So President Trump has pulled America out of the shackles of the Paris Agreement. Back in December 2015, 196 countries of the United Nations adopted the agreement, requiring them to tackle climate change through emissions cuts. Under the previous administration, the US was an enthusiastic proponent of the measure, aiming to reduce its emissions by 23-25% through 2025. This week, President Trump, joins Syria and Nicaragua as the three lone holdouts. Syria is in the middle of a civil war. Nicaragua didn’t think the agreement went far enough. Russia supports the agreement. Even North Korea has adopted it!
The logic behind Trump’s decision can be debated ad infinium. In the dramatic ebb and flow of his administration, it now appears that the right-wing led faction has asserted itself over the argument for what is best for America. There have been observations that Trump’s decision was a petulant one in the wake of what he perceived as disrespect as he met the leaders of the European Union and the G7 last week. But whatever the actual reasons, the reality is that the US no longer wants to be bound to the (voluntary) targets.
President Trump wants to free the US to drill for oil anywhere and burn coal as much as it wants, to grow its economy and create jobs. Good news for medium and small-sized drillers, who may now face fewer costly environmental regulations. It is also nectar to the ears of American mining towns, hoping for a return for coal, his strong voter base. The mining towns of the Appalachia were instrumental in handing Trump the Presidency.
“I was elected to represent the citizens of Pittsburgh, not Paris,” Mr. Trump said, on Thursday, calling the decision a “reassertion of our sovereignty.” Mr. Trump cited disadvantages to US workers and the blocking of the development of “clean coal” technologies as reasons for pulling the out of the agreement, which is aimed at curbing greenhouse-gas emissions, believed to be a key driver of climate change, the Wall Street Journal reports.
But there are some risks associated with this new freedom. What Trump has done will unleash market forces that may minimise any clear economic advantage in the long term. Amongst other things, further increased oil and gas supply in the US, will push crude prices down. OPEC may just decide that it is futile to continue their supply cuts, and revert to a war for market share, driving prices further down again. And there will be so much gas sloshing around America that coal will continue to decline; not because it is a dirty fuel, but because burning it is too expensive.
Ironically, the heads of America’s largest energy firms (including ExxonMobil and ConocoPhillips) are all committed to it – recognising that energy now needs to include clean energy. American states are in rebellion. California, New York and Washington states – collectively the fourth largest economy in the world – have formed a pact to adhere to the Paris targets within their states. Some 11 American state governors and 71 city mayors - including Republicans – are defying their President to stick to the Paris climate accord emission standards. Across the pond, the EU has agreed closer cooperation with China to ensure the Paris Agreement does not collapse. However it is worth noting that it will take the US four years to pull out from the already implemented framework, so any effect will be in the long term.
Will the US be no longer a partner in global climate initiatives? It is worth noting that the US is not totally against any future climate accords but just a better deal (for itself). “President Trump said he would begin negotiations to either re-enter the Paris agreement under new terms or craft a new deal that he judges fair to the U.S. and its workers,” the Wall Street Journal reports. In response to the announcement from the White House, recently elected President Emmanuel Macron of France issued a joint statement with the leaders of Germany and Italy saying the accord “cannot be renegotiated, and there is no plan B, as there is no planet B”. This will be a mistake. The US is currently the world’s second largest greenhouse gas emitter, and to exclude it from any future climate discussion would be like ignoring the elephant in room. The world needs real leadership on how it can save itself.
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Working natural gas inventories in the Lower 48 states totaled 3,519 billion cubic feet (Bcf) for the week ending October 11, 2019, according to the U.S. Energy Information Administration’s (EIA) Weekly Natural Gas Storage Report (WNGSR). This is the first week that Lower 48 states’ working gas inventories have exceeded the previous five-year average since September 22, 2017. Weekly injections in three of the past four weeks each surpassed 100 Bcf, or about 27% more than typical injections for that time of year.
Working natural gas capacity at underground storage facilities helps market participants balance the supply and consumption of natural gas. Inventories in each of the five regions are based on varying commercial, risk management, and reliability goals.
When determining whether natural gas inventories are relatively high or low, EIA uses the average inventories for that same week in each of the previous five years. Relatively low inventories heading into winter months can put upward pressure on natural gas prices. Conversely, relatively high inventories can put downward pressure on natural gas prices.
This week’s inventory level ends a 106-week streak of lower-than-normal natural gas inventories. Natural gas inventories in the Lower 48 states entered the winter of 2017–18 lower than the previous average. Episodes of relatively cold temperatures in the winter of 2017–18—including a bomb cyclone—resulted in record withdrawals from storage, increasing the deficit to the five-year average.
In the subsequent refill season (typically April through October), sustained warmer-than-normal temperatures increased electricity demand for natural gas. Increased demand slowed natural gas storage injection activity through the summer and fall of 2018. By November 30, 2018, the deficit to the five-year average had grown to 725 Bcf. Inventories in that week were 20% lower than the previous five-year average for that time of year. Throughout the 2019 refill season, record levels of U.S. natural gas production led to relatively high injections of natural gas into storage and reduced the deficit to the previous five-year average.
The deficit was also decreased as last year’s low inventory levels are rolled into the previous five-year average. For this week in 2019, the preceding five-year average is about 124 Bcf lower than it was for the same week last year. Consequently, the gap has closed in part based on a lower five-year average.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report
The level of working natural gas inventories relative to the previous five-year average tends to be inversely correlated with natural gas prices. Front-month futures prices at the Henry Hub, the main price benchmark for natural gas in the United States, were as low as $1.67 per million British thermal units (MMBtu) in early 2016. At about that same time, natural gas inventories were 874 Bcf more than the previous five-year average.
By the winter of 2018–19, natural gas front-month futures prices reached their highest level in several years. Natural gas inventories fell to 725 Bcf less than the previous five-year average on November 30, 2018. In recent weeks, increasing the Lower 48 states’ natural gas storage levels have contributed to lower natural gas futures prices.
Source: U.S. Energy Information Administration, Weekly Natural Gas Storage Report and front-month futures prices from New York Mercantile Exchange (NYMEX)
Headline crude prices for the week beginning 14 October 2019 – Brent: US$59/b; WTI: US$53/b
Headlines of the week
Amid ongoing political unrest, Ecuador has chosen to withdraw from OPEC in January 2020. Citing a need to boost oil revenues by being ‘honest about its ability to endure further cuts’, Ecuador is prioritising crude production and welcoming new oil investment (free from production constraints) as President Lenin Moreno pursues more market-friendly economic policies. But his decisions have caused unrest; the removal of fuel subsidies – which effectively double domestic fuel prices – have triggered an ongoing widespread protests after 40 years of low prices. To balance its fiscal books, Ecuador’s priorities have changed.
The departure is symbolic. Ecuador’s production amounts to some 540,000 b/d of crude oil. It has historically exceeded its allocated quota within the wider OPEC supply deal, but given its smaller volumes, does not have a major impact on OPEC’s total output. The divorce is also not acrimonious, with Ecuador promising to continue supporting OPEC’s efforts to stabilise the oil market where it can.
This isn’t the first time, or the last time, that a country will quit OPEC. Ecuador itself has already done so once, withdrawing in December 1992. Back then, Quito cited fiscal problems, balking at the high membership fee – US$2 million per year – and that it needed to prioritise increasing production over output discipline. Ecuador rejoined in October 2007. Similar circumstances over supply constraints also prompted Gabon to withdraw in January 1995, returning only in July 2016. The likelihood of Ecuador returning is high, given this history, but there are also two OPEC members that have departed seemingly permanently.
The first is Indonesia, which exited OPEC in 2008 after 46 years of membership. Chronic mismanagement of its upstream resources had led Indonesia to become a net importer of crude oil since the early 2000s and therefore unable to meet its production quota. Indonesia did rejoin OPEC briefly in January 2016 after managing to (slightly) improve its crude balance, but was forced to withdraw once again in December 2016 when OPEC began requesting more comprehensive production cuts to stabilise prices. But while Indonesia may return, Qatar is likely gone permanently. Officially, Qatar exited OPEC in January 2019 after 48 years of continuous membership to focus on natural gas production, which dwarfs its crude output. Unofficially, geopolitical tensions between Qatar and Saudi Arabia – which has resulted in an ongoing blockade and boycott – contributed to the split.
The exit of Ecuador will not make much material difference to OPEC’s current goal of controlling supply to stabilise prices. With Saudi production back at full capacity – and showing the willingness to turn its taps on or off to control the market – gains in Ecuador’s crude production can be offset elsewhere. What matters is optics. The exit leaves the impression that OPEC’s power is weakening, limiting its ability to influence the market by controlling supply. There are also ongoing tensions brewing within OPEC, specifically between Iran and Saudi Arabia. The continued implosion of the Venezuelan economy is also an issue. OPEC will survive the exit of Ecuador; but if Iran or Venezuela choose to go, then it will face a full-blown existential crisis.
Current OPEC membership: