Energy market analysis Nov. 27, 2024

“There is an ongoing mismatch with the missing barrels. My expectation is that demand forecasts will be revised higher and agency balance sheets will look less bearish.” – Giovanni Staunovo, commodities analyst UBS Group AG

One of the biggest negative factors now hanging over the oil market is the conventional wisdom that 2025 will show a potential surplus of 1 million barrels per day (bpd). The result of accelerating supply and slowing demand. This surplus will begin to depress prices and prevent OPEC+ from increasing production. Often, however, conventional wisdom is wrong.

Many oil traders agree with the International Energy Agency’s (IEA) view that inventories will increase next year. Still, there are reasons to believe that the expansion could be much smaller than predicted or that there is no expansion at all. According to the agency, over the past quarter, global oil inventories declined by about 1.16 million bpd. That is the conclusion based on preliminary data and significantly more than the 380,000 bpd reduction predicted by the IEA in its supply-demand balance sheet. The gap between the two is comparable to Poland’s daily oil demand.

The gap totals some 70 million barrels over the 3-month period. Alex Longley of Bloomberg expects the market to be shaped next year by what happened to these missing barrels from that quarter. Oil bulls assume the IEA will eventually adjust its balance sheet to correct for larger inventory withdrawals. This will potentially reduce the size of the 2025 surplus.

This is not the first time “missing barrels” have had a negative impact on the oil market outlook. Oil forecasts have long suffered from the concept of missing barrels. The IEA as well as the U.S. Energy Information Administration and OPEC constantly compare their analysis to changes seen in the real world. They try to keep their models reliable, which actually almost never succeeds. Indeed, the imbalance always tends in a direction that encourages lower prices. In its defense so soon before the upcoming adjustments, the IEA has indicated that the mismatch likely reflects inventory changes in countries where data are unavailable or incorrect.

Historical data adjustments are common. Earlier this month, the IEA lowered its 2022 oil demand estimate by 70,000 bpd due to new data from non-OECD countries in Latin America and Asia. Now that Trump will become president again, the pro-green and pro-Biden IEA can be expected to possibly adjust its “error” in the opposite direction. It is generally expected that Trump will fire the head of the IAE after his inauguration.

Price Crude Oil – Brent January 2025 ($/barrel) – day cloud candle, log scale

“The goal of providing reliable, affordable energy – the reason utilities had a monopoly – was replaced by a controversial and partisan political goal.

“The article “Utility Companies Are Not on Our Side” explains how U.S. utilities are increasingly prioritizing profits over energy reliability and affordability. Originally, utilities were regulated to provide reliable and affordable energy. Their focus has shifted to pursuing net-zero carbon emissions. This has led to an increase in renewable energy sources such as wind and solar, despite their varying availability and higher costs.

Politicians and utilities are working together to obtain subsidies and tax breaks for large renewable energy projects. The article highlights that this shift to renewables does not always deliver the promised environmentally friendly benefits and often leads to ecosystem disruptions and higher rates. A report by The Heartland Institute provides more insight into the significant financial incentives from government and funders for this transition, with reliability and affordability often coming only second.

Policymakers and utilities are pushing further electrification in applications and transportation. This is taking place despite warnings in recent years that adding more electricity demand is destabilizing the electricity system, while reliable electricity sources are being replaced by variable renewables. As a result, rolling blackouts and brownouts have unfortunately become commonplace. It doesn’t have to be this way. Many countries can use these experiences to shape their energy transition gradually and more effectively, taking into account the possibilities and limitations ven the power grid.

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

“The high premium of European prices over U.S. prices will encourage LNG exporters to ship more cargoes to Europe this winter season.” – Tsvetana Paraskova of OilPrice

The European benchmark natural gas prices have reached a one-year high. This puts the price above U.S. benchmark gas prices AND well above the 2024 average. It will cause US LNG exporters to further upscale their deliveries towards Europe to take advantage of this spread. Currently, U.S. benchmark Henry Hub prices are about 80% lower than Dutch forward contracts TTF natural gas, the benchmark for Europe’s gas trade.

Last week, European benchmark prices rose to the highest level since November 2023 as Austria’s OMV warned of a potential cessation of Russian pipeline gas supplies. This combined with colder weather drove up heating and electricity demand. Russian Gazprom did indeed cut supply to OMV, but with less impact than expected.

European natural gas markets have been nervous for weeks with the start of the winter heating season. The reasons are:

• little wind in northwestern Europe
• the OMV-Gazprom dispute
• the end of the gas transit deal with Ukraine by Dec. 31, 2024.

The real heating season has yet to begin. Ukraine has indicated it will not enter into negotiations with Russia to renew this agreement.

Natural gas production volume from the seven U.S. LNG export plants last week was off to a 10-month high. Higher European prices caused LNG cargoes, initially destined for Asia, to divert to Europe. For example, 11 cargoes were diverted to Europe last week alone, according to Argus based on vessel tracking data from Vortexa.

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

“Russia leads the way with natural resources worth $75 trillion, largely consisting of coal, natural gas, oil and rare earths.“

Natural resources are the backbone of the modern manufacturing industry, necessary to produce everything. There are 10 countries that dominate the global natural resource landscape, according to Statista. Each country holds large reserves, essential for various industries.

Russia leads the charge with natural resources estimated at $75 trillion, consisting mainly of coal, natural gas, oil and rare earths. Russia’s mineral reserves are estimated at about $1.44 trillion, as of the end of 2018. In terms of global gas share, no country comes close to Russia with world’s largest proven reserves of over 37 trillion cubic meters as of 2020. Accounting for 20% of the global total.

America ranks second, with an estimated $45 trillion in natural resources, including coal, timber, natural gas and valuable metals such as gold. In Saudi Arabia and Canada, natural resources are mainly driven by oil wealth, making these countries the third and fourth place. Saudi Arabia, with its extensive oil fields, is a leader in global energy markets. On the other hand, Canada also reaps the benefits of substantial uranium reserves and is home to some of the world’s largest timber companies.

Further down the list is China with significant coal reserves. The country is the largest producer of this fuel. Mineral-rich Brazil and Australia are leading producers of metals such as iron ore, while Australia is also a top exporter of coal.

Global coal consumption continues to increase.

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

“Now Germany has a green power outage with huge consequences.” – Mike Shedlock of MishTalk.com

No sun, no wind. Hello Germany. Time to rethink the Green New Deal? Welt Business writes that Germany is now experiencing green power outages with huge consequences. The sensible approach would have been to replace coal with nuclear and natural gas. Instead, the country led by Angela Merkel chose to move away from nuclear with no viable alternative. When that failed, Germany had to import energy from France, as well as polluting coal from neighboring countries. As a result, the green parties took hard hits in European parliamentary elections, French elections and three German state elections.

However, that in no way changed the European position. European Commission President Ursula von der Leyen outlined Europe’s significant progress and continued leadership in the renewable hydrogen sector in her speech at the Renewable Hydrogen Summit. This is in sharp contrast to the slower pace of progress in the United States.

Europe completed investment decisions on more than 2 gigawatts of renewable hydrogen projects last year. A substantial increase that quadruples existing installed capacity.

The REPowerEU plan aims to produce 10 million tons of renewable hydrogen by 2030. Supported by legislative mandates that require a significant portion of hydrogen used in industry and transportation to be renewable by the end of the decade. In addition to being ambitious, these targets are also binding: member states must have incorporated them into national law by May 2025.

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

Solar powerhouse China leads green energy movement in Asia.

To implement green energy solutions in Asia, chances are you’re going to depend on China one way or another no matter what. Southeast Asian demand for renewable energy is increasing, driven by Tech industry and data center growth, according to Nikkei.

Solarvest, the region’s leading renewable energy provider, has plans to capitalize on this growth by increasing imports from China. According to a local manager, they plan to invest more in the coming years. By buying equipment and parts from Chinese suppliers who have mastered the supply chain and solar technology, they expect to have the best chance of generating green energy at a price low enough to compete with fossil fuels.

The Belt & Road Initiative (BRI), also known as the New Silk Road, is a large-scale infrastructure project launched in 2013 by Chinese President Xi Jinping. The aim of this initiative is to improve connectivity and cooperation between Asian, European, African and other countries through investment in infrastructure such as roads, railroads, ports and energy projects.

With the BRI initiative, China has expanded its influence over electricity infrastructure in other countries such as Malaysia, Thailand and Pakistan. America has criticized China for subsidizing manufacturing and underpricing goods. This has led to price and trade barriers. The Nikkei report indicates that China has economies of scale and increasing climate urgency despite American opposition. For example, solar energy, seen as the most accessible renewable resource, managed to attract $500 billion in investment by 2024, overtaking all other energy types, according to the International Energy Agency.

Offshore wind projects take 8 years to complete, while solar farms can be built within 2 years. This makes solar the fastest choice for companies looking to make the transition toward renewable, according to industry leaders. This urgency is especially evident in emerging Asian economies like Malaysia and Thailand that rely on fossil fuels, but also as these countries look to attract tech giants like Apple and Google that are 100% committed to renewable energy through the RE100 initiative.

China dominates the global solar energy market with leading players. Think Longi Green Energy, Tongwei, and Jinko Solar, as well as the top three inverter builders: Huawei, Sungrow, and Ginlong. Despite attempts by America and India to produce locally, China is predicted to control more than 80% of global photovoltaic capacity by 2030. With solar products costing 20-30% less than competitors, according to the IEA.

Analysts point to China’s economies of scale, advanced technology and cost efficiency. Even as countries erect trade barriers to reduce reliance on Chinese products, global demand for China’s affordable solar solutions will remain strong. Companies like Foxconn are showing that Chinese solar energy can compete with fossil fuels in terms of cost. This has made China popular as a renewable supplier worldwide, especially in markets eager to expand their renewable energy capacity. Meanwhile, China controls more than 90% of the solar supply chain, from polysilicone production to module manufacturing.