Saudi Arabia's Oil Earnings Drop

1. Saudi Arabia Takes One for the Team

- Saudi Arabia’s decision to unilaterally cut 1 million b/d of production in July 2023 has so far been backfiring as oil prices dropped back to levels seen before the OPEC+ summit, brushing aside the Middle Eastern kingdom’s pledge.

- The Saudi government remains optimistic and is still expecting an annual fiscal surplus of 4.3 billion this year, although the IMF’s breakeven level of $81 per barrel looms large.

- According to Bloomberg, if one is to account for Saudi Arabia’s giga projects (such as the new city of Neom) which the IMF treats separately, the country’s breakeven level would rise to $95 per barrel.

- The International Monetary Fund came out this week saying that OPEC+ production cuts would lower Saudi Arabia’s GDP growth in 2023 to 2.1%, after last year’s unprecedented 8.7%.

2. Canadian Wildfires Become a Large-Scale Risk Again

- A return to above-normal temperatures and prolonged dry weather has led to a resurgence in wildfires across Western Canada, impacting oil and gas production in the province of Alberta.

- Following a steady rebound in Canadian gas production by the end of May, gas output has dropped below the 18 BCf per day mark again as the number of out-of-control fires rose to 17 lately.

- The three most impacted Alberta producers – Cenovus Energy, Crescent Point, and Paramount Resources – have restarted most of shut-in oil production and it remains to be seen if a similar drop is to happen with crude output, too.

- In total, more than 4.3 million hectares have already burned in this year’s unprecedented fires, roughly 15 times the annual average of previous years.

3. As European Gas Prices Rebound From Lows, Focus Shifts to 2024

- European natural gas prices have seen a significant rally this week back to 30 per MWh (10 per mmBtu) amidst fears that global LNG competition would
Intensify and lower supply.

- LNG sendout across Europe is set to decline this month as France’s Montoir LNG terminal is shut until June 10 for maintenance, whilst several Norwegian gas fields will be shut for field maintenance.

- In the futures markets, the spread between the December 2023 and December 2024 contracts started to widen, signaling expectations for supply tightness into this year are easing but uncertainty is still there for 2024.

- The 2023/2024 discrepancy is also driven by the looming end of the Russian-Ukrainian gas transit deal which is about to expire in December 2024 and is almost certain not to be extended.

4. Dam Catastrophe Add to Bullish Pressures on Wheat

- Wheat prices have been surging ever since the destruction of the Kakhovka Dam in Ukraine brought fighting between Russia and Ukraine to a new level, jeopardizing the water supply in the region.

- The markets have also started to price in the end of the Black Sea grain deal after Russia’s ammonia pipeline – the resumption of which was Moscow’s main demand - was blown up this week.

- Wheat prices spiked at 6.40 per bushel earlier this week, whilst the other two key agricultural commodities coming out of Ukraine, corn and oat, also saw notable upswings.

- The destruction of the dam spells trouble for water supply to 31 field irrigation systems across 584,000 hectares, harvesting around 4 million tonnes of grain.

5. Spain Becomes Europe’s Solar Energy Pioneer

- Spain is on track to generate more than 50% of its electricity from renewable sources, the first large European country to reach that level thanks to its early start into wind and solar.

- With onshore solar and offshore wind taking 20% each of Spain’s power generation, bolstered by 10% coming from hydro, Spain’s power prices have been on average 34% lower than in neighboring France.

- Madrid has made great progress in phasing out coal, seeing its share decrease from 20% in 2015 to 2% currently, whilst nuclear and oil-fired plants are expected to be phased out by 2035.

- By now, Spain’s generation capacity stands at 120 GW, equivalent to 2.6 times the country’s peak demand, but its dependence on solar energy keeps the sunset-to-dawn period relying on gas.

6. Having no Other Option But LNG, Japan Readies for Higher Temperatures

- As many Asian countries have been experiencing strong heat waves since the start of 2023, Japan is readying its power grid to deal with higher temperatures, even if El Niño were to arrive later this year.

- In terms of profits, Tokyo would seek to maximize coal burning as dark spreads have been routinely surpassing gas-fired spark spreads, but the country’s coal capacity is already running near maximum levels.

- This means that heat waves in Japan would inevitably trigger higher LNG buying, 3-4 extra cargoes per month compared to current levels, as natural gas remains cheaper than fuel oil.

- According to Kpler data, Japan imported 27.8 million tonnes of LNG in January-May this year, a 13% year-on-year decrease as Tokyo focuses on restarting idled nuclear capacity.

7. Citi Says Copper Bull Run Is Around the Corner

- Citigroup is predicting a bull run in copper once the current recession-driven pricing weakness subsides, saying investors looking for exposure to the energy transition will prefer the base metal.

- The bank predicts that rising allocations from index-tracking investors could lift net bullish positioning in copper contracts to about 4 million tonnes by 2025, a sea change compared to the net shorts seen currently.

- Additionally, Citi expects additional long-term hedging from carmakers as they ramp up production of EVs, adding a further roughly 1 million tonne equivalent in long positions.

- With copper currently trading at $8,240 per metric ton, down 14% from this year’s January peak, the US investment bank is expected it to dip further and then start rallying within 6 to 12 months.