Energy market analysis November 12th 2024

“We fundamentally believe the world will need more energy and we fundamentally believe it will need different forms of energy.” – Wael Sawan, CEO Shell.

Geopolitical volatility typically serves as a tailwind for oil prices. According to Bloomberg, CEOs of major oil companies are most concerned about escalating tensions in the Middle East and the relationship between the U.S. and China. Increasing tensions between Israel and Iran, an OPEC member, have raised awareness among traders about potential supply disruptions, while China’s weak economy is slowing oil demand growth. Meanwhile, relations between America and China remain uncertain as President-elect Donald Trump has promised significant tariff hikes on Chinese exports.

The Middle East conflict currently poses the largest risk, according to Murray Auchincloss, CEO of BP. BP is active in five or six countries in the region. The company is concerned about the safety of its people and the continuity of the energy supply. Shell’s CEO Wael Sawan is worried about developments between America and China. He believes the world needs more energy, and especially different forms of energy.

CEOs of the big oil companies express confidence that oil demand will continue to grow despite the economic slowdown in Asia. Ongoing investments are needed to maintain supply, even as the world moves toward cleaner energy. They have mixed views on oil demand, with some scenarios anticipating strong growth despite a cooling Chinese economy, according to Bloomberg.

The International Energy Agency (IEA) expects demand to peak by 2030, while OPEC and Saudi Aramco remain optimistic, mainly due to recent Chinese stimulus. Muhammad Taufik, CEO of Petronas, believes demand will continue to increase beyond 2030. However, price volatility hinders investments, driving up futures prices, according to Eni’s CEO Claudio Descalzi.

Saudi Arabia aims to maintain its position as a major oil producer, ensuring global energy security. The maximum sustainable capacity of 12.3 million barrels per day (bpd) will be maintained. The country plans to increase its production capacity by 1.1 million bpd by 2027 to compensate for the natural decline of existing fields. It has also committed to its renewable energy goals, with plans for 44 GW of renewable energy projects by the end of this year.

By 2030, the country expects to have 130 GW of such projects underway, based on demand growth. Despite the ambitious program to boost renewables and the electricity grid, Saudi Arabia will remain visibly present in global oil markets.

As the world moves toward an energy transition, all forms of energy will be needed to ensure global energy security, according to Saudi Energy Minister Prince Abdulaziz Bin Salman. The kingdom will continue to monetize its energy resources while addressing climate change, according to OPEC+’s most influential minister.

The monthly chart for January 2025 below shows that the Brent oil price is at the lower end of the range that started in June 2022, shortly after the Russian invasion of Ukraine. The lowest point was set in September this year, after which the price rebounded strongly. This increase has largely been erased, but a higher low remains.

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

“Gas will be a critical enabler of wind and solar, providing the reliability for the grid that wind and solar alone cannot.” – Robin Gaster, Director of Research ITIF

The rapid deployment of solar and wind in the U.S. has led to a share of about 19% in electricity production. This could exceed 40% by around 2030. It is assumed that coal will quickly be replaced by clean energy. Many expect that renewables can also simply replace natural gas. However, solar and wind may remain dependent on gas for decades to come.

Today, solar and wind are relatively cheap, and prices will likely continue to fall. However, they are not available 24/7 like fossil fuels. They are variable renewable energy (VRE), meaning they only produce electricity when the sun is shining or the wind is blowing. Some of this variability is predictable; for example, solar does not produce electricity at night and delivers less in winter. Some variation, however, is unpredictable, such as prolonged periods of cloudiness or low wind. These “VRE shortages” pose no problem as long as wind and solar represent a small percentage of production. But as they become dominant, how can the gaps be filled when VRE supply is low?

American utilities are currently adding many short-duration (4-hour) lithium-ion batteries. This allows sufficient electricity to handle daily and hourly fluctuations, such as in the evening when demand is high. Despite the reliability of these batteries, which can be turned on at the push of a button, this only resolves shortages for a few hours. It’s a different story if VRE shortages last longer. What happens if shortages persist for weeks or months? Detailed studies, such as those by the Royal Society in Britain, show that prolonged periods of poor weather can occur, resulting in annual shortages of up to 20% of total grid production (in a fully carbon-free electricity grid). 

When demand peaks or supply is disrupted, utilities currently often use “peaker plants.” These are gas plants that run on a single cycle to drive turbines to generate electricity. These plants are less efficient than combined cycle gas turbines (CCGTs), and this energy is more expensive. They are often held in reserve and usually deployed to provide backup capacity, ensuring that emergency electricity is always available. Typically, grid operators pay around 15% of peak demand as reserve capacity. A lower percentage increases the risk of blackouts, while a higher percentage is wasteful. As long as VRE usage remains relatively modest, these peaking plants can cover VRE shortages. But as VRE takes a larger share of the total grid, the impact of adverse weather events will become more intense, and the supply more variable. A grid with 40% VRE will need more insurance to keep the lights on.

Alternatives to gas-fired electricity exist, such as technologies that can store energy for very long periods and deliver it on demand at a large scale, including hydrogen, hydropower, and compressed air. Compressed Air Energy Storage (CAES) stores electrical energy in a way that allows it to be released later. Hydropower is cheap to operate, is a mature and well-established technology, and generators last for decades. Still, more dams are being removed than built. Green hydrogen, on the other hand, suffers from very low efficiency; 100 kWh of green electricity is needed to deliver 40 kWh of stored dispatchable electricity. It’s costly to manufacture and store, and transport costs can be high and may cause significant emissions. Hydrogen will not suddenly become cheap like wind and solar. Compressed air currently operates at 50% efficiency, with significant improvements requiring cooling and reheating, which is expensive if the air needs to be stored for long.

That leaves gas as the only option. To enable a VRE-dominated grid, natural gas must be used as insurance against VRE shortages. This is why the DOE predicts that peaker plant capacity will grow during the clean energy transition and why it doesn’t expect a significant decline in CCGT capacity. The function of gas-fired electricity, however, is changing. Currently, CCGT plants are mainly used for steady baseload electricity, a source used 100% of the time, with additional capacity provided by peaker plants. When the green energy transition reaches full speed, CCGT plants will shift from producing baseload electricity to providing insurance against supply disruptions, much like peaker plants do today.

Finally, we can hope to build a green electricity grid without emissions, eventually phasing out gas emissions entirely. Gas might be replaced by new fuel sources, such as geothermal or even fusion. Carbon capture could eliminate gas plant emissions, and scalable storage technologies might finally mature to become the energy insurance of tomorrow.

However, it’s now clear that not all the technology needed is available. The emphasis should be on improving these essential technologies to allow for commercial deployment. Gas will be a critical enabler of wind and solar, providing reliability for the grid that wind and solar alone cannot offer. If decarbonization is to be taken seriously, this is what is needed: a realistic view of the short- and medium-term and a substantial financial commitment to developing essential technologies that deliver affordable and reliable energy. But also, a realistic understanding of the changing yet still critical role of gas in a decarbonizing electricity grid, where it will be needed for decades to come.

Price Baseload Elektricity year of delivery leverjaar 2025 (eur/MWh) – week cloud candle, log scale

“The share of Russian gas in EU imports dropped from 45% in 2021 to 18% by June 2024, while imports from trusted partners like Norway and the US have increased.” – EU State of the Energy Union Report

Despite high storage levels, European gas prices remain volatile due to supply disruptions. EU dependency on Russian gas persists, with alternative sources coming from Azerbaijan and the U.S. These countries are reaching their limits in meeting Europe’s total demand. Experts warn that Europe’s gas supply outlook for 2025 could deteriorate compared to 2024.

A year ago, European politicians declared the gas crisis, caused by the near-complete halt of Russian supply, as over. The EU focused on alternative natural gas suppliers and guaranteed enough gas to prevent shortages and high prices. However, these guarantees proved premature. At the end of October, European benchmark gas prices for the next month reached their highest level in a year, following production outages in Norway, which supplies 30% of EU gas. The TTF price hit €43.68 per MWh, the highest level since December 2023.

It appears that the future will bring more price spikes. The latest spike occurred in late October despite fully stocked European storage just before the heating season. It all revolves around supply security. For this reason, European gas buyers secured a reserve earlier this year to ensure sufficient storage for winter. Currently, gas reserves are filled to 95%, which is exemplary but will not shield the EU from shortages if the winter is colder than in the past two years.

The EU managed to get through the winter of 2022-2023 thanks to a milder-than-usual winter. But relying on luck is not a solid strategy for energy security. Thus, Russia remains the EU’s second-largest gas supplier despite all sanctions. The country supplies more to the EU than America does with LNG. This highlights that Europe still needs a lot of gas despite the voluntary demand reduction since 2022, which amounted to 138 billion cubic meters from August 2022 to May 2024, according to the State of the Energy Union Report.

It’s far from ideal if businesses must close due to unaffordable energy prices. Nevertheless, the EU has tried to put a positive spin on the demand reduction, presenting it as a success in reducing EU dependency on Russian gas. However, focusing solely on this aspect overlooks that alternative supply is far from guaranteed. The recent price spikes serve as a stark reminder of this. The Biden administration’s “pause” on approvals for new LNG export terminals was overturned by the courts. However, it will still take years to build all the planned new capacity.

Europe needs gas in the short term as Ukraine is unlikely to renew its gas transit deal with Russia. The Ukrainian pipeline is the only one transporting Russian gas to the EU, besides LNG. Bloomberg reports that the EU is discussing alternative supply options, including replacing Russian gas with Azerbaijani gas through Ukraine’s pipeline network. However, this contract would require a swap agreement between Azerbaijan and Russia since Azerbaijan lacks the export capacity to replace existing deliveries, Bloomberg explains. When this news broke, TTF prices logically fell. The dip, however, was short-lived, and prices quickly rebounded. With international gas demand rising, winter approaching, and the Azerbaijan deal not finalized, the risk is that Europe’s gas supply outlook for 2025 may not improve over 2024 and could even worsen, expects Kim Fustier from HSBC’s European oil & gas research.

Unless the EU finds a full replacement for Russian gas, it may end the winter with gas storage only 30% full, which would mean higher prices. For context, the EU ended the last heating season with storage 58% full, a comfortable level that resulted in stable prices. In a worst-case scenario, Europe might have to drain its storage to keep lights and heating on. Asia is also keen to import LNG, and winter is typically not ideal for wind and solar. Therefore, Europe’s gas problems are far from resolved.

The market reflects these uncertainties. After an initial dip yesterday, November 11, when the “opening gap” from last Friday was filled, the price for 2025 delivery rose with a long green candle toward the two-week high. The higher top from August is also nearby.

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

“The outlook for coal has been revised upwards particularly for the coming decade, principally as a result of updated electricity demand projections, notably from China and India.” – IEA

Both India and China have made it clear that they will not follow Britain’s example and have no plans to shut down any coal plants in the near future. Coal-fired electricity provides the cheap energy that Chinese and other Asian manufacturers of wind and solar components, equipment, and EVs rely on to keep their products affordable. These two countries will continue to drive coal demand in the short and medium term.

Reuters reports that coal-fired electricity production in India declined for two consecutive months due to higher solar output and lower electricity demand. Meanwhile, the import of coking coal, used in metal smelting, reached a six-year high in the first half of the fiscal year. In neighboring China, coal remains the largest contributor to the electricity supply, despite China being the world’s largest developer of solar and wind capacity—and by a wide margin. The latest domestic production figures show an increase in supply as a response to rising demand. Coal still accounts for 60% of China’s electricity production, and this will not change quickly. Both India and China have officially prioritized securing affordable energy over emissions, though both countries desire a more diverse electricity grid.

Ironically, it is coal-fired electricity that essentially drives the energy transition, as Javier Blas from Bloomberg notes. The increasing electricity demand from data centers will likely boost coal demand in parts of the world where natural gas is no longer so cheap. In its latest World Energy Outlook, the International Energy Agency (IEA) was optimistic about the energy transition and how future energy demand growth could be fully met by adding solar and wind capacity. The IEA predicts that increased investments in wind and solar will lead to 10,000 GW by 2030, up from the current 4,250 GW. This is less than the COP28 goal of tripling capacity but more than enough to meet the growth in global electricity demand and reduce coal-fired generation, according to the IEA.

Meanwhile, Britain is preparing blackout scenarios as its baseload capacity was recently decimated by the closure of the country’s last coal plant.

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

“The current regulations will with today’s assumptions, lead to a massive shrinking of the industry as a whole.” – Oliver Zipse, CEO BMW

The German car manufacturer BMW warns that an EU ban on the sale of gasoline and diesel cars from 2035 is no longer realistic amid disappointing EV sales. The European automotive industry will face massive shrinkage if this ban takes effect. European car manufacturers are struggling with their EV sales as subsidies in many countries end and Chinese low-cost car manufacturers gain market share. Last year, EU member states approved emissions regulations to end sales of new CO2-emitting cars and vans by 2035.

The European Commission will review progress in 2026 that the EU has made in meeting the new regulations’ objectives. The EU rules aim for a 55% CO2 emission reduction for new cars from 2030 to 2035 compared to 2021 levels. There’s also a target of 100% emission reduction for both new cars and vans from 2035. The Commission will decide whether these targets need to be revised.

Electric vehicle sales in Europe are under tremendous pressure this year. Sales in Germany plummeted when subsidies ended at the end of 2023. The European Automobile Manufacturers’ Association, ACEA, called for urgent action in September to reverse the declining trend in EV sales this year. European automakers, united in ACEA, are urging EU institutions to “implement urgent measures before the new CO2 targets for cars and vans take effect in 2025. European car manufacturers are doing their part in this transition, but unfortunately, the other necessary elements for this system shift are not yet in place.”

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

“By virtue of history, geography, and regional and cultural particularities and dependencies, Central Asian countries are bound with Russia and China.” – The Interpreter

Securing reliable and strategic supply chains for rare earth minerals has become a geopolitical battleground for the world’s superpowers in the intensifying context of the global clean energy transition. Decarbonizing the global economy will require an immense amount of clean energy infrastructure—from solar panels and wind turbines to lithium-ion batteries for energy storage and electric vehicles. All of this will demand large quantities of primary materials, especially metals, many of which fall into the category of rare earth elements.

Central Asian countries such as Kazakhstan, Uzbekistan, and Tajikistan are emerging as key players in the rare earth minerals market. These nations offer abundant reserves, political stability, and a willingness to develop their resources, attracting interest from Western powers as well as from China and Russia. Securing rare earth minerals is crucial for countries aiming to achieve clean energy goals and reduce dependence on China, which currently dominates this market.

The term “rare earth mineral” is actually a misnomer. These elements are not scarce, but global production capacity is relatively limited compared to demand. The need for these materials has only recently surged as the world embarks on the energy transition. Securing reliable and affordable access to these minerals is therefore an essential step to remain competitive in a fast-growing and rapidly changing sector. So far, China sets the tone and dominates the competition.

For years, China has been acquiring rare earth reserves and contracts in emerging markets around the world, resulting in what is currently an effective chokehold on global supply chains. China is home to 34% of the world’s rare earth minerals and accounted for 70% of global rare earth mining activity in 2022. The country represents at least 85% of the global capacity to process rare earth ore into factory-ready materials. Additionally, China has managed to position itself as the only large-scale producer of heavy rare earth ore on the planet, thanks to decades of state investment, export controls, cheap labor, and low environmental standards, according to a report by the Oxford Institute of Energy Studies.

China’s aggressive role has created an alarming international dependency on Chinese exports to meet global and national energy and climate goals. To compete with China and mitigate this imbalance, other global powers must make greater efforts to secure supply contracts for these elements in locations where they naturally occur and where extraction is relatively affordable.

The U.S. and China faced off in Latin America in the battle for rare earth dominance. The U.S. has so far been relatively unsuccessful in gaining a significant foothold in the so-called “lithium triangle” of Argentina, Chile, and Bolivia. Africa holds significant reserves of rare earth minerals, but political instability and corruption generally make potential investors wary. As a result, Central Asia is currently the hottest new battleground for rare earth metal contracts.

Kazakhstan, Uzbekistan, and Tajikistan are rich in vast amounts of valuable rare earth minerals. These countries appear to offer the political and economic conditions that the West is looking for. Unlike the West, Central Asian governments are enthusiastic about the prospect of turning their vast deposits of rare earth minerals and rare metals into a new source of revenue for the local economies, according to The Interpreter.

Kazakhstan is taking strategic steps to strengthen its position in the global electric vehicle (EV) battery market by increasing the output of critical metals, reports Daryo. Kazakh President Kassym-Jomart Tokayev has even referred to these materials as the new oil. The vast Central Asian country has already signed agreements with the European Union and the United Kingdom. The country could also be a receptive trading partner for the U.S.

However, Western powers are not the only major economies interested in Central Asia’s mineral wealth. China and Russia are also eager to enter these emerging markets and have certain competitive advantages over the West. Central Asian countries are bound to Russia and China by history, geography, regional and cultural particular.