Energy markets react to higher interest rates – coal demand surges to all-time high, petcoke now buyers’ market

By Frank O. Brannvoll, Brannvoll ApS, Denmark

Inflation keeps rising and while central banks have started aggressive interest rate hikes to curb it, these may be too late. The IMF has revised global economic growth down, and fear of demand destruction is lowering energy prices. The US Federal Reserve increased its interest rates by 0.75 per cent and the European Central Bank followed through. Further hikes are forecast as inflation moves above nine per cent.  

The US dollar strengthened to US$1.00 and is now seen in the lower range of US$1.00-1.08, slightly down. A stronger US dollar will pressure commodity prices.

Oil and gas

The OPEC+ production cuts are coming to an end in September and the markets await the future set-up. Russian oil is currently sold with big discounts to non-sanction countries such as China, India and Turkey. Moreover, Russia is now the biggest supplier to Saudi Arabia. The geopolitical situation in Ukraine and increasingly tensions between Taiwan and China are keeping prices up despite slower growth projections. Iran-US nuclear talks have come to a halt, adding to tensions in the Middle East.

The cut in the flow of gas deliveries from Russia to Europe, plus the EU’s pledge to reduce gas consumption by 15 per cent has sent gas prices to record highs – making the region’s industry seek oil and coal solutions.

Brent oil has fallen from US$111 to US$104 after having reached US$100 following an IEA report of lower demand. It is expected to trade between US$100-115 and would fall sharply on a peace agreement in Ukraine.

Coal

Higher gas prices in Europe are driving the current high demand for coal as the region is the new buyer with imports reaching the highest level since 2018. It remains to be seen how this continues after 10 August when sanctions start. The IEA forecasts a record total global demand of 8bnt. This may lead to challenges in the coal sector where investment has been low in many countries and logistics have not been kept up-to-date as a result of the intended removal from the energy complex in favour of green energy and alternative fuels – a situation that may require revision.

In addition, there have been several disruptions due to inclement weather in Australia, rail issues in South Africa and lower water levels in the Rhine – all supporting higher coal prices. Moreover, exporting countries Colombia, Indonesia and Australia are unable to bridge the shortfall of EU-sanctioned Russian coal. However, China has increased domestic production, providing some relief to seaborne export markets and keeping domestic prices artificially low. Australia is seeking a lifting of the Chinese import ban.

The API2 front-quarter (4Q22) contract fell seven per cent MoM to US$337 with a range of US$295-355 expected. The API2 Cal23 contract was up 10 per cent MoM at US$277. Higher levels are expected to consolidate between US$255-295.

The API4 front-quarter (4Q22) contract declined five per cent MoM to US$312, with a higher range of US$290-350 expected. The API4 Cal23 contract continued up 10 per cent MoM to US$253, with an expected range between US$230-270.

Petcoke

With traders and refiners very long, the petcoke market has been turning into a buyers’ market. Buyers are seeing less demand in cement and other commodities while Russian coal is being offered with huge discounts, leaving petcoke as too expensive despite apparently large discounts. This is the case in India and Turkey, where the monsoon and slower growth, respectively, are also softening demand. Venezuelan petcoke export volumes rose 4.5 per cent, sold with huge discounts to China and India. As ports resume activity, a further increase is expected. This has put a pressure on the medium-sulphur market and narrows the gap between high- and medium-sulphur to US$8.

Refiners running at high capacity must sell the petcoke and are accepting lower bids from buyers, who may have their stocks filled based on the scramble for petcoke just a few months ago. Despite high discounts (but less than Russian coal) further downward pressure is expected.

The USGC FOB 6.5 per cent S contract is estimated at US$139, down 15 per cent MoM from US$163, with the discount to API4 at 64 per cent. The USGC CFR ARA 6.5 per cent contract fell 18 per cent to US$167 due to lower FOB and freight rates MoM, leading to a new all-time high discount at 60 per cent.
The USGC FOB 4.5 per cent S contract is estimated at US$147, down 17 per cent MoM from US$177, the discount to API4 at 62 per cent. The CFR ARA 4.5 per cent contract fell 17 per cent to US$175 with the discount at 58 per cent.