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Power Up: The Oil Market's State of Mind

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Nov 3 - David Gaffen Editor-in-Charge, Energy Markets Hello Power Up readers! It’s a busy time and oil markets seem robust given low inventories and the skies turning a hazy shade of winter. Here’s what’s happening. FUNDAMENTAL THINKING A Market Less Obsessed With Macro

A curious thing happened in late Thursday’s trading. U.S. Federal Reserve Chairman Jerome Powell gave markets the day’s headline - that it was “premature” to consider pausing rate increases. This isn’t a surprise; the Fed is obviously not finished. But what’s interesting is that the stock markets, dollar and bond markets all freaked out, but the oil market held together. Now, the oil market had already settled for the day, but if anything, that should have exacerbated the volatility. But oil went from a gain of roughly $1.50 a barrel to up about 90 cents, which isn’t that much. To some, it meant a market shifting away from worrying about the dollar’s vacillations and more on the fundamentals - most of which point to tight markets. U.S. inventories? Down again, and very low inventories of heating oil in the U.S. Northeast. The Europe-and-U.S. move to cap Russia’s oil profit could take 500,000 to 1.5 million barrels a day off the market. And the Biden Administration is basically out of bullets from its strategic reserves, while OPEC+ just cut its own output target (and fell short of its targets again last month). “I’d rather be positioned for tail risk on the upside - if I could only do one thing let’s protect that tail. I’m more nervous about that upside than the downside,” said Rebecca Babin, senior energy trader at CIBC Private Wealth US. UNIPER’S BLACK HOLE German gas company loses $40 bln Uniper, the German gas importer that is set to be nationalized amid the continent’s energy crisis, lost $40 billion this quarter - Germany’s largest ever corporate loss, with the company’s chief financial officer saying it has “left massive scars” on their results. How did this happen? Well, the company was the facilitator of Russian gas imports - and Moscow stopped supplies to Europe earlier this year. So Uniper had to go out and replace previous gas volumes already contracted for with spot supplies, which were at much higher prices. That snowballed into daily losses of more than 100 million euros ($100 million) a day as prices spiked - and they see future losses, too. The German government is set to take it over, and so those losses to come will be passed onto the government.

Adding insult to injury, the company was a co-financier in the Nord Stream 2 pipeline from Russia that never did start up - and was later damaged in explosions whose perpetrator is still unknown. OPEC: CALL US. REALLY. Hello Hello Baby I Can’t Hear a Thing Fresh off their decision to trim output targets by 2 million barrels a day, various ministers from the Organization of the Petroleum Exporting Countries have fanned out in the last day to remind the world - again - that it needs to invest more in oil, and by the way, call us if there’s a problem. Yes, they really said the latter - Suhail al-Mazrouei of the United Arab Emirates said in Abu Dhabi that OPEC+ can always be trusted to balance supply and demand, adding that “we are only a phone call away if the requirements are there.” Were it ever that simple. Goldman Sachs pointed out last month that OPEC had never entered a major production target cut with OECD inventories this far below the five-year average in the last three decades. And it’s not as if the United States is alone here; Indian officials also expressed their concern at the cuts, saying that it adds uncertainty to markets to move when physical markets are as tight as they are. Separately, Indonesia’s Finance Minister Sri Mulyani Indrawati recently told a local paper that he’d be supportive of the U.S.-led price cap on Russian oil because it would help keep his costs down. Nevertheless, OPEC is staying on message - a message that also includes, by the way, the admonishment that the world isn’t spending enough on oil investment to prevent future crises. …BUT EVEN THEY’RE GOING GREEN UAE, US reach deal for $100 bln in clean energy The United Arab Emirates and the United States - two of the world’s biggest oil producers - reached an agreement to spend $100 billion on clean energy projects to add about 100 gigawatts of power generation globally by 2035. That deal was signed in Abu Dhabi, same place as the chatter from other ministers - and basically, the two countries get together to provide project management and funding for big sustainable projects elsewhere. There’s a good deal of momentum in the U.S. for projects like this now, following legislation centered around infrastructure spending and around climate-related investment, but this shows that it is not limited to U.S. borders. The UAE and U.S. are hoping to get involved in projects that include carbon and methane management and advanced nuclear reactors including small modular reactors, and industrial and transport decarbonisation. QUOTE Demand Destruction "A lot of companies are just quitting production. They actually demand destruct." Patrick Lammers, management board member at utility E.ON, at a late October conference in London, on European manufacturing activity. THE WINTER OF DISTILLATE CONTENT Supply worries in U.S. Northeast, Europe The winter is approaching fast, and areas of the world that rely heavily on heating oil and other distillate fuels are looking down at mostly empty tanks, a concerning prospect that has elevated the prices of those fuels. Right now the profit to produce heating oil is a still-insane $67 a barrel, compared with the $23 profit margin for gasoline (also pretty high), and the various hot, or cold, spots in the world have little cushion in case of extreme cold. The Northeast, the biggest user of heating oil and where a heck of a lot of people live, is sporting diesel prices above $5 a gallon, while flows from the Gulf Coast in the summer were lower than usual for that time of year. Further, global distillate supply is also being affected by the legacy of the changes in the International Maritime Organization’s rules on sulfur content in ocean liner fuel (commonly called bunker fuel). The fuel in question may be still called bunker, but RBN analysts note that about 700,000 barrels per day of global middle distillate supplies are going to those ships - which squeezes supply even further.

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