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The Energy Report: Chain, Chain, Chain

Published 12/20/2023, 01:54 PM
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Just when you thought the global supply chains were opening, the wait time for products became longer than the chains that Jacob Marley had to drag around in eternity.  Chain Chain Chain, Chain of fools.

The Houthi rebel’s attack on shipping in the Red Sea, which accounts for 12% of all global seaborne trade, has added substantial delays to shipping and is crying out for someone to do something about it. Vortexa reports the routes from India to northern Europe will now take 38 days instead of 24 days which is a 58% increase. If you’re shipping from the Middle East Gulf to northern Europe it’s now going to take 40 days, an increase of 74%. If you’re shipping from the Middle East Gulf to the Mediterranean the route is now going to take 39 days instead of 17 days which is a 129% increase. If you’re shipping from the Mediterranean to Southeast Asia  the route is going to take 40 days versus 23 days which is up 74% If you’re shipping from the Russian Black Sea to China the route is going to take 55 days instead of 31 days and from the Russian Baltics to the Indian route it’s going take 44 days instead of 27 days.

Oil Tidbits reported that there’s a massive logjam already now for ships that need to dock to pick up fuel and supplies at South Africa’s already heavily congested ports. By the end of November, cargo ships were already waiting 215+ hours at Port Nqura and 32 hours to enter Port Elizabeth. Meanwhile, the wait to enter the Durban port stood at 227+ hours.

The actions by the Iranian-backed Houthi rebels to disrupt international shipping lanes are not only an act of war but also an assault on the global economy. While the US is setting up an international coalition to try to stop the piracy, the question becomes whether they will go after Iran.Let’s face it when you look at the terror attacks from Hamas and now the Houthi rebels on the innocent, all roads lead back to Iran. The Biden administration must admit that their appeasement of the Iranian regime was a major mistake that has had disastrous consequences for the world. Allowing Iran to get access to funds and allowing them to reap billions from oil revenue as the US turned a blind eye has allowed Iran to fund the terror around the world. If they want to stop it, they must hold Iran accountable.

For the oil trade, it is a wake-up call. Last month, the market declared that war premium was unnecessary, but we are seeing that war premium forced back into the price. War premium is a real cost. Because we are seeing shipments being delayed, taking longer routes is a real cost.

 

Bloomberg News reports, “The cost of insuring vessels that will transit the Red Sea jumped again this week after mounting attacks in the region forced some ships to avoid the vital waterway, underscoring the need to secure an area pivotal to global trade. Cover has now surged to about 0.5% of the value of a ship’s hull, according to three people involved in the market. That’s a sharp increase from earlier this month when costs were about 0.1% to 0.2% of the hull value.” Bloomberg News reported that, “for a vessel costing $100 million, an expense of 0.5% translates to an insurance cost of $500,000 per voyage. This applies to merchant ships entering routes in the Southern Red Sea or Gulf of Aden.”

 

The impact is already being felt at the gas pump as you probably have noticed. After this steep November drop in gasoline prices, we’re already starting to see an increase. We’ve been pointing out that crack spreads have been very solid for both diesel and gasoline which is suggesting all the talk about demand destruction was greatly exaggerated. So even as the conflict in the Red Sea has turned the market around, we believe that the fundamental outlook for oil is bullish regardless. The increased drama is going to add more to the upside over the long run unless we get an immediate retreat from the Houthis and at this point that doesn’t look likely. We hope that you used the Thanksgiving Day crash to lock in prices for the rest of the year and next.

 

Today the market will get the Energy Information Administration report to give us a bit of an idea of where this market is going. Based on surging crack spreads, one would assume that the demand for products is outstripping demand or at least demand expectations.

The API report was mixed. The API did report a slight 939,000 barrel build in crude supplies on the back of a whopping 1.853 million barrel increase in Cushing, OK where supplies had been falling pretty dramatically. We did see reports that the Biden administration has purchased another 3 million barrels for the Strategic Petroleum Reserve which is another supportive factor for oil but at the end of the day they still have a long way to go to replenish those depleted supplies.

The API showed a bigger-than-expected increase in distilled inventories coming in at 2.738 million barrels. One would expect that that number will be smaller next week as the export window for US diesel to Europe is going to be very attractive.

Gasoline inventories did increase by only 669,000 barrels. There is a signal that gasoline demand is solid.

It’s almost funny as I hear the debate from different weather forecast services. It’s almost like they are taunting each other with some predicting a much warmer January than normal and others predicting a deep freeze. We have not seen this type of debate between those who are rooting for cold and those who are rooting for warmth since the sibling rivalry between the Snow Miser and the Heat Miser in the 1974 animated “Year Without A Santa Claus.” Yet the weather will have a dramatic impact on natural gas prices and may seal the fate of beleaguered natural gas producers.

 

EBW Analytics says that, “The NYMEX front-month contract is up more than 16% from Wednesday’s intraday lows on a technically-driven rebound and a potential break cooler in the 11-15 day forecast window from the blowtorch December weather pattern. Still, overbearing near-term warmth and an exploding North American storage surplus towards 750 Bcf above year-ago levels into year-end offer caution. Over the next 30-45 days, the prospect of a chillier early January, ebbing supply, strong LNG demand, and substantial speculator short exposure collectively suggest that a medium-term turn higher should not be ruled out.

 

Still, the enormity of the storage surplus anticipated during the 2024 injection season remains foreboding—and NYMEX futures may ultimately return any near-to-medium term gains into the end of winter. Faltering weekly average electricity demand touched five-year minimum levels amid balmy mid-December weather, but low prices and normalizing weather into January could lift power sector gas burns 3.0 Bcf/d month-over-month.

 

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