We will take the liberty of adapting Henry Ford’s famous quote to say: “Whether you think you are a bull or whether you think you are bear, you are right!” Either side of the divide could marshal enough arguments to support its case this week, though clearly the bulls were louder as Brent attempted to brush up against the $60 mark for the first time since July 2015. The futures market is notoriously given to short-termism when establishing prices, and it was understandably hard to look beyond one’s nose as crude rallied beyond the year’s previous peak. So, we took it upon ourselves to bring the bearish factors in clear view, including the fact that the worst fears of supply disruption as result of the Kurdish independence referendum were not realized, and remain a tail risk at best in an otherwise comfortably oversupplied world. OPEC basked in reflected glory, but it would be premature to declare its strategy a clear win. Demand growth projections could yet leave the optimists in the lurch. Meanwhile, away from Brent’s backwardation is the continuing WTI contango, which is giving US producers an opportunity to hedge and lock in prices above $50 for output a year from now.
“Is Brent in a bubble waiting to burst?” we asked in last Friday’s Viewsletter. It didn’t burst (which to us meant giving up most of its premium above $52) and a few oil experts we hold in high regard argued with us this week that it wasn't a bubble, either.
Some of the oil trading and analyst heavyweights gathered in Singapore for the 33rd Asia Pacific Petroleum Conference over September 25-27 were sanguinely bullish. Speaker Ben Luckock, co-head of group market risk at Swiss trader Trafigura, grabbed imaginations and headlines by suggesting that 2018 could mark the end of “lower-for-longer” oil prices.
As front-month ICE Brent futures rallied to a high not seen in two years above $59/barrel Monday amid tensions over the Kurdish independence referendum and flirted with the $60 high-water mark in subsequent trading sessions, being a bull was de rigueur. Cautioning the industry to not forget the bearish factors still looming in the background risked making you a party pooper.
The prospect of a new wave of demand destruction advancing towards the oil industry in the shape of electric vehicles and the sharing economy got the cursory nod in conference presentations and networking chatter at the seemingly endless cocktail receptions, but wasn’t spoiling the mood for most.
Giddy talk of this year’s “surprisingly strong demand growth” and how it would rid the world of oversupply, helped by the OPEC/non-OPEC cuts (which were hastily declared an unmitigated success) and speculation over the declining fortunes of the US shale industry dominated groupthink.
Coincidentally, as the parties petered out, Brent had corrected down to the $57/barrel level. WTI, which had rallied only to sevenmonth highs, was holding just over $51 Friday. If there is a bull run, be ready to run fast and change course swiftly. The underlying fundamentals of oversupply, we believe, remain firmly in place.
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In its latest Short-Term Energy Outlook (STEO), released on January 14, the U.S. Energy Information Administration (EIA) forecasts year-over-year decreases in energy-related carbon dioxide (CO2) emissions through 2021. After decreasing by 2.1% in 2019, energy-related CO2 emissions will decrease by 2.0% in 2020 and again by 1.5% in 2021 for a third consecutive year of declines.
These declines come after an increase in 2018 when weather-related factors caused energy-related CO2 emissions to rise by 2.9%. If this forecast holds, energy-related CO2 emissions will have declined in 7 of the 10 years from 2012 to 2021. With the forecast declines, the 2021 level of fewer than 5 billion metric tons would be the first time emissions have been at that level since 1991.
After a slight decline in 2019, EIA expects petroleum-related CO2 emissions to be flat in 2020 and decline slightly in 2021. The transportation sector uses more than two-thirds of total U.S. petroleum consumption. Vehicle miles traveled (VMT) grow nearly 1% annually during the forecast period. In the short term, increases in VMT are largely offset by increases in vehicle efficiency.
Winter temperatures in New England, which were colder than normal in 2019, led to increased petroleum consumption for heating. New England uses more petroleum as a heating fuel than other parts of the United States. EIA expects winter temperatures will revert to normal, contributing to a flattening in overall petroleum demand.
Natural gas-related CO2 increased by 4.2% in 2019, and EIA expects that it will rise by 1.4% in 2020. However, EIA expects a 1.7% decline in natural gas-related CO2 in 2021 because of warmer winter weather and less demand for natural gas for heating.
Changes in the relative prices of coal and natural gas can cause fuel switching in the electric power sector. Small price changes can yield relatively large shifts in generation shares between coal and natural gas. EIA expects coal-related CO2 will decline by 10.8% in 2020 after declining by 12.7% in 2019 because of low natural gas prices. EIA expects the rate of coal-related CO2 to decline to be less in 2021 at 2.7%.
The declines in CO2 emissions are driven by two factors that continue from recent historical trends. EIA expects that less carbon-intensive and more efficient natural gas-fired generation will replace coal-fired generation and that generation from renewable energy—especially wind and solar—will increase.
As total generation declines during the forecast period, increases in renewable generation decrease the share of fossil-fueled generation. EIA estimates that coal and natural gas electric generation combined, which had a 63% share of generation in 2018, fell to 62% in 2019 and will drop to 59% in 2020 and 58% in 2021.
Coal-fired generation alone has fallen from 28% in 2018 to 24% in 2019 and will fall further to 21% in 2020 and 2021. The natural gas-fired generation share rises from 37% in 2019 to 38% in 2020, but it declines to 37% in 2021. In general, when the share of natural gas increases relative to coal, the carbon intensity of the electricity supply decreases. Increasing the share of renewable generation further decreases the carbon intensity.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2020
Note: CO2 is carbon dioxide.
GEO ExPro Vol. 16, No. 6 was published on 9th December 2019 bringing light to the latest science and technology activity in the global geoscience community within the oil, gas and energy sector.
This issue focusses on oil and gas exploration in frontier regions within Europe, with stories and articles discussing new modelling and mapping technologies available to the industry. This issue also presents several articles discussing the discipline of geochemistry and how it can be used to further enhance hydrocarbon exploration.
You can download the PDF of GEO ExPro magazine for FREE and sign up to GEO ExPro’s weekly updates and online exclusives to receive the latest articles direct to your inbox.
Headline crude prices for the week beginning 13 January 2020 – Brent: US$64/b; WTI: US$59/b
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