Market Currents: Limbering up for OPEC

Last week we discussed how some OPEC producers are exhibiting compliance via lower exports, while others are not. Our export data affirms what others are saying about Iraq: that OPEC’s second largest producer has not been playing ball.

Exports out of the south of the country continue to hold up, above 3 million barrels per day, while exports from the north are also consistently holding above 500,000 bpd.

India remains the leading destination for Iraqi crude, just beating out China. It has averaged just over 700,000 bpd of deliveries since the start of last year, while China is averaging just under that threshold.

The U.S. is the third leading destination, accounting for just under 500,000 bpd over the same period – with imports last month reaching a whopping 842,000 bpd. Indian imports were super-strong too last month, climbing to close to 1mn bpd.

The chart below from the WSJ provides a number of different insights into China’s passenger car fleet. While the government is targeting 40 percent of cars sold in 2030 to be either electric vehicles or plug-in hybrids, SUV sales are projected to grow at a rampant pace instead.

SUV sales are about to surpass sales of sedans next year, with SUVs rising to 45 percent of the passenger-car fleet by 2025 – increasing from 4 million in 2010 to 150 million by 2025. Nonetheless, Bernstein Research projects that 9 percent of China’s passenger-car fleet will be electric vehicles. That will equate to 30 million.

The graphic below shows natural gas pricing on a global basis, illustrating how China has bears the highest costs in the world. Most of China’s long-term LNG supply contracts are on an oil-linked basis, with it paying as much as 16.3 percent of the cost of crude. With U.S. natural gas prices so cheap, and given the impending increase in exports over the coming years, flows betwixt the U.S. and China look likely to ramp up over the next decade.

Exports should also be further encouraged by the bilateral trade agreement signed betwixt the U.S. and China last month. As the chart below illustrates from Rystad Energy, natural gas production in the U.S. and Canada can rise to accommodate higher LNG exports into next decade.

With oil-indexed prices likely to be ~$10/MMBtu for China into next decade for LNG imports from elsewhere, lower-priced North American gas will be a more attractive option. Rystad projects US and Canadian production to be at 105 Bcf/d by 2025, and sustainable at a natural gas price of $3/MMBtu.

Finally, the pun of the week thus far goes to RMG Investment Management, and their latest commentary titled Gentlemen prefer bonds.