The perfect storm is brewing in the US diesel markets.

Refinery

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1. Rail Stike Threat Highlights US Energy Vulnerability

– The prospect of a national rail strike pushed US natural gas futures above 9 per mmBtu, amid fears of disruptions in coal by rail, underscoring the importance of gas in power generation .

– According to the US EIA, natural gas consumption in the United States will rise to an all-time high of 86.6 bcf per day in 2022, amid the closure of coal-fired power plants.

– With the deal between rail unions still tentative, a resurgence of strike risk would lift Henry Hub futures again as 70% of all coal deliveries to US power plants are They drive by rail.

– September is typically the month with some of the largest weekly gas stock builds before winter sets in: a surge in emergency gas generation could disrupt gas injection rates, adding another layer of pressure on prices.

2. The Middle East claims Europe’s diesel market

– According to Reuters, the Middle East is poised to become Europe’s biggest supplier of diesel as regional buyers prepare for the start of EU sanctions on Russian products in February 2022.

– The combination of extremely low stocks of middle distillates and remarkably healthy diesel cracks, still around $50 a barrel despite the recent price drop, makes Europe a coveted destination.

– European diesel imports have been increasing in September so far, rising to 1.65 million…

1. Rail Stike Threat Highlights US Energy Vulnerability

Gas

– The prospect of a national rail strike pushed US natural gas futures above 9 per mmBtu, amid fears of disruptions in coal by rail, underscoring the importance of gas in power generation .

– According to the US EIA, natural gas consumption in the United States will rise to an all-time high of 86.6 bcf per day in 2022, amid the closure of coal-fired power plants.

– With the deal between rail unions still tentative, a resurgence of strike risk would lift Henry Hub futures again as 70% of all coal deliveries to US power plants are They drive by rail.

– September is typically the month with some of the largest weekly gas stock builds before winter sets in: a surge in emergency gas generation could disrupt gas injection rates, adding another layer of pressure on prices.

2. The Middle East claims Europe’s diesel market

middle East

– According to Reuters, the Middle East is poised to become Europe’s biggest supplier of diesel as regional buyers prepare for the start of EU sanctions on Russian products in February 2022.

– The combination of extremely low stocks of middle distillates and remarkably healthy diesel cracks, still around $50 a barrel despite the recent price drop, makes Europe a coveted destination.

– European diesel imports have been rising in September so far, amounting to 1.65m b/d, with the Middle East controlling a growing share of the market.

– Russia used to be the main exporter of diesel to Europe, but has so far seen its share fall from 60% three months ago to 44% in September.

3. We need to talk about gas

Natural gas

– European TTF natural gas futures have found a reprieve around €200 per MWh as fears of inadequate supply have been partially eased by the EU’s new plan to cut consumption.

– Goldman Sachs forecast some optimism in the market that European wholesale prices would halve to less than €100 per MWh by the end of the first quarter of 2023, assuming a normal winter.

– On the other hand, the nationalization of Germany’s main gas importers, Uniper and VNG, has caused nervousness across Europe, stoking fears that more are on the way.

– The European Commission has committed to working on a more “representative” benchmark than the Dutch TTF, noting the current discrepancy between delivered LNG prices and the TTF.

4. India’s growth trajectory will soon make it the biggest buyer of coal

India

– According to the Central Electricity Authority of India, the Asian country will see an addition of 43-53 GW of coal-fired power generation capacity as it tries to quench skyrocketing demand growth.

– As such, India is catching up with China on its thermal coal imports and increasing deliveries from Russia and Indonesia, as is ICE Newcastle futures trading around 430-440 per metric ton.

– According to Wood Mackenzie, India’s thermal coal imports will increase by 7% this year to 158 million tons and will continue to increase in 2023, totaling 163 million tons.

– China, on the other hand, is cutting back on imports and is expected to buy just 182m tonnes this year, down 64mtpa from a year earlier, suggesting India could become the world’s largest sales market by mid 2020s.

5. EU windfall plan angers low emitters

EU

– The European Commission unveiled a new plan that would limit the profits of energy and fossil fuel companies, aiming for €142 billion in windfall profits and committing to a 5% reduction in energy demand in peak hours.

– While electricity demand has so far been fairly in line with 2021 figures, with August seeing a 1% year-on-year drop, Brussels has targeted a 10% cut in total electricity demand until the end of March of 2023.

– Energy generation companies that do not work with gas will see their benefits limited to 180 per MWh and the surplus will become public income, that is, to be reallocated by the EU.

– With this, it seems that the idea of ​​setting an energy price cap has been removed from the agenda as the authorities questioned the demand-reducing effect of such a measure.

6. US diesel stocks are low at the worst possible time

Diesel

– Record low middle distillate inventories may create the perfect storm for US diesel prices as the country heads into harvest season first and then into winter heating oil season.

– The ongoing backlog is hampering the rebuilding of diesel stocks, leaving inventories on the US Atlantic Coast 41% below the 5-year average, just as refineries head for fall maintenance .

– Despite solid cracks, shipping the fuel along the Colonial Pipeline is not attractive to suppliers as the two-week travel time creates unnecessary risks to cover the regressive curve.

– Similarly, in the Midwest, where diesel stocks typically peak in August before peak demand begins with the harvest season, inventories at this time are below the average post-harvest level.

7. Russian aluminum bucks the sanctions trend

Russia

– The United States and the European Union have increased imports of Russian industrial metals in 2022, despite logistical constraints and talk of depriving Moscow of revenue.

– According to data compiled by Reuters, imports of aluminum and nickel have increased by 70% in the Atlantic basin, and so far sanctions have not affected the industrial metals sector.

– European smelters such as Norsk Hydro and Novelis have pledged not to buy any Russian products by 2023, and supply deals for next year are being negotiated right now in what is generally called the industry’s mating season.

– However, without US/EU sanctions, Russian aluminum and nickel are expected to maintain their market share thanks to marginal discounts; indeed, US suppliers are poised to increase purchases as China’s metal exports shrink.



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