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Close Look: August 2023

28 days ago

Energy markets:  what’s the big story?

As summer temperatures soared in the northern hemisphere, the head of the UN claimed that the world had moved to an ‘era of global boiling’. The International Energy Agency (IEA) declared in June that oil consumption of 103 million barrels per day (mbpd) was the highest figure ever recorded, a reminder that energy is required for cooling as well as heating. After such a scorching summer, we examine the state of the energy markets, as we move into the cooler months.

Fearing lacklustre Asian demand, the OPEC+ group of oil producing nations announced production cuts equivalent to 3.6% of global demand early in June. The action was effective, and the price jumped more than 15% and has since traded above $85 per barrel. European stocks of natural gas have been replenished and should suffice for this winter, hopefully sidestepping the price surges of last year. Meanwhile LNG (liquid natural gas) prices are on the rise, as Australian refinery strikes threaten delivery to Asian buyers. It is feared they might turn to European markets instead, putting the squeeze on prices.

And what of the contribution of sustainable energy? In the face of a challenging geopolitical backdrop, global additions of renewable power capacity are forecast to leap by over 30% this year. This is expected to be led by solar photovoltaic (PV) and wind power, with solar PV accounting for two thirds of the increase. With expectations of continuing growth next year, global renewable electricity capacity could hit 4,500 gigawatts, the equivalent of the annual power output of the US and China combined. A growing alternative energy supply could help to take the heat out of the fossil fuel markets longer term.

With demand for oil hitting new highs, and as production cuts begin to bite, there are forecasts the daily shortfall of oil could rise to 2 mbpd. For short periods this can be met by tapping into strategic reserves of oil, but not indefinitely. The US Strategic Petroleum Reserve was steadily rundown after the invasion of Ukraine, with President Biden mandating the release of 1 mbpd for 180 days, in order to cool prices. With presidential elections on the horizon, President Biden will be mindful of voters’ dislike of higher prices at the pump. This could trigger a repeat of last year’s controversial request to Saudi Arabia to ‘pump more oil’.

Whatever the geopolitical background, the laws of economics dictate that an imbalance involving tighter supply and greater demand risks pushing prices higher. The converse is also true, as shown recently by a sharp fall in the German producer price index, attributed to sharply lower wholesale energy prices. Elsewhere, the recovery in demand from China, the world’s second largest economy, might prove patchy. All of these factors will inevitably feed through to monthly inflation reports. And onwards to market expectations for the trajectory of interest rates, whether that be an early pivot or ‘higher for longer’. 

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