The global oil supply path into 2021 is in focus this week, along with the impact of storms on US oil output. Away from oil, we also survey they outlook for LNG demand in Asia and the European power mix, and look at the key factors driving the copper market.
1. OPEC+ compliance, Libya output to drive global oil supply growth in Q4
What’s happening? Global oil supply has increased by 3.6 million b/d from July through September after dropping more than 13 million b/d from April to June. This is despite a more active hurricane season in the US Gulf, which has temporarily removed upwards of 100,000 b/d of crude oil production. OPEC+ has carefully managed providing additional barrels to the market as oil demand has recovered from peak pandemic impacts seen in Q2.
What’s Next? Supply increases are set to slow starting 4Q 2020 as OPEC+ pushes for compliance and cohesion. OPEC will meet towards end-November to review market demands and quotas. Production increases in Libya are expected to be choppy and sustainability is uncertain. Geopolitics will take center stage with US presidential elections in November. If the Democrats win the White House some sanctioned barrels (Iran, Venezuela) could re-enter the market. S&P Global Platts Analytics forecasts show non-OPEC supply growth over 2020 and 2021 will be limited to few key areas – Norway (300,000 b/d), Brazil (320,000 b/d), Guyana (120,000 b/d), and Canada (85,000 b/d). Declines will be widespread with the US seeing the biggest falls, of 865,000 b/d in 2020 and more than 1.14 million b/d in 2021.
2. High hurricane count slashes US Gulf oil production
What’s happening? Hurricane Delta is on track to surpass Hurricane Laura as most disruptive so far this season. As of Oct. 9, 92% of crude oil and 62% percent of natural gas production was shut in. Production will begin to return after the storm passes, but it can take as long as 2-3 weeks for full ramp-up, depending on damage and storm severity.
What’s next? With 25 named storms, it is the second most active Atlantic hurricane season on record, behind only the 2005 Atlantic hurricane season. It is also only the second tropical cyclone season to feature the Greek letter storm naming system, with the other season again being 2005. Production outages this season will rival peak levels seen in 2005 and 2008. The US hurricane season runs through end-November, though the probability of landfalls and storm intensity is past peak as weather turns cooler and the jet stream pushes deeper south out of Canada.
3. Asian LNG prices hit 11-month high on winter procurement, outages
What’s happening? The Platts JKM for November was assessed at $ 5.535/MMBtu Oct. 9, its highest in 11 months, after spending much of the year languishing in the $2-$3 range. Some buying interest has emerged from North Asian buyers like Japan and South Korea. There was also a flurry of activity from Pakistan, with tenders being issued for at least nine spot LNG cargoes for this winter in a single week. The country’s government has allowed unutilized LNG terminal to be auctioned, and domestic gas production has been on the decline. On the supply side, Norwegian facilities have been affected by strikes and accidents, and US LNG terminals and gas production shuttered last week in anticipation of Hurricane Delta making landfall.
What’s next? Asian LNG markets are expected to continue tightening due to global producer outages and an uptick in winter procurement from regional buyers. There are indications of healthy downstream demand in North Asia, although high storage inventories are capping demand growth and much of the peak winter demand will depend on colder temperatures going forward.
4. European power demand down 6% in 2020, but Q4 tightness in focus
What’s happening? Power demand in Europe’s five biggest markets has fallen 6% in the first three quarters of 2020 as the coronavirus pandemic reduced economic activity, data analyzed by S&P Global Platts show. The 85 TWh demand equates to the entire nine-month consumption of the Netherlands. Nuclear absorbed much of the drop, with generation down 61 TWh, while wind and solar output increased 41 TWh year on year. Coal continues to beat a steady retreat, down 39% or 60 TWh YoY, while gas generation was stable on year and up over a two-year view. Gas-fired generation now accounts for over 20% of power demand in the five markets, becoming a significant swing factor in the traditionally coal-dominated German market.
What’s next? While electricity demand is unlikely to see on-year gains before 2021, all eyes are on supply dynamics going into Q4 2020 after warnings of regional tightness across northwest Europe in September. French nuclear has been ramping up sharply and could soon erase deficits running since November last year, while new wind capacity will feed into the general thesis of greater surpluses at times, but also greater volatility when the wind drops. September price spikes reminded the market that lulls in wind can affect the whole of northwest Europe, prompting price-inflation competition on interconnections between the UK, France, the Netherlands and Belgium. Rising gas and falling CO2 prices have reduced gas generation’s advantage over coal, but clean spark spreads still justify the recent return of CCGT units in Germany and the Netherlands.
5. Copper keeps rising despite inventories, coronavirus woes
What happened? Copper has been on a run higher since the initial pandemic-induced sell-off. Back in April, mine closures boosted the metal, but now there are a variety of factors at play including Chinese stimulus spending, the reopening of economies and general buoyancy in global equities. Another boost came from the UK government’s announced plan to power every home in the UK with wind power by 2030. The turbines required can have anywhere up to 6 mt of copper in them. This news sent the price even higher over the past week, helping copper to recover from a brutal sell-off linked to an increase of around 100,000 mt of metal in LME-registered warehouses.
What’s next? The bullish factors listed above appear to be negating the fact that global copper stockpiles are up, and a second wave of coronavirus is sweeping across Europe. The metal could go either way, but for now many seem to be positioning for a break towards $7,000/mt.
Reporting and analysis by Alan Struth, Sami Yahya, Ashutosh Singh, Eric Yep, Andreas Franke, Ben Kilbey