Easwaran Kanason

Co - founder of NrgEdge
Last Updated: March 17, 2020
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Business Trends
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There are two items dominating the headlines in the energy sector at the moment: the global Covid-19 pandemic and the alarming decision of Saudi Arabia and Russia to go head-to-head in a price war. Individually, either event is disastrous. Together, they are catastrophic. 

A global rout on equities and commodities has kicked in, with capital fleeing to safe havens while country after country announces lockdowns to halt the contagion. Covid-19 and the oil price war are our current truths. But how long will they last? And what does this mean for the energy industry?

Scenario 1:
Fast Covid-19 containment, Quick resolution to the price war

Covid-19 will be with us for at least another 2 months. Taking China as an example – which enforced a total lockdown on the pandemic’s epicentre in Wuhan in late January – cases and deaths have been slowing down since the start of March. After spiking suddenly, South Korea too seems to be coming under control. All of this took a month or so. If that holds true, then the current spread in Europe could be halted by early April. Immediate resumption of normality won’t happen immediately; China took two months to restart, so the best case scenario is that the world will resume normal service in early May. That’s optimistic, but still possible; especially given how serious governments worldwide are treating the pandemic.

Saudi Arabia can be prone to grandstanding, and its opening salvo to lower the price of its crude dramatically could be seen as a shock-and-awe tactic to remind Russia of just how potent its spare capacity of 2-3 mmb/d is. Russia has alluded to the possibility of the OPEC+ alliance continuing, so talks between the two leading oil producers must still be going on in hopes of striking a deal. The current OPEC supply deal expires on 31 March 2020; there is still time for the two oil giants to agree that the industry’s needs is greater than the sum of theirs, and avoid a flood of cheap oil swamping a fragile global economy.

Brent price forecast (June 2020): US$45-50/b

Scenario 2:
Fast Covid-19 containment but slow resolution to the price war or Prolonged Covid-19 pandemic but fast resolution to the price war

World governments are panicking, particularly in Europe, where a second wave of cases emanated from Italy to the rest of the continent, sparing no one. European governments have responded by issuing travel lockdowns, reinstating border controls and funding emergency medical services to contain the pandemic. But the health system is strained, and it may already be too late. Europe has neither the authoritarian power of China or the meticulous plans that South Korea, Hong Kong, Taiwan and Singapore put in place to deny the virus traction. It may already be too late. With trouble brewing in the USA as well, where the healthcare system is even more unfriendly to pandemics like this and a second wave of infections emerging across the rest of the world, it may very well be 2021 before the virus has truly be contained.

In a war, everyone loses. In a classic instance of the Prisoner’s Dilemma and an illustration of potent Game Theory, Saudi Arabia and Russia should be working together (along with the rest of OPEC+) to keep prices steady. US$50/b oil is better than US$30/b oil, after all. The rise of the US shale patch has its limitations, so ceding some ground to US producers is still acceptable in the context of a growing market. But for various reasons, a desire to wipe out US shale, a want to power-play Saudi Arabia and Russia are at odds on how to proceed. So they may dig their heels in, choosing the path of most benefit for themselves but resulting in a sub-optimal result for the whole industry. A prolonged price war will not be pretty, and there will be many corporate casualties along the way.

Brent price forecast (June 2020): US$35-45/b

Scenario 3:
Prolonged Covid-19 pandemic and slow/no resolution to the price war

The nightmare scenario. Airlines worldwide have said that the global airline industry is at risk of bankruptcy by May, without any state or institutional support. With lockdowns, people are driving less, consuming less and productivity is way down, impacting energy and power consumption. Governments will do their best to keep the economy going, but they are at the mercy of an unsympathetic foe. Some medical experts are already suggesting that Covid-19 may never be fully contained, and could join influenza as a permanent seasonal disease. It took several years for the world to recover from the Spanish Flu in 1918; the same might apply here.

If Saudi Arabia and Russia hold true to their threats to massively increase crude output, there will be a tsunami of crude oil travelling around the world at a time when the world needs less. This is a battle for market share at the expense of profits. Many players that were banking of the cushion of US$50-60/b oil prices will be wiped out, with ramifications for LNG as well. The remaining players will be stronger for the death of competition, though their shareholders will not be happy campers, especially the shareholders of Saudi Aramco. If oil gets pumped without restraint over the rest of 2020, there is only so much that can go into strategic storage. The glut will only be erased when demand recovers. With Covid-19 still a major question mark, there is no telling what the timeline for recovery is.

Brent price forecast (June 2020): US$30-35/b

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Renewables became the second-most prevalent U.S. electricity source in 2020

In 2020, renewable energy sources (including wind, hydroelectric, solar, biomass, and geothermal energy) generated a record 834 billion kilowatthours (kWh) of electricity, or about 21% of all the electricity generated in the United States. Only natural gas (1,617 billion kWh) produced more electricity than renewables in the United States in 2020. Renewables surpassed both nuclear (790 billion kWh) and coal (774 billion kWh) for the first time on record. This outcome in 2020 was due mostly to significantly less coal use in U.S. electricity generation and steadily increased use of wind and solar.

In 2020, U.S. electricity generation from coal in all sectors declined 20% from 2019, while renewables, including small-scale solar, increased 9%. Wind, currently the most prevalent source of renewable electricity in the United States, grew 14% in 2020 from 2019. Utility-scale solar generation (from projects greater than 1 megawatt) increased 26%, and small-scale solar, such as grid-connected rooftop solar panels, increased 19%.

Coal-fired electricity generation in the United States peaked at 2,016 billion kWh in 2007 and much of that capacity has been replaced by or converted to natural gas-fired generation since then. Coal was the largest source of electricity in the United States until 2016, and 2020 was the first year that more electricity was generated by renewables and by nuclear power than by coal (according to our data series that dates back to 1949). Nuclear electric power declined 2% from 2019 to 2020 because several nuclear power plants retired and other nuclear plants experienced slightly more maintenance-related outages.

We expect coal-fired electricity generation to increase in the United States during 2021 as natural gas prices continue to rise and as coal becomes more economically competitive. Based on forecasts in our Short-Term Energy Outlook (STEO), we expect coal-fired electricity generation in all sectors in 2021 to increase 18% from 2020 levels before falling 2% in 2022. We expect U.S. renewable generation across all sectors to increase 7% in 2021 and 10% in 2022. As a result, we forecast coal will be the second-most prevalent electricity source in 2021, and renewables will be the second-most prevalent source in 2022. We expect nuclear electric power to decline 2% in 2021 and 3% in 2022 as operators retire several generators.

monthly U.S electricity generation from all sectors, selected sources

Source: U.S. Energy Information Administration, Monthly Energy Review and Short-Term Energy Outlook (STEO)
Note: This graph shows electricity net generation in all sectors (electric power, industrial, commercial, and residential) and includes both utility-scale and small-scale (customer-sited, less than 1 megawatt) solar.

July, 29 2021
PRODUCTION DATA ANALYSIS AND NODAL ANALYSIS

Kindly join this webinar on production data and nodal analysis on the 4yh of August 2021 via the link below

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July, 28 2021
Abu Dhabi Lifts The Tide For OPEC+

The tizzy that OPEC+ threw the world into in early July has been settled, with a confirmed pathway forward to restore production for the rest of 2021 and an extension of the deal further into 2022. The lone holdout from the early July meetings – the UAE – appears to have been satisfied with the concessions offered, paving the way for the crude oil producer group to begin increasing its crude oil production in monthly increments from August onwards. However, this deal comes at another difficult time; where the market had been fretting about a shortage of oil a month ago due to resurgent demand, a new blast of Covid-19 infections driven by the delta variant threatens to upend the equation once again. And so Brent crude futures settled below US$70/b for the first time since late May even as the argument at OPEC+ appeared to be settled.

How the argument settled? Well, on the surface, Riyadh and Moscow capitulated to Abu Dhabi’s demands that its baseline quota be adjusted in order to extend the deal. But since that demand would result in all other members asking for a similar adjustment, Saudi Arabia and Russia worked in a rise for all, and in the process, awarded themselves the largest increases.

The net result of this won’t be that apparent in the short- and mid-term. The original proposal at the early July meetings, backed by OPEC+’s technical committee was to raise crude production collectively by 400,000 b/d per month from August through December. The resulting 2 mmb/d increase in crude oil, it was predicted, would still lag behind expected gains in consumption, but would be sufficient to keep prices steady around the US$70/b range, especially when factoring in production increases from non-OPEC+ countries. The longer term view was that the supply deal needed to be extended from its initial expiration in April 2022, since global recovery was still ‘fragile’ and the bloc needed to exercise some control over supply to prevent ‘wild market fluctuations’. All members agreed to this, but the UAE had a caveat – that the extension must be accompanied by a review of its ‘unfair’ baseline quota.

The fix to this issue that was engineered by OPEC+’s twin giants Saudi Arabia and Russia was to raise quotas for all members from May 2022 through to the new expiration date for the supply deal in September 2022. So the UAE will see its baseline quota, the number by which its output compliance is calculated, rise by 330,000 b/d to 3.5 mmb/d. That’s a 10% increase, which will assuage Abu Dhabi’s itchiness to put the expensive crude output infrastructure it has invested billions in since 2016 to good use. But while the UAE’s hike was greater than some others, Saudi Arabia and Russia took the opportunity to award themselves (at least in terms of absolute numbers) by raising their own quotas by 500,000 b/d to 11.5 mmb/d each.

On the surface, that seems academic. Saudi Arabia has only pumped that much oil on a handful of occasions, while Russia’s true capacity is pegged at some 10.4 mmb/d. But the additional generous headroom offered by these larger numbers means that Riyadh and Moscow will have more leeway to react to market fluctuations in 2022, which at this point remains murky. Because while there is consensus that more crude oil will be needed in 2022, there is no consensus on what that number should be. The US EIA is predicting that OPEC+ should be pumping an additional 4 million barrels collectively from June 2021 levels in order to meet demand in the first half of 2022. However, OPEC itself is looking at a figure of some 3 mmb/d, forecasting a period of relative weakness that could possibly require a brief tightening of quotas if the new delta-driven Covid surge erupts into another series of crippling lockdowns. The IEA forecast is aligned with OPEC’s, with an even more cautious bent.

But at some point with the supply pathway from August to December set in stone, although OPEC+ has been careful to say that it may continue to make adjustments to this as the market develops, the issues of headline quota numbers fades away, while compliance rises to prominence. Because the success of the OPEC+ deal was not just based on its huge scale, but also the willingness of its 23 members to comply to their quotas. And that compliance, which has been the source of major frustrations in the past, has been surprisingly high throughout the pandemic. Even in May 2021, the average OPEC+ compliance was 85%. Only a handful of countries – Malaysia, Bahrain, Mexico and Equatorial Guinea – were estimated to have exceeded their quotas, and even then not by much. But compliance is easier to achieve in an environment where demand is weak. You can’t pump what you can’t sell after all. But as crude balances rapidly shift from glut to gluttony, the imperative to maintain compliance dissipates.

For now, OPEC+ has managed to placate the market with its ability to corral its members together to set some certainty for the immediate future of crude. Brent crude prices have now been restored above US$70/b, with WTI also climbing. The spat between Saudi Arabia and the UAE may have surprised and shocked market observers, but there is still unity in the club. However, that unity is set to be tested. By the end of 2021, the focus of the OPEC+ supply deal will have shifted from theoretical quotas to actual compliance. Abu Dhabi has managed to lift the tide for all OPEC+ members, offering them more room to manoeuvre in a recovering market, but discipline will not be uniform. And that’s when the fireworks will really begin.

End of Article 

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Market Outlook:

  • Crude price trading range: Brent – US$72-74/b, WTI – US$70-72/b
  • Worries about new Covid-19 infections worldwide dragging down demand just as OPEC+ announced that it would be raising production by 400,000 b/d a month from August onward triggered a slide in Brent and WTI crude prices below US$70/b
  • However, that slide was short lived as near-term demand indications showed the consumption remained relatively resilient, which lifted crude prices back to their previous range in the low US$70/b level, although the longer-term effects of the Covid-19 delta variants are still unknown at this moment
  • Clarity over supply and demand will continue to be lacking given the fragility of the situation, which suggests that crude prices will remain broadly rangebound for now

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July, 26 2021