Energy market analysis Dec. 11, 2024

“Russia has become India’s largest supplier of crude oil.” –Tsvetana Paraskova of OilPrice

With interest rates rising in Russia and financing costs for trade skyrocketing, many small trading parties and middlemen have recently exited Russia’s oil trade with India. So says Reuters based on customs and shipping data.

India, one of Russia’s largest consumers of oil banned by the West, now depends on Russian oil for much of its consumption. Since 2022, Russia has been India’s largest oil supplier. In 2022 and 2023, many traders were eager to supply Russian oil to India. Because of the high risks, there are lucrative trade profits to be made.

New unknown trading companies have handled large volumes of Russian oil and oil products since the Russian invasion and the withdrawal of Western countries from the Russian oil trade. These new oil trading companies, emerging like mushrooms from the ground, have established themselves in jurisdictions outside Europe. They are often notoriously opaque in their management and trading.

Russia raised its benchmark interest rate to 21%, the highest level in two decades. This affects financing costs for traders who rely on Russian banks to finance Russian oil transactions. In fact, Western banks are no longer allowed to do so. Since financing costs rose sharply earlier this year, many middlemen have dropped out of trading with India. Several trading houses have taken over this business. Indian demand for Russian oil, cheaper than alternatives because of sanctions, has recently been so high that discounts, at which Russian oil is sold to India, have fallen.

Price Crude oil – Brent February 2024 ($/barrel) – week cloud candle, log scale

Electricity demand from data centers, cryptocurrencies and AI could reach 1,000 Terawatt hours (TWh) by 2026 – roughly equivalent to Japan’s electricity consumption.” – Felicity Bradstock of OilPrice

Global electricity demand is increasing significantly due to the rapid growth of data centers needed to support AI. This increase in demand threatens to outpace the development of renewable energy sources. International regulation is needed to ensure Tech companies use clean energy to minimize their impact on climate goals.

As governments worldwide introduce new climate policies and pump billions into alternative energy sources and clean tech, all these efforts could be negated by increased electricity demand from data centers. Unless more international regulatory action is taken to ensure companies invest in clean energy sources and stop using fossil fuels for electricity. The International Energy Agency (IEA) published this report on this in October, “What the data center and AI boom could mean for the energy sector.” It shows that electricity demand has risen rapidly over the past two years with increasing investment in new data centers, especially in the Americas. A trend that appears to be continuing for now.

The report shows that in America, annual investment in data center construction doubled in the past two years alone. China and the EU are also seeing rapidly increasing investment in data centers. By 2023, total investments by tech companies Google, Microsoft and Amazon exceeded those of the U.S. oil and gas industry. That’s about 0.5% of U.S. GDP.

The tech sector expects to implement AI technologies more widely in the coming decades as the technology is improved and more embedded in everyday life. It is just one of several advanced technologies expected to contribute to the increase in global electricity demand in the coming decades.

Global aggregate electricity demand is expected to increase by 6,750 terawatt-hours (TWh) by 2030, according to IEA’ s Stated Policies Scenario. This is further driven by several factors including digitalization, economic growth, electric transportation, air conditioners and the increasing importance of electric-intensive industries. In major economies such as America, China and the EU, data centers currently contribute about 2-4% of total electricity consumption. The sector already accounts for more than 10% of electricity consumptionin at least five U.S. states. In Ireland, it already accounts for more than 20% of all electricity consumption.

While the speed and manner in which AI will grow remains uncertain and efficiency improvements are still expected to be made, electricity demand from data centers, cryptocurrencies and AI could reach a volume of 1,000 Terawatt-hours (TWh) by 2026. The organization calls for more public-private dialogue with policymakers, the tech sector and the energy industry to put their heads together and discuss both managing expectations and energy use. More international regulation of the tech sector is required to ensure that the growing electricity demand of data centers does not outweigh what needs to be achieved globally with the energy transition.

Currently, many tech companies have data centers with a capacity of about 40 MW. In coming years, however, more companies are expected to invest in centers of 250 MW or more. When an increasing number of 500 MW or more emerge in the coming decades, equivalent to the electricity required for 350,000 homes, it could lead to a sharp increase in demand for gas-generated electricity. And this comes after years of national investment in renewable energy.

While America will see the greatest expansion of data centers in coming decades, Europe’s electricity consumption from data centers is expected to triple around 2030. Meanwhile, China has invested more than $6.12 billion in a national project to develop data centers in recent years.

A collaborative approach will be needed to regulate the energy use of data centers. This will prevent the anticipated increase in electricity demand from hampering the development of the global energy transition. Governments worldwide must come up with clear regulation and set limits on energy use by tech companies in particular for the benefit of advanced technologies such as AI. Otherwise, Paris Agreement climate promises will not be met. This could include requiring companies to generate their energy needs through clean energy sources such as renewable and nuclear, as well as phasing the rollout rate of these technologies.

The price of electricity on a weekly basis is trading in the cloud again after two weeks of being above it. The lagging line, running 26 weeks “behind” it, should provide confirmation of the price.

Price Baseload Electricity supply year 2025 (eur/MWh) – week cloud candle, log scale

The relationship with the gas market is evident from almost the same price movement on a weekly basis. Two long red weekly candles says little yet, but looks corrective with the upward waves being retraced too deeply for a true bull market. Time will tell. Weekly price support is the cloud.

Price TTF gas supply year 2025 (eur/MWh) – week cloud candle, log scale

“European gas storage empties fastest since 2016.” –John Kemp, senior analyst JKempEnergy

Europe’s gas reserves have been depleted at the fastest rate over the last 8 years. This is due to repeated waves of colder-than-normal temperatures and low wind speeds since the start of the winter heating season. Combined stocks in underground storage facilities in the European Union and Britain decreased by 83 terawatt-hours (TWh) between the official start of winter on Oct. 1 and Nov. 26.

Stocks fell more than 4 times faster than the 20-year average. And faster than any year since 2016 according to operator data compiled by Gas Infrastructure Europe (GIE). Stocks were still 58 TWh (+6%) above the previous 10-year seasonal average on Nov. 26. However, the surplus decreased from 122 TWh (+13%) at the beginning of winter.

Storage facilities in the EU were on average 87% filled, sharply lower than 97% at the same date in 2023 and 94% in 2022. Northwest Europe has a colder start to winter this year, following exceptionally mild winters in 2023/24 and 2022/23. This has boosted heating demand.

With the heating season 20% underway, Frankfurt has had 377 heating days, close to the average of the past 10 years. Far more than in 2023 (303) and 2022 (345). London has now experienced 327 heating days, the coldest start to winter in 5 years. Far above the number in 2023 (268) and 2022 (219).

While lower temperatures have pushed up heating demand, wind speeds in the North Sea are lower than normal. As a result, production from offshore wind farms is lower and they are forced to lean more often on gas-fired power plants.

Based on stock movements over the past decade, stock levels this winter may end up some 30% below record carryouts in late winter 2023/24 and 2022/23. Stocks in the EU and Britain are on track to end the winter at about 468 TWh, with a likely range of 293 to 573 TWh. The forecast carryout is already much lower than the 532 TWh at the beginning of winter, with a likely range of 349 to 718 TWh.

Stocks are still at comfortable levels, but can no longer be described as abundant. Gas prices have increased, discouraging consumption and more LNG cargoes will be pulled into Europe. Front month forward prices on the Dutch Title Transfer Facility (TTF) recorded an average of € 45 per megawatt hour. In September, the front month average was € 36; in February it was € 24.

Due to the much larger drawdown this winter, traders anticipate that Europe will need to buy much more gas to replenish its storage facilities in the summer of 2025. Much more than was the case in the summers of 2024 and 2023. Forward prices for summer 2025 (April-September) recently traded up to €4 per megawatt-hour above the prices of forward contracts for winter 2025/26 (October-March).

The unusual backwardation is a sign that traders expect Europe to have to pay more next summer to replenish gas buffers. Through this pricing mechanism, the market ensures that stocks are back to comfortable levels for the winter of 2025/26.

Europe will need to draw more LNG cargoes away from fast-growing gas markets in Asia next summer. That implies higher prices. In most seasonal commodity markets, the greatest risk of shortages is caused not by a single disruption but by repeated disruptions in successive years. Stocks are usually sufficient to absorb one unexpected supply disruption or demand shock. However, this depletes them and they are then less prepared for the event of a subsequent disruption or shock.

Europe’s biggest challenge is what would happen if winter 2024/25 remains colder than normal, followed by another cold winter in 2025/26. To minimize that risk, supplies will have to be rebuilt by the summer of 2025. Traders are already betting that will be costly as Europe has to compete for more gas with fast-growing economies in Asia.

Price TTF gas supply year 2025 (eur/MWh) – day cloud candle, log scale

“Competitive markets – not the dictates of distant asset managers – should set the price Americans pay for electricity.” – Ken Paxton, Attorney General of Texas

For allegedly breaking antitrust law by conspiring to suppress coal causing electricity prices to rise, Texas is joining ten other U.S. states in a new lawsuit against BlackRock, Vanguard and State Street. These companies are accused of “intentionally and artificially restricting supply,” causing prices to soar and allowing investment firms to reap extraordinary profits. This complaint is one of the highest profile lawsuits targeting companies that promote Environmental, Social & Governance (ESG) goals.

BlackRock, Vanguard and State Street are accused of using their equity stakes in Peabody Energy, Arch Resources and other companies to pressure management to reduce their carbon emissions. This began in 2021 at the height of the ESG hype, according to Bloomberg. The companies partnered with groups like Climate Action 100+ and the Net Zero Asset Managers Initiative in which they “agreed to leverage their collective interests of publicly traded coal companies to force industry-wide production cuts.”

Over several years, these three players built up substantial equity stakes in every significant, publicly listed, coal producer in America. In doing so, they gained the power to set the policies of coal companies. Using their combined influence over the coal market, this investment cartel collectively announced their commitment in 2021 to deploy their shares to force coal companies to pursue “green energy” goals.

Price ICE Coal delivery year 2025 (usd/t) – week cloud candle, log scale

“The forecast for EV production in 2025 appears to be headed in only one direction: down.” – Daniel Roeska, analyst at Bernstein

Now that the glitz and allure of electric cars as well as government subsidies have gradually disappeared, combined with high competition and robust supply, EV sales are stagnating. That was the subject of this report from Financial Times (FT). It shows that the auto industry’s shift toward EVs, once seen as essential, is now running into serious challenges:

• Northvolt, Europe’s top battery producer, recently declared bankruptcy. This raises questions about industrial strategy in Europe.
• Stellantis announced the closure of its van manufacturing operation in Britain, putting 1,100 jobs at risk.
• Volkswagen and Ford warned of significant job cuts and plant closures due to weaker-than-expected EV demand.
• General Motors announced it will take more than $5 billion in non-cash charges and depreciation to address declining operations in China.

This reflects the challenges facing automakers worldwide in the automotive market. Now America risks falling further behind in its green transition due to lagging EV adoption. Trump plans to cut subsidies. Thus, progress is further threatened. President Biden aims for an EV share of 50% of car sales by 2030, however this share was only 10% last year, according to FT.

Car manufacturers have scaled back their production plans. US EV production is expected to decline by 50%, Europe’s shrinks by 29%, according to Bernstein. By 2025, the EV market will reach 23% share in Europe and 13% in America. FT reported that the slow growth of EV adoption worldwide is caused by high initial costs, concerns about range and charging infrastructure.

Also, the energy price advantage has slowly disappeared because of geopolitical tensions. Rising interest rates have further driven up leasing costs. In Europe, EV prices have risen from €40,000 in 2020 to €45,000 by the end of 2024. That’s well above the €20,000 maximum many consumers are willing to pay. Meanwhile, inconsistent subsidies have led to uneven adoption. Germany and France, for example, have phased out financial incentives for this purpose.

China has successfully integrated its EV strategy, unlike Europe. More than half of the cars sold in China are EVs or plug-in hybrids. Europe cannot follow the Chinese state model and has decided to impose tariffs on Chinese EV imports.

Price Emission Rights – Dec-24 contract EEX (eur/t) – week cloud candle, log scale

“It is absurd that Britain pays Scottish wind farms to go out when the wind blows, while at the same time paying gas power plants in the south to go on.” – Clem Cowton, Octopus Energy Group board of directors

Totally wasted wind energy

Britain is paying 1 billion pounds to waste a record amount of wind power, according to Bloomberg. Burgeoning capacity and stormy weather should have accounted for a significant increase in production in 2024. But the power grid can’t handle the supply, forcing the grid operator to pay wind farms to turn off their turbines. Costs that will ultimately be borne by all customers. It’s a situation that jeopardizes plans to decarbonize the grid by 2030 and makes it harder to reduce energy costs.

Essential to the net zero goal is large-scale expansion of renewable electricity, especially wind. Britain has increased its offshore fleet by 50% over the past 5 years. It is expected to double in the next 5 years, Bloomberg expects. However, the power grid has not expanded at the same rate. As a result, the grid operator is increasingly paying wind farms, especially in Scotland, not to run. Britain has spent €1.25 billion in congestion charges so far this year to turn off plants that could not supply electricity because of grid constraints, and to turn on other conventional power plants.

Just last month, during Storm Bert, some of Britain’s newest and largest wind farms lay idle. Scotland’s £3 billion Seagreen project, owned by SSE plc and TotalEnergies, was evicted. SSE’s Viking development in the Shetland Islands was also shut down.

Wind versus GasBritishproducers usually sell their output in advance on the wholesale market. However, these transactions do not take into account the physical constraints of balancing supply and demand in real time. Keeping the lights on requires the grid operator to intervene by paying some plants to go offline and sparking others, closer to demand. Often this means turning off a distant wind farm and simultaneously starting up a gas plant at a location close to a city.

Wind losses are significant. Some examples:

• General Electric (GE): GE offshore wind business is expected to lose $1 billion in 2023 and 2024. This is due to a number of challenges, including:
  • Inflation
  • High interest rates
  • Bottlenecks in supply chains
  • Increasing cost of components
• Siemens: lost nearly $1 billion on wind last year.
• Vestas: saw an operating profit decline of 369%.

In doing so, new wind projects face:

• Increased costs: Prices of raw materials such as steel and copper, as well as construction and operating costs, have increased.
• Regulatory process: takes six years on average, but may be shorter in some countries.
• Lawsuits and disinformation: lawsuits by advocacy groups and disinformation campaigns delay further development.

Cancelled projects

• In late 2023, Orsted canceled the 2,400 MW Ocean Wind 1 and 2 projects in New Jersey. Reasons were reportedly: rising interest rates, high inflation and supply chain delays.
• In January, Orsted withdrew commitments to Maryland’s Public Service Commission to build the Skipjack 1 and 2 projects. totaling 966 MW, but is still in the process of advanced development and permitting.
• In late 2023, the developer of the 20-MW Icebreaker Wind project on Ohio’s Lake Erie shore put the project on hold because of rising costs and loss of financing.

The impact of the Jones Act on offshore turbines inAmericaAnother significant obstacle to offshore wind development in America involves a century-old law known as the Jones Act. The Jones Act requires that ships that ship cargo between American points, must be built in America, handled by America and owned by America.

This law was written to boost the shipping industry after World War¹ . However, there are only three installation ships worldwide large enough to transport the offshore wind turbines proposed for U.S. projects. None of these vessels are compliant with the Jones Act.

This means wind turbine components must be transported by smaller ships from U.S. ports. Then they can be installed by foreign installation ships waiting offshore. This increases costs and the likelihood of delays.

As a result, America has the highest shipping costs in the world.

The Biden administration has set a goal to install 30 Gigawat of offshore wind capacity to be installed by 2030. The actual number is more likely to be half that, according to Bloomberg: Material and labor costs have increased, the price of money (interest) has risen and opposition to projects has intensified. The cancellations show that these projects, at least the offshore ones, are absolutely unprofitable, even with hefty subsidies.