Russian gas shutoff fears and talk of more COVID shutdowns in China have led to a pretty volatile start to the oil trading week. A Russian court threatening to cut gas supply is causing fears in Europe that this might be a precursor to a much larger shut-off in the middle of the upcoming winter. Radio Free Europe reported last week a Russian court ordered the Caspian Pipeline Consortium (CPC), which brings oil from Kazakhstan to the Black Sea, to suspend activity for 30 days. The CPC, which handles about 1% of global oil and includes U.S. majors Chevron (NYSE:CVX) and Exxon (NYSE:XOM), said on July 6 that the ruling to suspend its operations, concerned issues related to the handling of oil spills and that the consortium had to abide by the ruling.
In a statement posted on its website, the CPC added that it planned to appeal the decision. “The Caspian Pipeline Consortium acts within the legal framework of the Russian Federation and is forced to execute the court ruling. The ruling will be appealed in accordance with the procedure established by law,” the CPC said in the statement.
Reuters reported that France’s energy-intensive companies are speeding up contingency plans and converting its gas boilers to run on oil as they seek to avoid disruption in the event any further reduction in Russian gas supplies leads to power outages. Gathered over the weekend at a business and economics conference in southern France, several top executives said they were preparing for possible blackouts.
It is clear that if natural gas gets cut off to Europe from Russia then it will only increase the demand for alternative fuels and by that I mean diesel. We can see the Russian shutdown has led to a big surge in ultra-low sulfur diesel in overnight trading.
Yet now come reports that the Russian court canceled the order to halt the CPC export terminal for 30 days causing more confusion. Oil rallied on the shutdown and pulled back on the reported reopening. S&P Global (NYSE:SPGI) reports loadings of Kazakh CPC Blend crude oil at the Russian port of Novorossiysk are set to continue after a court order suspending loadings was overturned on appeal, the press service of the court administration of Krasnodar region in southern Russia said July. Stay tuned.
China and COVID always seem to come up when oil prices rise. MarketWatch reported that Chinese stocks had their worst day in about a month as a covid resurgence, combined with fresh fines for the country’s tech giants, sent investors running for the door. The Hang Seng China Enterprises Index, a gauge tracking mainland firms listed in Hong Kong, slumped 3.1%, its biggest loss since mid-June. Tech heavyweights, property developers, and electric-vehicle makers were among the biggest drags.
CNN reported that casinos in the gambling hub of Macao were ordered to close for the first time since February 2020 because of a COVID outbreak, sending shares of their operating companies plunging, and fears of new lockdowns in Shanghai undermined the broader China market.
Adding to the downbeat mood, China’s tech stocks plunged after the country’s antitrust regulator imposed fresh fines on a batch of A-list companies, rekindling fears that Beijing is still not lifting the pressure on the country’s embattled internet giants. Top government officials had recently signalled an easing of President Xi Jinping’s bruising tech crackdown and pledged support for the internet sector. The change in rhetoric fuelled hopes that Beijing would support the private sector in helping to rescue growth at a time when China’s economic outlook is weak.
Biden’s trip to the Middle East will interest oil traders. The big question is whether or not Saudi Arabia – LOL – will signal to the president that they might raise production. In deference to him reaching out to them, Biden’s foreign policy with Saudi Arabia has been a disaster, not only for his administration but for relations in the Middle East overall. While Biden says that this meeting isn’t about oil, traders suspect that oil is a major part of this equation. The other question is whether Saudi Arabia has the spare capacity.
Reuters reports that, “Adding to skepticism about spare capacity, Saudi Arabia has been pumping below its OPEC quota despite near-record oil prices, and OPEC figures show drilling of new wells in the kingdom last year remained well below pre-pandemic levels. A senior industry source who recently sat down with the management of Saudi state oil company Aramco (TADAWUL:2222) said he was told the company had at most a further 1 million bpd of spare capacity that was readily available. “If push comes to shove, then Aramco has 1 million bpd that they can get into the market relatively quickly, but that can’t be sustained for long,” the source said. At the time of the meeting, Aramco was producing 10.5 million bpd, meaning its output could not jump above 11.5 million bpd. The source declined to be identified by name given the sensitivity of the matter.
Another senior source, citing information from private conversations with Aramco insiders, said his intelligence showed Aramco could not pump more than 11 million bpd without drawing on stocks at home and abroad in consuming countries such as Japan, the Netherlands and Egypt. Aramco doesn’t disclose the level of stocks but the industry estimates the firm could release an extra 0.3-0.5 million barrels per day for between 60 and 90 days.
A natural gas explosion in Oklahoma has caused natural gas prices to surge. We are also getting some backdoor support from the Russian halt of supply. Reuters is reporting that, “Shell on Monday told customers it would be unable to supply liquefied natural gas cargoes from its Prelude facility off northwestern Australia due to industrial action over a pay fight, which has been extended to July 21. Shell (LON:RDSa) has stopped production and will be sending workers off the huge floating facility from Monday night as work stoppages were affecting the company’s ability to moor tankers at the site to pick up LNG cargoes, a Shell spokesperson said.