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Don’t count on gas costs to return down anytime quickly

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One factor to start out:

Welcome to a different Energy Source.

Thanks to everybody who wrote in to touch upon stranded property, the subject of Tuesday’s publication. We welcome all suggestions.

If you haven’t already, go now and skim our colleague David Pilling’s Big Read on vitality in Africa. Can the continent’s financial system develop with out fossil fuels? It is likely to be probably the most essential questions in world vitality and local weather coverage.

Even with the Saudis able to re-enter the fray, the import ban on Russian oil introduced by Europe this week signifies that costs are set to proceed their rise. That is the main target of the primary merchandise in right this moment’s publication as we have a look at the repercussions of the EU deal.

Data Drill highlights the hovering worth of uncooked supplies wanted in photo voltaic — and what this may imply for the bloc’s decarbonisation efforts.

Thanks for studying.

Derek

Oil costs are solely going a technique after Europe’s import ban

It has been per week of massive bulletins within the geopolitics of vitality.

First got here the information that Europe had lastly agreed on a Russian oil embargo — topic to carve-outs to placate Hungary — that can ban the overwhelming majority of imports by year-end.

Then got here this morning’s information that Saudi Arabia could also be prepared to extend manufacturing.

The two elements will pull oil markets in numerous instructions. But even with the dominion making ready to open the spigots, a bit, the EU deal means crude’s upward march is ready to proceed apace — as member states scour the globe for different sources of oil.

“We believe the ban will continue a sustained bullish trend for oil markets signifying persistent higher prices for key refined products such as gasoline, diesel, and jet fuel,” stated Frederick Lawrence, a companion at Capital Alpha.

The deal struck by the 27 EU member states on Monday bans most Russian imports of crude and petroleum merchandise, however contains an exemption for oil delivered by pipeline.

The carve-out was inserted to placate Hungary, after a prolonged stand-off with Budapest, which had insisted that forcing it to ditch Russian oil this 12 months would represent a intestine punch to its financial system. It means Hungary — together with Croatia, Slovakia and the Czech Republic — could have further time to wean themselves off Russian oil, which is shipped in by way of the Druzhba pipeline.

Still, the ban marks an enormous geopolitical shift. Seaborne imports will likely be no extra. And Germany and Poland have agreed to chop imports from the northern artery of the Druzhba.

It will successfully kill three-quarters of prewar Russian oil exports to Europe instantly, and 90 per cent by the top of the 12 months, in accordance with EU council president Charles Michel. Seaborne imports had already dropped 600,000 barrels a day in March and April, per knowledge supplier Kpler, from about 3mn b/d in February.

For extra on the nuances of the deal, try this explainer from my colleagues in London. But the principle takeaway, from a markets perspective at the very least, is that oil goes to proceed shifting upwards as European refiners scan the broader world — and shell out no matter is critical — for different sources of crude.

Brent crude, which has been on the rise for weeks, settled at $116.29 a barrel yesterday, up 69 cents. West Texas Intermediate, the US marker, was up 59 cents to settle at $115.26 a barrel.

For its half, Russia has insisted it will possibly flip its gaze east and redirect provides to extra pleasant importers together with China, India and Iran. But there are large query marks hanging over the volumes that these international locations can suck up, even with the hefty low cost on Urals blends.

So far, these redirections have allowed Russia to maintain its output up, with no materials web decline in loadings. Wellhead manufacturing was up between 200,000-300,000 b/d in May, after a 1mn b/d slide in April, in accordance with S&P Global Commodity Insights. That is ready to vary.

“Despite the resilience so far, we believe significant Russian supply losses are coming,” stated Shin Kim, head of provide and manufacturing evaluation, at S&P. “The military conflict continues to worsen and is looking increasingly prolonged.”

Winners and losers

As Europe appears to be like to plug the hole, it’s already turning to the Middle East and west Africa. Saudi Arabia and Nigeria look set to be among the many large winners as refiners snap up barrels.

Traders are braced for a leap in Middle Eastern official promoting costs. Saudi Arabia has already advised it might elevate July costs for all crude to Asia by $1-$1.50 a barrel.

The losers in all this may proceed to be customers, who’re already battling sky-high petrol costs. In the US, the worth on the pump has soared to recent information in latest days as vacation makers took to the street final weekend at first of the American driving season. The common worth of a gallon of gasoline was $4.67 yesterday. In California, costs are properly over $6.

With the Biden administration’s frantic scramble for extra crude provide failing to yield a lot in the best way of outcomes, customers’ greatest hope at this level might properly be that sky-high costs trigger demand to slip. (There are already some indicators that this course of has begun, as I wrote on the weekend). 

“Demand destruction may be one of the only viable market relief valves remaining,” stated Lawrence at Capital Alpha. “The new oil market is in its early innings.”

(Myles McCormick)

Data Drill

Rising prices for photo voltaic threaten the EU’s plan to wean itself off Russian gas, says a brand new evaluation by Wood Mackenzie.

Last month, Brussels introduced plans to double its photo voltaic capability by 2025 and set up 600 gigawatts by 2030 because the “kingpin” of its REPowerEU technique to finish vitality dependence on Russia.

But hovering costs for uncooked supplies comparable to polysilicon and the shortage of a powerful home provide chain are pushing up the price of photo voltaic modules and threatening the EU’s targets, says Wood Mackenzie. Prices for modules elevated 30 per cent final 12 months and proceed to stay above pre-pandemic ranges.

“As more sanctions are on the way against Russia, and with electricity and fuel prices showing no sign of slowing down, Europe needs to navigate this high price environment and act fast to develop a local solar supply chain to achieve its targets,” stated Theo Theodorou, a senior analyst at Wood Mackenzie.

Wood Mackenzie estimates that to be able to obtain its REPowerEU targets, Brussels wants to provide thrice extra polysilicon, 20 instances extra semiconductor wafers, 42 instances extra cells, and 6 instances extra modules. (Amanda Chu)

Line chart of Raw material prices for solar panels showing Some raw material prices for solar have more than tripled since January 2020

Power Points

Energy Source is a twice-weekly vitality publication from the Financial Times. It is written and edited by Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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