likelihood of seeing a nuclear deal coming to fruition in 2022.

2. Indonesia Coal Export Ban Sends Ripples Across Asia

- Only a week has passed since the world’s largest exporter of thermal coal, Indonesia, announced it would halt coal exports to keep its production at home as coal markets experience a period of unprecedented turmoil.

- ICE Newcastle coal prices have gained almost $50 per metric ton this week, trading only marginally below the $200 per metric ton mark.

- Routinely, half of Indonesia’s coal exports are supplied to China but Chinese prices saw very little change this week.

- The export ban might be lifted soon as other (albeit smaller) buyers of Indonesian coal, amongst them India and Japan, have informally asked Jakarta to reconsider its ban.

3. Brazil Continues to Lead Global FPSO Capacity

- The FPSO construction market has largely shrugged off the consequences of the COVID-induced slowdown, with 10 floating production and storage units coming onstream in 2022, Rystad Energy reports.

- Consolidating its status as the world’s leading FPSO play, Brazil will add three additional units this year as Buzios production continues to increase, half of what the Latin American country added last year.

- In terms of production capabilities, the P-80 unit in Brazil and the Yellowtail FSPO destined for Guyana will lead the global pack, both wielding a 225,000 b/d capacity.

- Following a still elevated tanker delivery rate in 2021, with more than 80 oil tankers floating off largely on the back of pre-pandemic orders, this year will see a slowdown in total delivery, so far only totaling some 30 tankers.

4. South Korea Labels LNG ‘Green’ to Bridge Transition Goals

- The government of South Korea has classified LNG as a green fuel in its sustainable fuel taxonomy, relying on gas as a bridging fuel as it seeks to phase out coal completely by 2050.

- South Korea still relies on coal for 40% of its electricity generation, whilst natural gas only accounts for 25%, with the rest taken up by nuclear (30%) and increasingly renewables.

- LNG deliveries to South Korea hit their highest-ever level in 2021, totaling 47 million tons of LNG, with Australia remaining the largest supplier.

- Interestingly, this year’s LNG inflows showed very little seasonality in contrast to previous years, with summertime buying roughly in line with the 2020/2021 and 2021/2022 winter seasons.

5. China's Carbon Market Fails To Impress

- Despite China launching its very own carbon exchange market in July 2021, there has been very little progress in implementing it, with only 40% of the country’s emitters currently covered.

- Going beyond the power sector (the only sector fully covered as of today), China’s Environment Ministry is seeking to add the refining, chemicals, aviation, and the steel industry by the end of 2025.

- The refining and petrochemicals sector accounts for 8.2% of China’s vast 14 gigatons of CO2eq. emissions and its inclusion into the carbon market is expected to take place in 2022-2023.

- Whilst the 2021 contract expired whilst trading around ¥50 per mtCO2eq. ($8/mt), the 2022 contract did see a marginal spike to $9/mt over the past two weeks, though it is still a fraction of the EUA/UK carbon prices.

6. Rising Coal Inventories Ease India’s Supply Concerns

- Going contrary to India’s proclaimed goal of decreasing energy imports, Indian companies are ratcheting up coal imports as still-low inventories require restocking.

- Adani, India’s largest trader of imported coal, has won the nation’s first coal tender in two years, organized by NTPC for the supply of 1 million tons, with Kolkata-based Damodar Valley reported seeking a similar deal.

- With annual coal demand expected to top 1 billion tons this year, with 70% of power generation being coal-reliant, New Delhi is struggling to meet rising needs from domestic sources exclusively.

- Domestic coal production rose to 75 million tons in December 2021, up 3.8% compared to the pre-pandemic level of December 2019, with Coal India accounting for 80% of total output.

7. Doubling Earthquake Rate Puts Shale Water Usage under Microscope

- According to a recent study carried out by Rystad Energy, the pressure on shale companies to optimize their oilfield water utilization will increase amidst intensifying seismic activity.

- Earthquakes in West Texas with a magnitude of more than 2.0 have almost doubled over the course of 2021, spiking year-on-year from 1,110 to 1,929.

- Treating the water that was used for hydraulic fracturing does help decrease seismic risks by avoiding underground injection, with treated water volumes assessed to be around 9% currently.

- Even though the Texas Railroad Commission has enforced stringent saltwater disposal restrictions in most-impacted counties (Culberson, Midland, Martin), the overall increase in shale drilling will most probably increase seismic risks over the coming years.