Welcome back to another Energy Source!
The fighting in Ukraine escalated again yesterday after Russian president Vladimir Putin unleashed a deadly barrage of missiles across the country.
One target was Ukraine’s power grid and heating infrastructure, plunging swaths of the country into darkness just ahead of winter. The attacks will put European energy markets on edge after the recent sabotage on the Nord Stream pipelines.
We’re also watching oil prices closely after Opec+ decided last week to start pulling crude supply out of the market despite already high prices. The Brent price rally stalled yesterday with prices closing out the day down a bit at about $96 a barrel; US prices were around $91 a barrel.
Tightening crude supplies will collide in the coming months with central bank efforts to slow the economy through rate rises aimed at bringing down inflation, pitting Opec+ against the Federal Reserve.
If economic growth barrels ahead alongside tightened crude supplies, oil prices could be poised for a run well past $100 a barrel. But if the global economy falters, and brings energy demand down with it, prices could tumble again.
In the newsletter today, Amrita Sen, director of research at consultancy Energy Aspects, argues that the Opec+ cuts are just one of the bullish forces amassing in oil markets, and prices are set to run higher.
That would put the White House, already contending with petrol prices that are rising again just before next month’s midterm elections, under immense pressure to retaliate against Opec.
One of the measures the administration of Joe Biden is discussing to stem rising fuel costs is a curtailment of fuel exports. The idea has alarmed the American oil industry. That’s the topic of my note today.
And in Data Drill, Amanda looks at how the slow rollout of public electric vehicle charging stations is not denting sales yet.
Thanks for reading! — Justin
Opinion: Oil’s bull run is about to restart
Oil prices have stayed below $100 a barrel for more than a month now — even after Opec+ announced new, deep cuts to its output quotas last week. But big bullish forces are building.
The first is Russia. Looming over the market is the deepening of EU sanctions on Russian oil exports, starting from December 5, and then more restrictions on the country’s petroleum products, starting in February. At the very least, a lot of Russian oil will find itself on ships for much longer. As European ports close to Russian oil, cargoes that once sailed for just three or so days will need 20-60 days to reach markets in Asia. Millions of barrels of oil will be tied up as a result. Some Russian output may even be shut-in.
At the same time the world’s biggest petroleum products exporter comes under the cosh, its biggest importer is about to rediscover its thirst for oil. That’s China, and while its slower consumption in recent months has been welcome relief for an oil market already under strain, Beijing is now slowly but surely trying to boost economic growth again. The latest awards of large crude import quotas and product export quotas all suggest months of unusually sluggish Chinese crude buying are about to end.
Shale isn’t riding to the rescue
Underlying today’s higher oil price and our bullish view of the coming months are years of under-investment in new supply. To be clear, oil prices are not high due to the Russian invasion of Ukraine. Brent was already trading at $95 a barrel before the war because of this chronic drop in capital spending.
The best example is in the US, where shale output growth — so crucial to keeping price jumps in check in the pre-coronavirus pandemic years — has been disappointing. Rampant oilfield service cost inflation and the exhaustion of top-tier drilling acreage had producers looking to cut back the number of operating rigs even before the recent pullback in prices. The break-even prices for shale producers have risen steeply, to well over $70 a barrel, and most likely $80 a barrel. And of course drillers have got the message from investors that growth at any costs will not be rewarded. Don’t expect the American shale patch to bail out the market once again.
So why are crude prices not even higher?
Fears of a global economic recession are still a headwind for oil prices. But another reason that prices remain below $100 a barrel is that policy has become so unpredictable. Some in the market wonder if Europe, where economies are already struggling with higher energy costs, will truly go ahead with the December embargo on Russian oil that could further elevate crude prices. It’s also not clear how effective the US plan to cap the price at which Russia can sell its oil will be. Even the pace of China’s re-emergence from zero-Covid policies is unclear.
And now, following deep oil production cuts by Opec+, the market is trying to understand how the Biden administration will react. Congressional antitrust legislation targeting Opec+ is plausible — but would that tighten or loosen oil markets? The release of more US strategic oil stocks is also on the cards.
Traders need some clarity on all of this, because policy confusion has contributed to the liquidity squeeze that has gripped the oil market since March. Hazy policy has left oil-market volatility at its highest since Iraq invaded Kuwait in 1990.
The volatility has led to exchanges and derivatives counterparties maintaining stringent margin requirements — sometimes equivalent to 100–150 per cent of the nominal contract value. This has resulted in big margin calls, particularly on gas and electricity trades. And the bigger the margin call, the less capital is available for other trades: a vicious cycle that ends with less liquidity and more volatility.
All told, today’s oil market is a picture of dysfunction. But when you couple it with the mounting threats to Russian supply, Opec+’s willingness to take crude off the market, and China’s re-emergence as a buyer, it means one thing: sooner or later, oil prices are heading much higher.
Amrita Sen is the head of research at consultancy Energy Aspects.
US fuel export ban threatens European supplies, domestic chaos
Petrol prices are on the rise again across the US and the timing could not be worse for President Biden and the Democrats, who are fighting to keep control of Congress in November’s midterm elections. Opec’s decision to slash crude supplies has only heaped more pressure on Biden.
It has the White House contemplating some big oil market moves, including a potential ban on fuel exports.
America’s oil industry is sounding alarms over the prospect. They argue restrictions on petrol and diesel exports would exacerbate the energy crisis for Washington’s European allies and cause chaos in US fuel markets.
How likely is such a move? One industry executive I spoke with that has participated in recent discussions with administration officials about fuel markets called it a “50/50” prospect at this point.
“We are creating contingency plans,” said the executive, whose company is a top refiner and fuel exporter.
The industry has also mobilised its messaging machine in Washington. The American Petroleum Institute, the powerful DC lobby group, publicised a letter it sent to energy secretary Jennifer Granholm last week arguing a ban would mean abandoning “your commitment to our allies abroad”, among other things.
The Biden administration has promised to keep Europe well supplied with natural gas and diesel after severe disruptions from Russia have left buyers looking to global markets to plug the gap.
Oil companies also argue that a fuel export ban would not achieve the administration’s aim of bringing down pump prices for American consumers.
The industry executive argued that there’s no “silver bullet” fix for the north-east’s supply problems after the region lost refining capacity during the pandemic.
Pipelines to the region from big American refining hubs in the Gulf Coast and Midwest are full and Jones Act shipping restrictions make it impossible to send fuel on tankers, industry executives say. An export ban would cause inventories to overflow in the refining hubs, forcing plants to cut back fuel production, while doing little to alleviate tight supply in other areas.
Potentially worse would be if other countries took retaliatory trading measures and import-dependent areas of the US such as the north-east and California were suddenly unable to acquire fuel on international markets.
The industry’s criticism is also, of course, self-serving. Refiners’ bottom lines would take a hit from any export controls. But that doesn’t mean the underlying analysis is wrong. A carefully crafted restriction on exports could potentially bring some short-term relief at the pumps, but it would be a big gamble.
Data Drill
Lack of public charging is not hindering electric vehicle uptake, for now, says a new analysis from Rystad Energy. The consultancy looked at EV adoption and the availability of fast chargers and found no direct correlation between the two.
China, for example, has seen rapid growth in electric vehicle sales despite slower growth for public charging. In 2021, EV sales in Beijing grew more than three times faster than charging deployment, according to Rystad. The US and Germany also saw sales outpace the growth in charging availability last year.
Rystad argues subsidies for EVs and incentives for private charging may be better alternatives in boosting early adoption.
The analysis comes as countries set lofty targets to build a public charging network. China, for example, wants to have enough chargers to support 20mn EVs by 2025. How likely it is that countries will achieve these targets is questionable. Rystad found Germany would need to double its deployment to meet its 2030 target of 1mn chargers, nearly a third of the EU’s end-of-the-decade goal.
Power Points
Joe Biden has few good options to keep petrol prices down after historic cuts from Opec.
Austria increases the legal challenges against the EU’s green taxonomy that classify nuclear and gas as climate friendly.
Extreme weather and high utility bills are pushing more households to adopt rooftop solar and cut ties with utility companies.
Food and energy crises have distracted leaders from their climate commitments ahead of COP27.
Some carmakers are betting on hybrids in the push to electrify, hoping to tap into consumers in hard-to-reach areas where electricity supply is unreliable or chargers are not available. (WSJ)
Source: Economy - ft.com
