“FIRST TRULY GLOBAL ENERGY CRISIS”: WAR COMING?

A looming shortage of liquefied natural gas (LNG) worldwide and a reduction in output by OPEC+ have thrust the world into “the first truly global energy crisis”, Fatih Birol, executive director of the International Energy Agency (IEA) said in a 25 October speech during the Singapore International Energy Week.

In an attempt to offset its loss of imported Russian natural gas, Europe has snapped up most of the world’s excess LNG, Birol noted.

If China’s economy stabilizes and demands more of the fuel next year, the market could flip to a shortage because only 20 billion cubic meters of new LNG capacity will enter the market in 2023, he warned.

Meanwhile, the recent decision by the Organization of the Petroleum Exporting Countries and its allies, chiefly Russia, to lop two million barrels a day from their output target is “risky”, Birol added, because worldwide oil demand has grown by almost two million barrels a day this year.

“I found this decision really unfortunate,” he said.

If Europe sees a mild winter, the continent “should go through this winter with some economic and social bruises,” Birol said, but a particularly cold or long winter could be catastrophic.

The world will demand 1.7 million more barrels a day of oil next year, according to the IEA, so tightening Western sanctions on Russian exports—which is scheduled for early December—is likely to sharpen shortages and worsen the crisis.

Western allies have proposed allowing Russia to export oil to developing nations under a price cap that would ease financial strains on emerging economies while limiting Russia’s ability to raise money to fund its war.

Many analysts have said the scheme is unworkable; Birol said only that the proposal still has many details to resolve and will require support from nations that are major oil importers.

If the plan is adopted, as much as 90 percent of Russia’s oil could evade the price cap, a U.S. treasury official said last month during a Reuters interview.

A global energy crisis could have a silver lining, Birol noted, if it speeds adoption of clean, renewable fuels and fosters development of a more secure and sustainable energy system.

European nations in particular are streamlining permitting and licensing processes to accelerate installation of “clean green” energy capacity, Birol said.

“Energy security is the number one driver” of the ongoing shift to renewable power, he added.

The IEA had predicted renewable power installations would grow 8 percent this year, but has now revised that expectation to 20 percent, due to Europe’s energy crisis, the war in Ukraine and Western sanctions, and the high cost of fossil fuels.

Coal use, which has spiked post-COVID, will fall back to previous levels within a few years, the IEA predicts, and natural gas demand will level off by 2030.

Meanwhile, oil use will peak in the mid-2030s as the manufacture of electric vehicles expands to meet growing market demand, the agency believes.

“Energy markets and policies have changed as a result of Russia’s invasion of Ukraine, not just for the time being, but for decades to come,” Birol said. 

“The energy world is shifting dramatically before our eyes,” he added. “Government responses around the world promise to make this a historic and definitive turning point toward a cleaner, more affordable and more secure energy system,” he concluded.

TREND FORECAST: As the global economy bogs down, OPEC+ will adjust its production to keep prices from falling much further than their current levels.

Shortages and higher prices boost conversions to renewable energy, a trend that will accelerate now, not only because fossil fuels are in short supply but also because droughts, floods, and wildfires are becoming customary.

And, there are always the wild cards, be they made by humans or nature. On the in-human side, should military confrontations escalate in the Middle East between Israel and Iran and/or the Ukraine War expand beyond its borders, oil prices will rapidly rise. 

Indeed, today, The Wall Street Journal reported that the United States and Saudi Arabia are on high alert after Saudi intelligence reveals that Iran is expected to carry out an attack on targets in Saudi Arabia.

During a press conference today, Air Force Brig. Gen. Pat Ryder, the Pentagon mouthpiece said Washington is “concerned” about “the threat situation in the region” and is “in regular contact” with Saudi officials.

“We will reserve the right to protect and defend ourselves no matter where our forces are serving, whether in Iraq or elsewhere,” Ryder said. 

PUBLISHER’S NOTE: America is not being threatened by Iran, so what “right to protect and defend ourselves” is Ryder rapping about? Saudi Arabia is not America? And as for “our forces are serving, whether in Iraq or elsewhere,” America invaded Iraq based on lies and as per the Founding Fathers of the United States, “our forces” should only be serving the homeland and not involved in foreign entanglements. 

SUDDENLY, EUROPE HAS STORED ENOUGH GAS FOR THE WINTER

Facing the loss of imported natural gas from Russia, Europe has spent the last several months locking up replacements in the form of liquefied natural gas (LNG) from around the world to fill its storage tanks ahead of winter.

That strategy, and unusually warm autumn weather, has allowed the continent to virtually fill its winter gas storage reserves.

Europe’s overall storage capacity is 93.6 percent full and Germany’s 97.5 percent, Gas Infrastructure Europe reported.

“The European gas glut is expected to last until at least December,” Giacomo Masato, lead analyst and senior meteorologist at Italy’s Illumina energy company, told Bloomberg. “It is unlikely Europe will see a prolonged cold spell in November.”

As a result, natural gas prices there have fallen by more than half from their peaks over the summer, Bloomberg reported. 

“At the end of October, the continent is in better shape than policy makers dared hope,” Bloomberg said.

Now European officials fear an opposite problem: that citizens, flush with gas, will fail to continue to conserve supplies once the weather gets cold.

Europe has reduced gas demand between 7 and 9 percent this year, only about half of the 15-percent goal set by the European Union. Most of the savings has come by way of large industrial users that have curtailed or shut down production because fuel was prohibitively expensive.

“Europe’s ability to navigate a parallel power and gas crisis across the next two years depends strongly on its ability to reduce demand,” analysts at energy consulting firm Timera wrote in the company’s blog. “We think the crisis is far from over.”

Although Germany’s storage capacity is virtually full, it can meet normal winter demand for only two months; therefore, it needs to keep buying gas.

Northern Europe welcomed 82 tankers of LNG in October, a 19-percent gain from October, with more vessels filled and waiting for turns in the continent’s limited number of LNG unloading ports—a backlog that could last until mid-January, according to LNG shipper Flex LNG Ltd.

However, that surplus could flip if Asia’s demand for LNG increases and Russia ends the last of its gas imports to Europe.

“As temperatures start to drop and storages get emptied, the market reality of supply-demand mismatch will mean higher prices, translating into further inflationary pressures,” Katja Yafimava, senior research fellow at the Oxford Institute for Energy Studies, told Bloomberg. “This problem is likely to become more acute during the next winter.”

TREND FORECAST: The Nord Stream 1 pipeline, the main venue moving Russian natural gas to Europe has been sabotaged and is unable to function, which we reported in “West Blames Russia for Blowing Up Nord Stream Pipelines” (4 Oct 2022).

The Nord Stream 2 line, which was recently completed but never began carrying gas, also was heavily damaged.

Even when the shooting stops in Ukraine, Europe will be without two key sources of gas for months, if not years, afterward.

As a result, Europe will become a booming market for LNG for the next several years, tightening the global gas market and keeping prices up.

However, there will be no parallel boom in building LNG terminals.

Construction of a terminal consumes years and billions of dollars. With future energy markets and balances uncertain, few investors will be willing to take a flier.

OIL SHORTAGE AHEAD?

Oil prices “are going to be headed well over $100” late this year as French labor strikes end and China’s anti-COVID lockdowns taper off, Amrita Sen, chief researcher at Energy Aspects, predicted in late October during a Bloomberg interview.

In addition, new restrictions on importing and shipping Russian crude taking effect in early December will reduce the amount of Russian oil in the market, she added. 

Those restrictions will end Europe’s oil imports from Russia, which total as much as 1.5 million barrels a day. Those Russian barrels will have to be shipped to more distant ports, jacking up shipping costs, she pointed out.

Also, tanker owners could decide to stop shipping Russian oil altogether to avoid being sanctioned, which would mean “you will lose some shipping and that will tie up more oil,” Sen noted.

Bans on shipping or importing Russian oil could add the equivalent of $50 a barrel to gasoline prices, effectively increasing them by as much as 50 percent, according to a Bloomberg analysis.

Oil’s price could reach $115 a barrel in 2023’s first quarter, Goldman Sachs analysts wrote in a research report.

The Other Side

International oil prices will ease by 11 percent next year, averaging $92 a barrel through 2023 and dipping to $80 in 2024, the World Bank predicted last week in its Commodity Market Outlook.

Slowing global economic growth and more COVID flare-ups and lockdowns could drive the price down even more, the bank added.

Prices will fall even though as much as two million barrels a day of Russian oil is likely to disappear from the world market after December 5 when sanctions tighten on shipping and insurance, the bank expects. 

Downward pressure on oil prices will be welcomed by the 60 percent of developing nations that saw their oil costs rise following Russia’s invasion of Ukraine and resulting Western sanctions, the bank’s report noted.

Nine in ten of those countries also saw food prices jump, Ayhan Kose, the outlook’s chief author, said in a statement accompanying the report.

“The combination of elevated commodity prices and persistent currency depreciation translates into higher inflation in many countries,” he wrote.

Emerging nations must prepare for “a period of even higher volatility in global financial and commodity markets,” he warned.

The strong dollar, coupled with inflation and rising oil prices, has raised the risk of food insecurity for 200 million people around the world, Kose said.

TREND FORECAST: China’s extreme anti-COVID lockdown policy will remain in place through the winter and into next spring. At the same time, the world’s economy will continue to sputter and is increasingly likely to enter a full-blown recession before long.

Those factors will ease any shortage of oil but are unlikely to allow the world to avoid it: OPEC+ will cut back production as needed to ensure prices remain above $80 a barrel.

Russia will remain a wild card, needing to sell as much oil as possible to keep its weakening economy alive and to pay for its destruction in Ukraine.

U.S. EXPORTS MORE OIL AS ELEVATED PRICES CAUSE TENSIONS AT HOME

During the week of 17 October, U.S. oil firms exported a record 11.4 million barrels of crude oil and refined products, about two million more than the previous week, the U.S. Energy Information Administration reported.

During the same week, the U.S. imported 6.2 million barrels of crude oil, some of which was refined into products for export.

The U.S. has become a major supplier to world oil markets that tightened after Russia invaded Ukraine and Western allies imposed sanctions on Russian commodity exports.

Domestic producers have shrugged off pressures from the Biden administration to curb exports and produce more refined products to lower gasoline and heating oil prices in the U.S.

As oil prices began rising during the post-COVID recovery, major U.S. producers chose not to increase production but to use their cash windfalls to buy back their stock and pay higher dividends to shareholders, moves we documented in “Oil Majors Withhold Investment in New Production” (3 Aug 2021) and “Oil Majors Use Cash to Buy Back Stock, Increase Dividends” (10 May 2022).

With sanctions on Russian oil due to tighten even more next month, nations are eager to build their stores before the strengthening dollar pushes up oil and gas prices even more.

U.S. president Joe Biden has refused calls for export controls. Nevertheless, energy secretary Jennifer Granholm told U.S. oil companies in August to keep more oil and refined products at home to avoid “additional federal requirements or other emergency measures.”

Regarding a clampdown on exports, the Biden administration has said “all options” remain open to “ensure domestic supply,” especially after OPEC+ spurned Biden’s insistence that the cartel boost production, as we reported in “OPEC+ Cuts Daily Oil Output Limit By Two Million Barrels” (11 Oct 2022).

However, “banning or limiting the export of refined products would likely decrease inventory levels, reduce domestic refining capacity, put upward pressure on consumer fuel prices, and alienate U.S. allies during a time of war,” the American Petroleum Institute and the American Fuel and Petrochemical Manufacturers wrote in a letter to Granholm.

Last week, the U.S. average price for diesel fuel, which also is used as home heating oil, was $5.32, the Financial Times reported, down markedly from its recent high but still about twice the price it was two years ago.

TREND FORECAST: Oil majors are unlikely to increase production; they assume that oil and gas prices will fall once the Ukraine war ends.

Also, much of the U.S.’s available oil and gas is in shale formations, where wells have been expensive to drill and quick to deplete.

Therefore, U.S. production is unlikely to increase markedly in the foreseeable future, keeping prices high.