1. Oil product cracks see support from demand, run cuts and low stocks

What’s happening? Tighter fundamentals are supporting gasoline and diesel cracks in major hubs. Gasoline inventories are low in the Atlantic Basin, while distillate stocks are below average in all major hubs as heating season approaches in the northern hemisphere. Current backwardation in the ICE gasoil market is signaling incentives to destock product. Refining—particularly in Europe and parts of Asia—is feeling additional pressure from high natural gas prices. Refiners unable to substitute gas with cheaper inputs might need to cut runs as margins are squeezed, adding to refined product tightness.

What’s next? Diesel cracks are expected to stay firm as winter approaches, with potential spikes ahead from colder-than-normal weather or supply disruptions. Backwardation in the gasoil market should remain constructive for the next month as higher prompt prices pull up the front end of the strip. The ongoing high gas price environment will continue to exert pressure on refiners to trim runs, leading to market tightness. Abnormally high gasoline cracks this season should correct to their five-year range through end-2021. Increased mobility and economic recovery will keep supporting demand although there are risks: new COVID-19 variants, constrained global supply chains (consumer goods and raw materials), high oil prices, and extreme weather, among others.

2. Demand shift in focus as Tesla announces change in battery chemistry

What’s happening? Tesla announced that it will shift to lithium-iron-phosphate (LFP) battery chemistry for all its standard range vehicles globally. The electric vehicle maker already employs LFP in its standard range Model 3 in China, but the rest of its portfolio is powered by batteries featuring a nickel-rich chemistry known as nickel-aluminum-oxide (NCA). Nickel-rich chemistries require lithium hydroxide instead of carbonate because the first can operate at much higher temperatures. They also provide longer driving ranges. Carbonate-based LFP is cheaper and safer, and does not use nickel or cobalt.

What’s next? Shifts in battery chemistry choices imply demand changes for battery metals. Tesla’s announcement is supportive of lithium carbonate—once seen by many industry participants as doomed to lose relevance as carmakers favor lithium hydroxide. Battery-grade nickel supply is expected to be very tight in the coming years, while there are also concerns over the ethnical sourcing of cobalt. It will be crucial to watch the prices of these two key battery metals amid a potential shift in demand.

3. Oil’s role to remain crucial despite India’s energy transition push

What’s happening? Indian policy makers, ministers and refiners who attended the India Energy Forum by CERAWeek said that the country’s domestic gasoline and diesel consumption had bounced back to a level higher than even pre-pandemic levels, sending a strong signal that the worst for gasoline and diesel demand is over. Latest data from the Petroleum Planning and Analysis Cell showed that India’s demand for oil products in September rose 5.2% year on year to 15.92 million mt, or 4.2 million b/d.

What’s next? India’s increased demand in transportation fuels, like diesel and gasoline, is expected to be sustained from October onwards in the absence of any fresh wave of COVID-19. S&P Global Platts Analytics forecasts India’s overall 2021 oil demand to grow 295,000 b/d year on year to 4.9 million b/d, and return to pre-pandemic levels in 2022. Long-term, India Energy Forum delegates said while the share of oil in India’s energy basket won’t change drastically over the next two decades, incremental demand and the energy transition process would create enough room for new and cleaner forms of energy.

4. …while South Korea and Japan scout for cheaper crudes ahead of winter

What’s happening? Iraq’s State Oil Marketing Organization cut November official selling price differentials by 40-50 cents/b across its Asia-bound Basrah crude grades. The cuts were on top of the $1.20-$1.50/b reduction in OSPs announced over August-September. As a result, major Northeast Asian refiners indicated that OSP spreads between Iraqi crude and other Persian Gulf grades have fallen sharply, making Iraq’s flagship Basrah Light and Basrah Heavy crudes very attractive.

What’s next? South Korean refiners are especially keen to take full advantage of the competitive prices to serve their fast-rising refinery run rates. The country’s overall crude imports are on course to recover to pre-pandemic levels over the coming quarters as major refiners raise run rates to lift transportation fuel production, with the government aiming to shift to a phase of living with COVID-19 starting Nov. 9. Meanwhile, Japanese refiners continue to seek lighter crude grades for kerosene production ahead of winter, though rising premiums of some Middle Eastern grades have also prompted Japan’s Basrah purchases.

5. IMO explores complete emissions accounting methods, with implications for fuel choice

What’s happening? The International Maritime Organization has set a target to reduce shipping emission intensity by at least 40% by 2030 (from 2008 levels). The IMO also plans to further reduce emission intensity by 70% and overall emissions by 50% by 2050 from 2008 levels. The 2025 and 2030 international shipping carbon intensity targets are well within reach, but to achieve IMO’s long-term goals is impossible without large-scale adoption of alternative fuels and technologies.

What’s next? The IMO is discussing different proposed lifecycle greenhouse gas accounting methods—from fuel production to end-use on a ship. There is pressure to include GHG emissions from the upstream process, also known as well-to-tank, which would encompass flaring and fugitive methane leaks from oil and gas production. The current IMO targets only include emissions from the combustion of the fuel on the ship. If the scope of emissions were to change, it could serve as a driver to clean up the maritime upstream fuel supply by holding the suppliers accountable. It can also increase investments in the infrastructural development of clean future marine fuels such as green methanol, ammonia and hydrogen.
Source: Platts