Electric spillovers

Futures crude markets continued to rise on early Monday, with WTI crude prompt prices nearing 81 $/b at the prompt while ICE Brent futures climbed at 83.8 $/b, amid deepening energy crises in India and China. Indeed, rolling blackouts are now implemented across most Indian provinces to curb coal consumption amid ultra-low coal stocks. Similarly, China’s energy grid is curtailing industrial power use to limit coal consumption ahead of a potentially risky winter in terms of security of supplies. Coal futures on the Chinese Zhengzhou commodity exchange opened almost 7% higher today, amid reports on the weekend that 10% of the domestic mines were potentially flooded amid heavy rain in central Chinese provinces. Crude inventories held as collateral in the Chinese INE exchange continued to decline at a steady pace.

Both of these countries – experiencing some sort of power outages – will likely increase their backup power generation use, which will boost diesel demand. It is still unclear how much diesel-fired generation capacity is installed, with India being likely to have a larger fleet, as the power grid is usually more unstable. Furthermore, Indian refiners are boosting refining runs going forward, as Indian Oil and other downstream players mentioned that they would run at nominal capacity for the months to come. Saudi Arabia and Middle-Eastern oil-producing countries have integrated this in their pricing, with substantial cuts in their official selling prices, limiting inflationary pressures for the Asian refiners The Saudis reportedly even suggested to two Asian players to supply beyond their contracted volume, in a rare move to limit the bidding pressure in crude markets.