Home Commodities The oven keeps the market on its toes

The oven keeps the market on its toes

by SuperiorInvest

This article is a version of our Energy Source newsletter. Register here to receive the newsletter every Tuesday and Thursday directly to your email inbox

Welcome to another power source.

Expectations for COP27 were low, given that Western countries are struggling to secure more fossil fuels following Russia’s large-scale invasion of Ukraine. But the result – with a vague agreement that rich countries disproportionately contributing to climate change would compensate the poorer ones who suffer the most – was still disappointing. And if you are a producer or consumer of energy – dirty or clean – summit there was no event. Consumption of all forms of energy, from coal to solar, continues to grow. So are emissions.

With perfect timing, China meanwhile stepped up, while private jets were still on the Sharm el-Sheikh runway, to announce colossal new shipments of liquefied natural gas. deal with Qatar — one that is likely to raise eyebrows in Europe, where utilities have been reluctant to enter into such long-term purchase contracts.

Our main note today is the oil markets, which were volatile yesterday. And speaking of Qatar, Amanda’s Data Drill looks at the carbon cost of the World Cup.

England are off to a great start, by the way, although a note to Gareth Southgate: Manchester’s best Marcus Rashford should be in the starting XI.

Thank you for reading. — Derek

Is Opec going to increase oil supplies?

Oil prices they were wild again yesterday, the first since the Wall Street Journal story claimed that Opec would increase production — just a month after pledging to cut it — and then recovered after Saudi Arabia flatly refused, indicating instead that it might even cut further supplies if necessary. The UAE also made a similar statement. Russia’s statement that it may also cut output again if the proposed price cap goes ahead also helped prices settle around the level, despite a dip earlier in the day.

So what is it about?

It is not entirely out of the question that OPEC could increase production now, given that some countries, such as Iraq and the United Arab Emirates, have fumed over cuts in the past. When the news broke, some commentators privately speculated that Saudi Arabia was now willing to reward Joe Biden after his administration granted Crown Prince (and Prime Minister) Mohammed bin Salman immunity for his role in the assassination of journalist Jamal Khashoggi.

Don’t forget, too, that when the virus began shutting down the global economy — and oil demand — in the spring of 2020, Saudi Arabia turned on the taps. The kingdom has prepared surprises before.

But as several confused OPEC insiders said yesterday, the timing of any production increase now would be very odd. After all, the one last month decision to limit supplies, OPEC insisted, reflecting growing evidence of a weakening economy and a slowdown in global oil demand.

“We need to avoid a crash in the oil market due to the slowdown,” Suhail Al Mazrouei, the UAE’s energy minister, told us at the time.

Saudi Energy Minister Prince Abdulaziz bin Salman said OPEC must be “proactive” and avoid the mistakes of central banks that acted “belatedly” in raising interest rates.

That was all six weeks ago – but the data now looks even worse. Ahead of OPEC’s meeting last month, the group forecast a 2.3 million bpd increase in oil demand in 2023, and the International Energy Agency’s estimate was 2.1 million. Opec has since cut that by 100,000 b/d and the IEA is down 500,000 b/d from its 2023 forecast to 1.6 million.

The main problem is China, the global engine of oil demand growth in recent years. With its “unyielding” zero-Covid policy and a stuttering economy, the IEA believes China’s oil demand will fall by more than 3 percent in 2022.

“The outlook for global oil demand continues to face myriad headwinds in the form of rising recession probabilities, China’s persistently weak economy, Europe’s energy crisis, soaring crack product values ​​and a strong US dollar,” the IEA said in its latest oil market report. published earlier this month.

The market itself hardly signals a need for more oil. Even after yesterday’s rise, Brent has fallen by 11 percent since its October peak. Meanwhile, the front end of the forward curve for West Texas Intermediate is now in contango (meaning spot prices are cheaper than the price of oil due months later) and Brent is flirting with the same. Contango is a reliable signal of bearish sentiment.

A line chart of the 12-month spread ($/barrel) showing the 1-year spread is moving towards contang...
Line chart of 1-month spread ($/barrel) showing ... and 1-month WTI spread already exists

The bearish sentiment may not last, given that the market is less than three weeks away from the implementation of tougher sanctions on crude supplies from Russia, the world’s largest oil exporter. On Monday, Moscow’s Deputy Prime Minister Alexander Novak reminded the market of this looming cliff edge, reiterating that his country could unilaterally curb oil exports if customers cooperated with a plan by Western countries to limit the price at which Russia sells its oil.

In that case, Saudi Arabia might reconsider increasing its supply, people familiar with its thinking say. But that is now far from the mind, analysts said.

“Saudi Arabia remains extremely concerned about the state of oil demand, particularly in China, which led it to cut output last month,” said Amrita Sen, head of research at consultancy Energy Aspects. “To reverse this at a time when China’s quarantine is worsening and some crude classes are in contango would defy logic.”

If anything, Abdulaziz’s claim said yesterday that the kingdom “categorically denies” reports that Opec was set to increase production, hinting at even deeper cuts to keep oversupply at bay. “The current cut of 2 million barrels per day by Opec+ continues until the end of 2023, and if further measures are needed to cut production to balance supply and demand, we are always ready to intervene,” Abdulaziz said.

The department’s strong statement “and the suggestion that further cuts are not completely off the table should give market participants pause in predicting a policy reversal next meeting,” Helima Croft, head of global commodities strategy at RBC Capital Markets, wrote in a note.

“We see a significant chance of a ‘stay the course’ decision until there is clear evidence of a real supply disruption from Russia, but recognize that an adjustment to OPEC’s baseline could still be considered, which could lead to a modest increase,” she added. (Derek Brower)

Data drill

The 2022 World Cup kicked off in Qatar this weekend, and it comes with quite the carbon footprint. FIFA predicts that the tournament’s total emissions will reach 3.6 million tonnes of CO₂ – equal to annual emissions of some small nations – which calls into question the tournament’s claims to being carbon neutral.

Emissions may even exceed FIFA’s estimate. The Carbon Market Watch report states that emissions from the construction of stadiums were eight times higher than FIFA’s projections and accused the organisation’s mitigation measures, which include carbon offsets and a nursery school, of a lack of integrity.

Fifa said it uses the Greenhouse Gas Protocol, the most widely used accounting standards to quantify emissions, and had FIFA’s carbon footprint consultancy, South Pole, create it.

Football’s governing body also said it has implemented a comprehensive set of initiatives to reduce emissions, including energy-efficient stadiums, low-emission transport and sustainable waste management practices.

Major sporting events such as the FIFA World Cup and the Olympics are coming under increasing scrutiny for their expensive and carbon-intensive facilities built to last only a few weeks at most.

Since Qatar won its bid to host this year’s tournament in 2010, the oil-rich nation has spent $200 billion on World Cup infrastructure, including the construction of seven stadiums, an effort fraught with concerns of human rights abuses. (Amanda Chu)

Bar chart of range 3 emissions by source showing the majority of World Cup 2022 emissions will come from aviation

Power Points

  • Cheaper energy costs and climate subsidies are sparking in the US investment exodus as European industry moves production across the Atlantic.

  • BP says Biden’s new climate bill will put green plans in the US.on steroids“.

  • Future emissions from active coal-fired power plants will overcome you of all existing coal-fired power plants.

  • Big companies claim to be “carbon neutral”. purchase of carbon offsets which according to experts are unnecessary. (Bloomberg)

Energy Source is a bi-weekly energy newsletter from the Financial Times. Writes and edits Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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