Easwaran Kanason

Co - founder of NrgEdge
Last Updated: July 20, 2020
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Business Trends

With just over two weeks to go before the largest coordinated crude oil supply cut in the world is set to expire, the 23-nation club that is OPEC+ gathered to discuss that very issue. It had two choices: extend the 9.7 mmb/d cuts by another month (having already provided a single month extension from the original expiration in June) or adhere to the schedule of quota trenches agreed back in April. With rumbles of discontent within the club and signs that global oil demand had turned a corner as economies recovered, the club chose the latter.

This means that beginning 1 August 2020, the nations that comprised OPEC+ will taper their drastic supply cuts to the next level – overall cuts of 7.7 mmb/d that are scheduled to remain in place until 31 December 2020. That’s a return of 2 mmb/d of crude to the market; but the net effect will be even higher as recovering crude oil prices have also prompted market-driven producer nations, such as the US, Brazil and Norway to restore curtailed production as well.

This gradual return to a ‘normal’ level of crude production is necessary. But some are questioning whether the haste is presumptive. It is certainly true that demand has recovered. Led by China, which is largely back to full capacity, and the re-opening of key economies in Europe and Asia, the EIA estimates that global fuels consumption had recovered by 10 mmb/d from April levels. OPEC itself predicts that world oil demand by rebound by 7 mmb/d in 2021 from an average of 90 mmb/d in 2020, with demand for OPEC crude surging by 25% in 2021 to an average of 29.8 mmb/d. That’s a bullish projection, but it is certainly backed up by consumer behaviour and business sentiment, eager to move back into the full swing of commerce to reclaim the few months that were lost entirely to Covid-19.

But that recovery is fragile. There are fears that countries have re-opened too fast and too soon. In Australia, a state-wide lockdown was re-imposed in Victoria as Covid-10 cases spiked. In Europe, where EU border controls were removed, there have been clusters of cases discovered in Spain, in Germany and elsewhere, prompting regional lockdowns. While nowhere near the full-scale lockdowns seen in April, this does showcase the ever-present threat of the virulent virus. In Asia, re-openings have been more gradual and cautious, but Covid-19 is still rampaging in India, where cases are spiking. And the situation in the Americas is still dire: spiralling out of control in the USA, and reaching critical levels in key parts of Latin America like Brazil, Mexico and Colombia. The asymmetrical regional situation of the pandemic means that restoring full global connectivity is at least 6 months from even being considered, and that the possibility of another wave of severe lockdowns is high.

For now, OPEC is sanguine, betting that most countries will be able to keep the situation under control. The move to taper the cuts was widely expected already, but crude prices still fell in response. However, OPEC+ has made a strong show of prioritising adherence, demanding firm commitments from errant members, countries like Iraq, Nigeria, Kazakhstan and Angola to compensate for their overproduction in May and June with cuts in August and September. All four have, in principle agreed to these, including laggard Angola, with Saudi Arabia even commending Iraq for implementing 90% of its cuts in June. The OPEC+ technical committee has directed the countries to make an additional 842,000 b/d of cuts, which would be able to blunt the net rise in OPEC+ production to just over 1 mmb/d instead of a full 2 mmb/d.

Will this be enough to keep the market buoyant and confident? For now, it seems so. Although crude prices fell in response to the announcement on July 15, the decline was still within the trading range, indicating that it was nowhere near a shock to the marketplace. OPEC+ did also offer an olive branch by stating that it would continue to closer monitor the demand recovery and will not hesitate to act if the situation turns, which are words that will mollify a jittery market. The oil world is itching to return to some semblance of normality, as is the rest of the global economy. The signs so far are promising. China, for example, saw its economy return to growth, expanding more than expected in Q2 2020. These green shoots of hope have been taken by OPEC+ that its approach is working and it can relax a little. One would have to hope that those assumptions hold true, and the long road to recovering from the worst crisis the oil world has possibly ever seen can begin to accelerate into higher gear.

Market Outlook:

  • Crude price trading range: Brent – US$42-44/b, WTI – US$40-42/b
  • Recovering oil demand kept crude prices steady, but OPEC+’s move to taper its supply cuts to the next tranche caused prices to skirt the lower part of their range
  • Crude oil prices were also supported by US data showing American crude and fuel inventories had continue to fall – indicating demand recovery amid constrained supply
  • Libya’s NOC was forced to redeclare force majeure on all oil exports, just two days after it lifted the previous force majeure, after militant action blockaded key oil ports; this does prevent an unexpected return to crude supply to an already nervous market

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The United States consumed a record amount of renewable energy in 2019

In 2019, consumption of renewable energy in the United States grew for the fourth year in a row, reaching a record 11.5 quadrillion British thermal units (Btu), or 11% of total U.S. energy consumption. The U.S. Energy Information Administration’s (EIA) new U.S. renewable energy consumption by source and sector chart published in the Monthly Energy Review shows how much renewable energy by source is consumed in each sector.

In its Monthly Energy Review, EIA converts sources of energy to common units of heat, called British thermal units (Btu), to compare different types of energy that are more commonly measured in units that are not directly comparable, such as gallons of biofuels compared with kilowatthours of wind energy. EIA uses a fossil fuel equivalence to calculate primary energy consumption of noncombustible renewables such as wind, hydro, solar, and geothermal.

U.S. renewable energy consumption by sector

Source: U.S. Energy Information Administration, Monthly Energy Review

Wind energy in the United States is almost exclusively used by wind-powered turbines to generate electricity in the electric power sector, and it accounted for about 24% of U.S. renewable energy consumption in 2019. Wind surpassed hydroelectricity to become the most-consumed source of renewable energy on an annual basis in 2019.

Wood and waste energy, including wood, wood pellets, and biomass waste from landfills, accounted for about 24% of U.S. renewable energy use in 2019. Industrial, commercial, and electric power facilities use wood and waste as fuel to generate electricity, to produce heat, and to manufacture goods. About 2% of U.S. households used wood as their primary source of heat in 2019.

Hydroelectric power is almost exclusively used by water-powered turbines to generate electricity in the electric power sector and accounted for about 22% of U.S. renewable energy consumption in 2019. U.S. hydropower consumption has remained relatively consistent since the 1960s, but it fluctuates with seasonal rainfall and drought conditions.

Biofuels, including fuel ethanol, biodiesel, and other renewable fuels, accounted for about 20% of U.S. renewable energy consumption in 2019. Biofuels usually are blended with petroleum-based motor gasoline and diesel and are consumed as liquid fuels in automobiles. Industrial consumption of biofuels accounts for about 36% of U.S. biofuel energy consumption.

Solar energy, consumed to generate electricity or directly as heat, accounted for about 9% of U.S. renewable energy consumption in 2019 and had the largest percentage growth among renewable sources in 2019. Solar photovoltaic (PV) cells, including rooftop panels, and solar thermal power plants use sunlight to generate electricity. Some residential and commercial buildings heat with solar heating systems.

October, 20 2020
Natural gas generators make up largest share of U.S. electricity generation capacity

operating natural-gas fired electric generating capacity by online year

Source: U.S. Energy Information Administration, Annual Electric Generator Inventory

Based on the U.S. Energy Information Administration's (EIA) annual survey of electric generators, natural gas-fired generators accounted for 43% of operating U.S. electricity generating capacity in 2019. These natural gas-fired generators provided 39% of electricity generation in 2019, more than any other source. Most of the natural gas-fired capacity added in recent decades uses combined-cycle technology, which surpassed coal-fired generators in 2018 to become the technology with the most electricity generating capacity in the United States.

Technological improvements have led to improved efficiency of natural gas generators since the mid-1980s, when combined-cycle plants began replacing older, less efficient steam turbines. For steam turbines, boilers combust fuel to generate steam that drives a turbine to generate electricity. Combustion turbines use a fuel-air mixture to spin a gas turbine. Combined-cycle units, as their name implies, combine these technologies: a fuel-air mixture spins gas turbines to generate electricity, and the excess heat from the gas turbine is used to generate steam for a steam turbine that generates additional electricity.

Combined-cycle generators generally operate for extended periods; combustion turbines and steam turbines are typically only used at times of peak load. Relatively few steam turbines have been installed since the late 1970s, and many steam turbines have been retired in recent years.

natural gas-fired electric gnerating capacity by retirement year

Source: U.S. Energy Information Administration, Annual Electric Generator Inventory

Not only are combined-cycle systems more efficient than steam or combustion turbines alone, the combined-cycle systems installed more recently are more efficient than the combined-cycle units installed more than a decade ago. These changes in efficiency have reduced the amount of natural gas needed to produce the same amount of electricity. Combined-cycle generators consume 80% of the natural gas used to generate electric power but provide 85% of total natural gas-fired electricity.

operating natural gas-fired electric generating capacity in selected states

Source: U.S. Energy Information Administration, Annual Electric Generator Inventory

Every U.S. state, except Vermont and Hawaii, has at least one utility-scale natural gas electric power plant. Texas, Florida, and California—the three states with the most electricity consumption in 2019—each have more than 35 gigawatts of natural gas-fired capacity. In many states, the majority of this capacity is combined-cycle technology, but 44% of New York’s natural gas capacity is steam turbines and 67% of Illinois’s natural gas capacity is combustion turbines.

October, 19 2020
EIA’s International Energy Outlook analyzes electricity markets in India, Africa, and Asia

Countries that are not members of the Organization for Economic Cooperation and Development (OECD) in Asia, including China and India, and in Africa are home to more than two-thirds of the world population. These regions accounted for 44% of primary energy consumed by the electric sector in 2019, and the U.S. Energy Information Administration (EIA) projected they will reach 56% by 2050 in the Reference case in the International Energy Outlook 2019 (IEO2019). Changes in these economies significantly affect global energy markets.

Today, EIA is releasing its International Energy Outlook 2020 (IEO2020), which analyzes generating technology, fuel price, and infrastructure uncertainty in the electricity markets of Africa, Asia, and India. A related webcast presentation will begin this morning at 9:00 a.m. Eastern Time from the Center for Strategic and International Studies.

global energy consumption for power generation

Source: U.S. Energy Information Administration, International Energy Outlook 2020 (IEO2020)

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The following are some key findings of IEO2020:

  • As energy use grows in Asia, some cases indicate more than 50% of electricity could be generated from renewables by 2050.
    IEO2020 features cases that consider differing natural gas prices and renewable energy capital costs in Asia, showing how these costs could shift the fuel mix for generating electricity in the region either further toward fossil fuels or toward renewables.
  • Africa could meet its electricity growth needs in different ways depending on whether development comes as an expansion of the central grid or as off-grid systems.
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  • Transmission infrastructure affects options available to change the future fuel mix for electricity generation in India.
    IEO2020 cases demonstrate the ways that electricity grid interconnections influence fuel choices for electricity generation in India. In cases where India relies more on a unified grid that can transmit electricity across regions, the share of renewables significantly increases and the share of coal decreases between 2019 and 2050. More limited movement of electricity favors existing in-region generation, which is mostly fossil fuels.

IEO2020 builds on the Reference case presented in IEO2019. The models, economic assumptions, and input oil prices from the IEO2019 Reference case largely remained unchanged, but EIA adjusted specific elements or assumptions to explore areas of uncertainty such as the rapid growth of renewable energy.

Because IEO2020 is based on the IEO2019 modeling platform and because it focuses on long-term electricity market dynamics, it does not include the impacts of COVID-19 and related mitigation efforts. The Annual Energy Outlook 2021 (AEO2021) and IEO2021 will both feature analyses of the impact of COVID-19 mitigation efforts on energy markets.

Asia infographic, as described in the article text

Source: U.S. Energy Information Administration, International Energy Outlook 2020 (IEO2020)
Note: Click to enlarge.

With the IEO2020 release, EIA is publishing new Plain Language documentation of EIA’s World Energy Projection System (WEPS), the modeling system that EIA uses to produce IEO projections. EIA’s new Handbook of Energy Modeling Methods includes sections on most WEPS components, and EIA will release more sections in the coming months.

October, 16 2020