High global gas and LNG prices are impacting the power mix in countries as far apart as Germany and Bangladesh. Plus, Middle East-China tanker freight rates, US gas prices and Asian refining.
1. Coal surges in German power mix as wind drops, gas price soars
What's happening? Lignite was the main source of electricity generation in Germany in the week to Aug. 8, with renewable generation sharply lower across the period. Margins for lignite and hard coal-fired generation stood at Eur12.24/MWh on Aug. 6 versus minus Eur13.77/MWh for gas-fired generation, ensuring coal ran ahead of gas where possible. Increased fossil-fired power in general is in part due to a below-norm year for wind speeds in Europe. On Aug. 12 Orsted reported an average offshore wind capacity factor of just 29% for H1 2021 vs a five year average in the UK of around 38%.
What's next? With the gap between coal and gas generation spreads so wide there is every chance coal will continue to run ahead of gas. Ahead of the season change and an expected improvement in wind input, gas looks set to remain the price-setting unit, with front-month German power trading as high as Eur96.00/MWh, a 13-year high. On Aug. 11 German utility Uniper said its CO2 emissions had risen 19% in H1 due to a 45% hike in fossil firing year on year (see chart). It expected similar levels of coal generation for H2 2021, maintaining H1's higher carbon intensity.
2. High spot LNG prices could drive oil switching for power generation in South Asia
What's happening? With the recent rise in spot LNG prices, HSFO is becoming cheaper than LNG for power generation in Asia. This price signal is strong and consistent from September to March, effectively covering the entire winter period.
What's next? S&P Global Platts Analytics expects countries in South Asia to take advantage of the situation and switch some volumes from imported spot LNG to oil for power generation. In Bangladesh and Pakistan there is a combined switching potential of about four LNG cargoes per month. Platts Analytics assumes initial switching will start in September and reach full potential a couple of months later. The volume to be switched also depends on top-line power demand, which could be at risk as both countries are under partial lockdown due to COVID-19.
3. Shipowners idle tankers amid weak VLCC freight on Persian Gulf-China route
What's happening? China's high onshore stock levels and oil price have deterred the world's largest crude oil importer from chartering ships in the market. The weak VLCC market has left many VLCC owners with negative earnings for a prolonged period of time. Freight on the benchmark Persian Gulf to China route has traded in a very narrow range of Worldscale 31.5 to w33 this year. Although bunker prices have spiked, owners are unable to transfer the higher operating cost to charterers. To cut losses, some VLCC owners have decided to lay-up their ships – that is, temporarily idle and remove them from commercial service. This will result in some tonnage being removed from commercial operations till freight levels improve.
What's next? According to Platts Analytics, stocks from inventories were drawn down in July and August in China, while fresh stock buildup is expected to resume later this year. On the flipside, with new coronavirus variants emerging, Platts Analytics has revised down growth for the third quarter of 2021 due to restrictions imposed in Asia in response to the resurgent virus. Due to the glaring imbalance between tonnage supply and loading demand, a strong recovery isn't expected in the short term even with the OPEC+ gradually easing production cuts. However, VLCC owners are pinning their hopes on small gains being made during the typically strong winter season that spurs crude demand.
4. Enduring US gas storage deficit fuels winter price rally at Henry Hub
What's happening? US natural gas storage remains at a persistent deficit this summer with less than three months remaining for the current injection season. For the week ended Aug. 6, inventories are estimated at 2.776 Tcf—178 Bcf, or nearly 6.5%, below the prior five-year average, according to the latest report from the US Energy Information Administration. For the coming two reporting weeks, Platts Analytics is forecasting injections to fall a cumulative 12 Bcf short of the historical average, further widening the inventory shortfall.
What's next? Rising alarm in the forwards markets over this season's storage deficit is fueling a sustained rise in winter gas prices at the Henry Hub. For the peak-demand month of January 2022, gas prices have recently settled as high as $4.40/MMBtu. If realized, the upcoming January gas price would be the highest monthly average on record for the benchmark index in over seven years, S&P Global Platts data shows. With annual production and supply gains forecast to outpace demand growth only narrowly this winter compared to last, Henry Hub forwards prices could see even more upward pressure in the weeks ahead.
5. Asian refiners see jet fuel as most profitable product post pandemic
What's happening? Major Asian refiners are cautiously optimistic jet fuel sales will significantly boost their profit margins from the first quarter of 2022 as the companies broadly expect international flight routes to rapidly open up from February next year, anticipating over half of East Asia's population to be vaccinated by then. Out of 11 major Asian refiners surveyed by S&P Global Platts, including PetroChina, SK Innovation, ENEOS, Idemitsu, Petronas, S-Oil, Pertamina, PTT and Formosa and others, seven expect Asia's oil product demand to climb back to 2019 levels by February-March 2022, while three companies see a full recovery happening by May-June 2022.
What's next? Asian refiners are especially looking forward to reviving their jet fuel production and sales when the pandemic comes to an end as aviation fuel tends to yield stronger profit margins than other fuel products. The slew of movement restriction measures enforced across many states and countries across East Asia and the continued risk of a resurgence of COVID-19 cases will likely hamper steady production, sales and exports of middle distillate fuels for the remainder of 2021. However, as vaccination gathers pace in the region, this will eventually lead to full population mobility and active international travels by first quarter next year, trading and fuel marketing managers at four survey participant companies said.
Reporting and analysis by Henry Edwardes-Evans, Vickey Du, Andre Lambine, Matthew Boyle, J Robinson, Philip Vahn, Surabhi Sahu and Jasper Chan