OPEC Oil Reserves in Decline

1. US Becomes Europe’s Leading Diesel Supplier

- US diesel exports to Europe are set to reach an all-time high this month, undeterred by loading delays caused by Hurricane Beryl earlier this month and blazing a trail to European customers despite weakening middle distillate cracks.

- Platts expects the volumes of the transatlantic middle distillate trade to soar above 500,000 b/d, benefitting from Saudi Arabian exports edging lower in June-July, with Valero and ExxonMobil taking the lead.

- The United Kingdom is by far the largest buyer of US diesel, accounting for roughly a third of all Europe-bound exports, followed closely by the Netherlands and Belgium, home to the Amsterdam-Rotterdam-Antwerp trading and blending hub.

- Diesel cracks remain lukewarm in Europe after sliding from 28 per barrel in March to $16-17 per barrel currently, however the arbitrage remains wide open for US diesel as Gulf Coast refiners are firing on all cylinders.

2. OPEC Oil Reserves Decline as Exploration Lags Production

- Global recoverable oil reserves have declined over the past 12 months, with Rystad Energy seeing a decline of 52 billion barrels year-over-year to around 1,500 billion barrels on the back of insufficient discoveries and downward adjustments in existing discoveries.

- Saudi Arabia has seen the largest downward revision of any country, with proven and probable oil reserves coming in at 233 billion barrels, down 27 billion barrels from a year ago, equivalent to 71 years of current production.

- The most year-over-year improvements were coming from Argentina, with some 4 billion barrels being derisked thanks to intensified drilling operations across the Vaca Muerta shale play.

- Rystad Energy disputes OPEC’s claim that the oil group’s members hold 1,215 billion barrels of crude reserves, saying that a more realistic assessment would be 657 billion barrels, with most overreporting coming from Venezuela, Iran, Libya and Kuwait.

3. Canola Oil Is The Next Best Thing for US Biofuels

- The United States is on the brink of a canola oil craze after Chevron’s recent experiment to sow a winter crop of rapeseed before planting soy or cotton in Tennessee and Kentucky exceeded expectations and set the stage for a new major source of biofuels.

- Rapeseed has long been Europe’s preferred domestically grown biodiesel feedstock, however in the US soybean has been the most popular option, largely thanks to its higher protein-meal content which is an upside for animal feed production.

- However, soybeans are made up of only 20% oil whilst canola’s oil share is above 40%, prompting oil and agriculture companies to expand processing facilities or retrofit existing ones to accommodate higher canola oil flows.

- As canola harvests tend to increase subsequent wheat yields by as much as 20%, farmers across the Mid South would be looking towards the new commodity – Chevron’s JV with Bunge is set to increase sevenfold into the next harvest season.

4. West African Oil Investment Slumps As Erstwhile Appeal Fades

- The exodus of international oil companies has created a financing vacuum in West Africa as the region’s producers struggle to stave off production declines yet fail to entice new players to join the game.

- Nigeria has been a particular case in point – just this year, Shell and TotalEnergies have sold their stakes in one of the largest onshore projects in the country, SPDC, for $2.4 billion and $0.8 billion, respectively.

- Gunvor’s $800 million loan to the Gabonese government’s buy-out of 40,000 b/d worth of Assala Energy assets might suggest traders could step in to provide some liquidity, however trading houses rarely (if ever) invest in greenfield exploration ventures.

- Government interference, pipeline sabotage and theft have restricted oil companies’ appetite to invest, even TotalEnergies’ Preowei offshore discovery has been waiting for a final investment decision since 2019.

5. Delayed Freeport LNG Restart Weighs on US Natural Gas Market

- Freeport LNG is reportedly aiming to restart all its production lines in early August after its fin fan air coolers were damaged by Hurricane Beryl, having so far repaired two production trains.

- The longer-than-assumed repair works have led to the cancellation of multiple scheduled shipments, with the number of lost cargoes potentially as high as 17-20, putting a lot of downward pressure on Henry Hub.  

- According to Kpler data, Freeport LNG has exported 11.99 million tonnes LNG last year and this year it will most probably underperform last year’s outflows, currently standing at 6.6 million tonnes in January-July.

- Freeport LNG has been facing all kinds of troubles in resuming full operations, with a brief power outage knocking down operations at the plant’s pre-treatment facility on Wednesday this week.

6. China’s Coal Romance Is Starting to Falter

- China is gradually reducing the share of coal generation, with coal-fired plants having generated 59.6% of the country’s total electricity output in the first half of 2024, the first time on record that the fossil fuel’s share stands below 60%.

- Coal usage is nevertheless still increasing, in outright terms rising by 2.4% year-over-year to 2,793.5 TWh, however the relative rise of renewables (up 17% year-over-year to 1,751 TWh) is gradually overshadowing coal.

- Coal has been the back-up option for Chinese power generators for the past years as the country struggled with droughts, however this year’s spike in hydropower output has limited the need for reserve capacity.

- Considering China’s solar generation capacity has expanded by an average annual rate of 30% in the last five years, with wind seeing 18% for the same period, China’s power sector emissions could peak well before Beijing’s 2030 target.

7. Disappointed by China’s Plenary, Copper Prices Plunge Lower

- Copper prices have dropped below the $9,000-a-ton threshold for the first time since early April this week, with the global tech stock selloffs combining forces with an increasingly pessimistic outlook on China’s economic stimulus measures.  

- The key transition metal has lost 20% of its value over the past two months, with bullish bets on copper breaking through later in 2024 being gradually dismantled after the CCP’s Third Plenary last week.

- As per the CFTC’s last report, net length held by hedge funds and other managed money fell to 42,895 contracts, down from 75,307 contracts in mid-May.

- Copper inventories held in London Metal Exchange’s warehouses have risen above 240,000 metric tonnes, the highest reading since September 2021 and up 45% since the beginning of this year.