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Power Up: The condition of the oil market’s condition

(Power Up is published on Mondays and Thursdays. Think your friend or colleague should know about us? Forward this newsletter to them. They can also subscribe here.) David Gaffen Editor-in-Charge, Energy Markets David.Gaffen@thomsonreuters.com

Hello Power Up readers! If you can tear yourself away from the World Cup, we’ve got a few things going on - the coming price cap on Russian oil sales, India’s coal binge, and the oil market turning upside down here. Qatar, meanwhile, has signed a big LNG deal with China, in between all of the football. Power Up will not be published this Thursday due to the U.S. Thanksgiving holiday - we will see you all next week!

Red Letter December

G7 Price Cap on Russia Approaches The European Union expects it will have its regulations completed in time for the G7 price cap on Russian crude oil purchases set for December 5 - and from there, who knows what will happen. That’s the day the EU will ban Russian crude imports, and is expected to use its leverage to squeeze Moscow’s oil revenues that have remained relatively stable despite other sanctions ever since that nation invaded Ukraine in February. What happens from there? Russia will work to find enough shipping vessels to transport crude - and in February, refined products - worldwide to avoid shutting in substantial amounts of production, and it is still not clear how either markets will react or Russia will react. Analysts have suggested dire consequences for the world, envisioning crude prices surging to more than $150 a barrel or more - but the market so far doesn’t sense that, given prices have been sinking for the last several days.

It Takes Two to Contango

Market structure upended in oil futures selloff The market’s “structure” is one of those things that can make people’s heads spin, but it’s important to pay attention to. Since mid-May of last year, the current U.S. crude oil futures contract has traded at a higher price than the contract expiring a month down the road. That’s known as “backwardation,” and it’s a signal that people are more worried about current supply than what they need in the coming months. That shift last year was a signal of a tightening oil market due to rebounding economic demand and production that wasn’t keeping pace. But that all accelerated after Russia invaded Ukraine - and the front-month U.S. crude contract soared to as much as $4 more than the next month’s contract. That’s not a signal of a need for a little more supply - that’s pretty much a panic. It’s been a long road since then, but on Friday, the market put its thing down, flipped it and reversed it. What happened? Well, U.S. crude futures this morning were at $76.11 - but the next contract is at $76.33, in a condition known as “contango”. On Monday, Brent joined the party, with the front-month also falling through the next-month contract, if only briefly, as the market is selling off dramatically. What it means is the near-term worry about oil demand has declined somewhat. That could be for a few reasons - slowing economic growth or output finally starting to pick up - but it represents a normalcy the market hasn’t seen in a while.

Europe’s Sudden Glut

Refiners Find Themselves Flush With Crude Part of the reason for this structural change in the market is that Europe’s biggest refiners have found themselves oversupplied with crude. Traders say those refiners appear to have bought much more than needed on the expectation that Russian supplies just won’t be available following a planned December 5 ban on that supply by Europe. "(European] refiners seem to have overbought in November and December, probably because of fears around Urals," one trader said, noting that French strikes and refinery maintenance also added to the overhang. The physical markets suggest that this isn’t made up; U.S. crude imports have been running strong for months, along with exports out of Latin America, to Europe. China plays a role in the flows as well, as they have been asking for less crude from Saudi Arabia due to their slowing demand. But it’s not as if there’s an abundance of supply everywhere; U.S. inventories of both diesel and gasoline remain very low, and the U.S. is all-but-done with its release of roughly 180 million barrels of its surplus reserves to tamp down gas prices. And with the December 5 red-letter day coming up, European traders are buying lots of Russian diesel - with loadings headed to the Amsterdam-Rotterdam-Antwerp (ARA) storage region hitting 215,000 bpd from Nov. 1 to Nov. 12, up by 126% from October, according to Vortexa data.

India’s Coal Binge

Using More Than Many Others India's coal-fired power output is surging - faster than any other Asia-Pacific country since Russia invaded Ukraine in February, and underscores just how difficult it will be to transition away from the world’s dirtiest fossil fuel. Coal fuels nearly three-quarters of the power output of India - and worldwide coal use has surged since the rebound from the pandemic and Russia’s invasion, with the International Energy Agency estimating that coal was contributing to the largest-ever annual increase in global energy-related CO2 emissions in absolute terms in 2021. The IEA puts India’s coal consumption at 1,053 metric tons in 2021, which was an all-time high, and a Reuters analysis shows that India is the only major country in Asia besides Japan where the contribution of coal-fired power in overall electricity production increased in the six months since March, the data shows. The increase in coal use is due to rising power demand.

Qatar-China Handshake

Biggest LNG exporter and importer ink major deal QatarEnergy and China’s Sinopec have signed a 27-year deal for the former to supply the latter with liquefied natural gas (LNG), the longest such agreement so far – as China locks down long-term pacts amid the volatile natural gas markets. "Today is an important milestone for the first sales and purchase agreement (SPA) for North Field East project; it is 4 million tonnes for 27 years to Sinopec of China," QatarEnergy chief Saad al-Kaabi told Reuters in Doha. LNG is becoming the modern world’s version of salt. Qatar is already the world's top LNG exporter, and China last year boosted its daily imports to 10.5 billion cubic feet per day (Bcf/d), up 19% from the previous year and vaulting it past Japan to be the largest importer, according to the U.S. Energy Information Administration data. QUOTE

Close Call in Ukraine: Nuclear Plant Shelled

"We were fortunate a potentially serious nuclear incident did not happen. Next time, we may not be so lucky." --Rafael Grossi, director general of the International Atomic Energy Agency, after shelling near Ukraine's Zaporizhzhia nuclear power station over the weekend Power Up is published on Mondays and Thursdays. Think your friend or colleague should know about us? Forward this newsletter to them. They can also subscribe here.

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