Brent and WTI prices are now at their highest levels in two years. With Brent almost touching US$65/b and WTI within shot of US$60/b, this is cheer for the market, where most participants had resigned themselves to a prolonged period of US$50/b oil. There are several factors propelling this rise. OPEC 's insistence that its supply freeze is working is proving true; despite the rise in American production (and American exports hitting all-time highs), the OPEC deal appears to be slowly clearing out the global glut. And then there has been a re-emergence of something the market hasn’t seen in a while – geopolitical risk premium.
Saudi Arabia’s decision to embark on a corruption purge in early November shocked the market. The arrest of some 11 princes – as well as the mysterious killing of a 12th as his helicopter was downed – sparked fears of turmoil was imminent in Saudi Arabia. While much of what goes on (and is going on) in the world’s largest crude producer remains a black box. Detractors within the sprawling House of Saud are not unknown, but have previously been dealt with quietly. This very public campaign – which included ‘imprisoning’ the ‘corrupt’ in the plush Ritz-Carlton – is unusual, and the market worries about what the future could hold. The politics of Saudi Arabia are complicated, and it is unclear where things will end with Crown Prince Salman’s current actions. If its future growth from a more diversified economy is all that he wants, things should go on track. If it’s just a power grab, things turn out differently.
What is truly more worrying is the part of an ongoing escalation between Saudi Arabia (and its allies, including the US) against Iran. On the day the purge was announced, Saudi Arabia said it had intercepted a missile fired from Yemen. Then the Prime Minister of Lebanon resigned while in Saudi Arabia, saying he ‘feared for his life’. Bahrain recently blamed a pipeline fire on Iran. This is a slowburn intensification since the Gulf states decided to blockade Qatar. There must be a lot of politicking going on behind the scenes, but one thing is clear – the Middle East is rapidly positioning themselves into two camps, for Saudi Arabia and for Iran. Threats of war have been declared, and even though it is unlikely right now, the danger is still real. With American diplomacy learning towards the Saudis under Donald Trump with no real peace maker in sight, bold moves could be made and hostilities could break out. Oil prices, naturally, would rise if that happens. But even the notion of it happening is making traders nervous. And keeping prices up. It is a repeat of the situation in 2011-2013, when the Arab Spring sent prices soaring.
Based on basic supply/demand fundamentals, the level of crude prices right now should probably be with the range of US$50-55/b. The market has been adding on a risk premium to prices due to the current Middle East tensions. This could rise if Iran-Saudi Arabia relations continue to sour or unless it also derails the planned extension of OPEC production cuts in March 2018! Rising American production is also not pacifying the market, after five weeks of declines, American rig owners added nine new rigs last week, tempted by rising prices. It is likely oil price stay within US$60/level through the end of the year. Some traders are betting it will go further. A flurry of trades last week betted on Brent to hit US$80/b by Christmas. There might be smiles if that happens, but for that to occur there will have to be some serious supply disruptions in the Middle East.
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In its latest Short-Term Energy Outlook, the U.S. Energy Information Administration (EIA) forecasts that natural gas-fired electricity generation in the United States will increase by 6% in 2019 and by 2% in 2020. EIA also forecasts that generation from wind power will increase by 6% in 2019 and by 14% in 2020. These trends vary widely among the regions of the country; growth in natural gas generation is highest in the mid-Atlantic region and growth in wind generation is highest in Texas. EIA expects coal-fired electricity generation to decline nationwide, falling by 15% in 2019 and by 9% in 2020.
The trends in projected generation reflect changes in the mix of generating capacity. In the mid-Atlantic region, which is mostly in the PJM Interconnection transmission area, the electricity industry has added more than 12 gigawatts (GW) of new natural gas-fired generating capacity since the beginning of 2018, an increase of 17%.
This new natural gas capacity in PJM has replaced some coal-fired generating capacity—6 GW of coal-fired generation capacity has been retired in that region since the beginning of 2018. The Oyster Creek nuclear power plant in New Jersey was also retired in 2018, and the Three Mile Island plant in Pennsylvania plans to shut down its last remaining reactor this month.
These changes in capacity contribute to EIA’s forecast that natural gas will fuel 39% of electricity generation in the PJM region in 2020, up from a share of 31% in 2018. In contrast, coal is expected to generate 20% of PJM electricity next year, down from 28% in 2018. In 2010, coal fueled 54% of the region’s electricity generation, and natural gas generated 11%.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook
Wind power has been the fastest-growing source of electricity in recent years in the Electric Reliability Council of Texas (ERCOT) region that serves most of Texas. Since the beginning of 2018, the industry has added 3 GW of wind generating capacity and plans to add another 7 GW before the end of 2020. These additions would result in an increase of nearly 50% from the 2017 wind capacity level in ERCOT. EIA expects wind to supply 20% of ERCOT total generation in 2019 and 24% in 2020. If realized, wind would match coal’s share of ERCOT's electricity generation this year and exceed it in 2020.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook
Natural gas-fired generation in ERCOT has fluctuated in recent years in response to changes in the cost of the fuel. EIA forecasts the Henry Hub natural gas price will fall by 21% in 2019, which contributes to EIA’s expectation that ERCOT’s natural gas generation share will rise from 45% in 2018 to 47% this year. Although EIA forecasts next year’s natural gas prices to remain relatively flat in 2020, the large increase in renewable generating capacity is expected to reduce the region’s 2020 natural gas generation share to 41%.
Headline crude prices for the week beginning 9 September 2019 – Brent: US$61/b; WTI: US$56/b
Headlines of the week
Detailed market research and continuous tracking of market developments—as well as deep, on-the-ground expertise across the globe—informs our outlook on global gas and liquefied natural gas (LNG). We forecast gas demand and then use our infrastructure and contract models to forecast supply-and-demand balances, corresponding gas flows, and pricing implications to 2035.Executive summary
The past year saw the natural-gas market grow at its fastest rate in almost a decade, supported by booming domestic markets in China and the United States and an expanding global gas trade to serve Asian markets. While the pace of growth is set to slow, gas remains the fastest-growing fossil fuel and the only fossil fuel expected to grow beyond 2035.Global gas: Demand expected to grow 0.9 percent per annum to 2035
While we expect coal demand to peak before 2025 and oil demand to peak around 2033, gas demand will continue to grow until 2035, albeit at a slower rate than seen previously. The power-generation and industrial sectors in Asia and North America and the residential and commercial sectors in Southeast Asia, including China, will drive the expected gas-demand growth. Strong growth from these regions will more than offset the demand declines from the mature gas markets of Europe and Northeast Asia.
Gas supply to meet this demand will come mainly from Africa, China, Russia, and the shale-gas-rich United States. China will double its conventional gas production from 2018 to 2035. Gas production in Europe will decline rapidly.LNG: Demand expected to grow 3.6 percent per annum to 2035, with market rebalancing expected in 2027–28
We expect LNG demand to outpace overall gas demand as Asian markets rely on more distant supplies, Europe increases its gas-import dependence, and US producers seek overseas markets for their gas (both pipe and LNG). China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand. Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet the growing demand to replace declining domestic supplies. We also expect Europe to increase LNG imports to help offset declining domestic supply.
Demand growth by the middle of next decade should balance the excess LNG capacity in the current market and planned capacity additions. We expect that further capacity growth of around 250 billion cubic meters will be necessary to meet demand to 2035.
With growing shale-gas production in the United States, the country is in a position to join Australia and Qatar as a top global LNG exporter. A number of competing US projects represent the long-run marginal LNG-supply capacity.Key themes uncovered
Over the course of our analysis, we uncovered five key themes to watch for in the global gas market: