Oct 10 / Victor Arduin

Energy Weekly Report - 2023 10 06

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"The energy market is heading towards a week-on-week loss, prompted by an increase in gasoline stocks, sparking concerns about lower demand in the last quarter of 2023."

The energy complex faces losses this week, but fundamentals remain strong

  • Oil stocks are at their lowest level since December 2022, suggesting that it is too early to be pessimistic about the energy complex.
  • The diesel market is more likely to experience scarcity than lower demand in the coming months, based on historically low stocks in Europe and the United States.
  • Although high interest rates are a force that could harm the world's energy demand, their effects are not likely to be felt in the last quarter of the year.

Introduction

The energy market is heading towards a week-on-week loss, prompted by an increase in gasoline stocks, sparking concerns about lower demand in the last quarter of 2023.

Despite signaling that prices of gasoline may drop in the coming weeks, easing inflation in the country, it also be a sign of economic weakness with U.S. government data showing the four-week average of gasoline demand at the lowest seasonal level in 26 years.

Even the announcements by Saudi Arabia and Russia, confirming that the current voluntary supply cuts of 1.3 million barrels per day (bpd), werent not sufficient to drive prices higher. Nevertheless, energy stocks remain very low indicating the prices may go up again soon.

Image 1: Higher Premium for Nearer WTI Contracts (USD Spread)

Source: Refinitiv

Image 2: U.S. Weekly Gasoline Demand (M bpd)

Source: EIA

More scarcity than lower demand is more likely in the diesel market

In recent days, the energy commodities markets have displayed a bearish reaction, primarily driven by a significant increase in gasoline stocks, surpassing expectations due to weakened demand. However, it's crucial to note that oil stocks are currently at their lowest levels since December 2022, indicating that it might be premature to adopt a pessimistic outlook for the energy complex.

Looking ahead, the diesel market is more likely to face scarcity rather than reduced demand in the upcoming months. This prediction is based on historically low stock levels in Europe and the United States for this time of the year. The latest report from the Energy Information Agency reveals a 1.3 million barrel decrease in US stocks, approximately 13% below the 5-year average.

Image 3: Refinery Profit Margin (Barrel USD)

Source: Refinitiv

The rising U.S. production has enabled the country. to become a net exporter. Mexico stands out as one of the most significant consumers of U.S. natural gas, driven by its strategic advantage of readily accessible pipeline infrastructure. This has resulted in a rapid upswing in exports to the southern neighbor.

According to data from Wood Mackenzie, Mexico's electric power sector has experienced a steady annual growth rate of 3% in recent years. While Mexico successfully bolstered its domestic production in 2022, reducing its dependence on American LNG exports, but this year's demand surge has boosted imports from the U.S. to bridge the supply gap.

Image 4: Backwardation of Heating Oil vs. Middle Distillate Inventories in the U.S.

Source: Refinitiv

In Summary

The demand for diesel is entering its peak season, which could further strain already low inventories if production does not increase. This could lead to higher prices for diesel as well for other goods and services that rely on diesel as a fuel.

The tight global supply will benefit refineries that are still achieving favorable margins from refined products. Despite diesel being the primary margin driver for the last quarter, jet fuel is also performing well due to the increasing number of flights around the world.

Also, the market could find some relief with Russia's recent announcement that it has partially lifted the ban on diesel exports for shipments delivered to ports via pipeline, under the condition that companies must sell a minimum of 50% of their diesel production within the domestic market. This development is anticipated to bring about some normalization in the fuel market.

Nonetheless, it's crucial to take into account that interest rates are currently elevated, constituting a primary risk factor for energy demand. This is particularly significant given the strong correlation between energy demand and the economic cycles of countries, potentially resulting in decreased prices for energy products.

Weekly Report — Energy

Written by Victor Arduin
[email protected]
Reviewed by Natália Gandolphi
[email protected]
www.hedgepointglobal.com

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