And a new oil shock looms
As the US struggles to increase domestic oil supply, a new supply shock lurks around the corner: Stranded Russian oil. Sweeping EU sanctions on Russian oil will take effect on December 5, barring seaborne imports of Russian crude to member countries and their companies from shipping, insuring and financing shipments. Craig Kennedy, an energy and finance analyst, estimates that as many as 3 million barrels a day of Russian export oil will be stranded under the imminent sanctions.
This cliff has been on the horizon since the EU agreed to the sanctions plan in June. It’s the threat that has catalyzed US-led efforts to establish an international price cap on Russian oil – a perhaps counterintuitive ambition to avoid the consequences of an all-out ban while still limiting Russian revenue or, alternatively, to backtrack on a sanctions plan more ambitious than popular resolve and capacity in the West.
Moscow could theoretically try to get around Europe’s sanctions by using its own tankers. But because Russia has long relied on foreign shipping to transport its oil, its capacity to do so on its own is limited. Russian oil exporter Rosneft has now moved into chartering tankers, while there has been a recent buying frenzy for ice-breaking oil tankers. Russian government officials estimate they’d need to grow the national tanker fleet fourfold to redirect the country’s oil to Asian buyers, according to Kennedy. Plus, there’s the question of whether Russia even wants to evade Europe’s ban: Moscow seems to be reveling in turning the screws on Europe’s energy supply; why switch tacks now?
Plus, a slew of natural-gas problems
It’s been a busy week of natural gas news. First off, China—which had been making handsome profits rerouting US LNG to Europe—is now cutting back on such resales to ensure enough domestic supply for the winter. That will tighten the global LNG market (though perhaps not dramatically, as analysts expect China to stay out of the spot market) just as Europe enters winter with no certainty that it can avoid a severe energy crunch, even with EU natural gas storage levels now above 93%.
And at a time when Europe needs all the energy it can get, bloc-wide natural gas production in the second quarter was down 3% year-on-year, according to the European Commission’s gas market report released this week (pdf, p.9). Production slump aside, there’s another bottleneck: regassification capacity. As Reuters reported this week, dozens of LNG tankers are languishing off Europe’s coasts because they lack slots to unload and regassify the chilled fuel. And that’s not the all of it. EU imports of Russian LNG have risen by 50% in the first nine months of the year, even as piped gas imports have fallen. That means Europe is fueling the Russian war machine with LNG purchases, not producing enough of its own gas, and not building LNG terminals quickly enough to use the gas it has bought.
In an effort to address this matrix of problems, the EU this week unveiled a series of interim measures meant to address gas prices, including a proposed emergency gas price cap on the benchmark Dutch TTF contract that would only be implemented if certain conditions are met. Yet the proposal—which appears to be designed to find a middle ground between the 15 EU countries that want a hard price cap and Germany and the Netherlands, who are opposed to one—may end up pleasing no-one.
Copper prices slip. But should they?
With global macroeconomic activity slowing, copper prices continue to tumble, to the tune of some 30 percent over the past twelve months. For the metal, it’s a perfect storm of concerns about US monetary tightening and a strong USD, China’s Zero COVID economy, and Europe’s energy squeeze. For copper companies, it’s a tough set of Q3 figures: Miner Freeport-McMoRan’s Q3 profits declined over 70 percent compared to last year’s third quarter.
But this drop could be a false flag; a function of market perception not reality. According to the world’s largest publicly-traded copper producer, Freeport, the copper market remains “strikingly tight,” characterized by high demand and shrinking inventories at near-historical lows. If that’s right, the mismatch between markets and reality could threaten future supply: Sliding prices at a time of tight supply would disincentivize necessary in new investments in copper mining, processing, and relevant technologies.