Global liquid fuels
· Significant disruptions in the U.S. energy market have occurred in recent weeks as a result of Hurricane Harvey. At the time of publication, continuing uncertainty exists regarding the timeline for the return to normal operations for a broad range of upstream production, refining, pipeline, and terminal and distribution infrastructure. The severity and duration of these outages create additional uncertainty about the path of energy prices in the coming weeks and months. Although this STEO attempts to incorporate a baseline scenario for energy production, flows, and prices, actual outcomes could deviate significantly from this forecast. This month’s forecast does not include any projected effects from Hurricane Irma, which made landfall in Florida on September 10. At the time of publication, it was too early to have meaningful information on the extent to which Hurricane Irma will cause disruptions to the U.S. energy system.
· U.S. regular gasoline retail prices reached $2.69 per gallon (gal) on September 11, up 29 cents/gal from August 28 and the highest weekly average since August 2015. EIA forecasts the average U.S. regular gasoline retail price to be $2.61/gal in September and then fall to $2.40/gal in October, which are 25 cents/gal and 10 cents/gal higher, respectively, than projected in the August STEO. EIA forecasts the regular gasoline retail price to fall to $2.23/gal in December.
· Refinery operations declined significantly following Hurricane Harvey. Based on EIA’sWeekly Petroleum Status Report, U.S. gross refinery runs averaged 14.8 million barrels per day (b/d) the week ending September 1, down by 3.1 million b/d from the previous week. EIA forecasts refinery runs to average 15.3 million b/d in September, down from an estimated average of 17.1 million b/d in August. Refinery runs are forecast to increase to 15.9 million b/d in October.
· EIA expects much of the reduction in refinery production of petroleum products to be offset by a decline in petroleum product net exports. EIA expects net petroleum product exports to average 1.1 million b/d in September, down from an average of 2.9 million b/d during the first eight months of 2017. A reduction in net exports can either come from a decrease in exports or an increase in imports. Additionally, the reduction in production of petroleum products could contribute to larger-than-typical inventory draws for September.
· U.S. crude oil production is estimated to have averaged 9.2 million b/d in August, down about 40,000 b/d from the July average. Crude oil production in the Gulf of Mexico fell to a monthly average of 1.6 million b/d in August, down by 70,000 b/d from the July level. At the time of publication, many oil production platforms in the Gulf of Mexico had returned to operation, and EIA forecasts overall U.S. crude oil production will continue to grow in the coming months. EIA forecasts total U.S. crude oil production to average 9.3 million b/d for all of 2017 and 9.8 million b/d in 2018, which would mark the highest annual average production in U.S. history, surpassing the previous record of 9.6 million b/d set in 1970.
· U.S. dry natural gas production is forecast to average 73.7 billion cubic feet per day (Bcf/d) in 2017, a 1.4 Bcf/d increase from the 2016 level. Natural gas production in 2018 is forecast to be 4.4 Bcf/d higher than the 2017 level.
· In August, the average Henry Hub natural gas spot price was $2.90 per million British thermal units (MMBtu), down 8 cents/MMBtu from the July level. Expected growth in natural gas exports and domestic natural gas consumption in 2018 contribute to the forecast Henry Hub natural gas spot price rising from an annual average of $3.05/MMBtu in 2017 to $3.29/MMBtu in 2018. NYMEX contract values for December 2017 delivery that traded during the five-day period ending September 7 suggest that a range of $2.39/MMBtu to $4.34/MMBtu encompasses the market expectation for December Henry Hub natural gas prices at the 95% confidence level.Electricity, coal, renewables, and emissions
· EIA expects the share of U.S. total utility-scale electricity generation from natural gas to fall from an average of 34% in 2016 to about 31% in 2017 as a result of higher natural gas prices and increased generation from renewables and coal. Coal's forecast generation share rises from 30% last year to 31% in 2017. The projected generation shares for natural gas and coal in 2018 average 31% and 32%, respectively.
· Coal production for August 2017 is estimated to have been 74 million short tons (MMst), 6 MMst (8%) higher than last August. August is also the first month that had production higher than 70 MMst since October 2015. Production for the first eight months of 2017 is estimated to have been 528 MMst, 64 MMst (14%) higher than production for the same period in 2016. Production is expected to increase by 8% in 2017 and by 2% in 2018.
· Coal exports for the first six months of 2017 were 55% higher than exports over the same period last year. EIA expects growth in coal exports to slow in the coming months, with exports for all of 2017 forecast at 73 MMst, 21% higher than the 2016 level.
· Wind electricity generating capacity at the end of 2016 was 82 gigawatts (GW). EIA expects wind capacity additions in the forecast to bring total wind capacity to 88 GW by the end of 2017 and to 96 GW by the end of 2018.
· Total utility-scale solar electricity generating capacity at the end of 2016 was 22 GW. EIA expects solar capacity additions in the forecast will bring total utility-scale solar capacity to 29 GW by the end of 2017 and to 33 GW by the end of 2018.
After declining 1.7% in 2016, energy-related carbon dioxide (CO2) emissions are projected to decrease by 0.5% in 2017 and then to increase by 2.6% in 2018. Energy-related CO2 emissions are sensitive to changes in weather, economic growth, and energy prices.
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Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.
A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.
Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.
Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.
And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.
That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.
Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.
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