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Welcome back to Energy Source. A discouraging data point in the climate fight to share today: US greenhouse gas emissions were up again last year, putting the country further behind its climate commitments under the Paris agreement, according to new data from Rhodium Group, Derek reports. But one bright spot is that Rhodium’s analysts say the Inflation Reduction Act, Congress’s big climate bill, could start to pull emissions lower as soon as later this year.
The rise in emissions came in a year in which soaring fossil fuel prices overshadowed efforts to cut emissions. Crude prices have come down of late, but many see another price jump brewing, which is the topic of today’s newsletter. And in Data Drill, Amanda looks at how sky-high energy prices are hurting UK manufacturing.
Thanks for reading! — Justin
Are we headed back to $100 oil?
Oil markets have been relatively calm of late compared with the wild ride through much of 2022.
Prices have been volatile but have mostly stayed at about $80 a barrel oil for the past couple months — high by historic standards but not high enough to menace the global economy or launch politicians into action like we saw over the past 12 months.
Few see the calm lasting. Wall Street’s top analysts see the makings of another price leap lurking in just about every important corner of the oil market. A run past $100 a barrel is likely in the coming months, they say, which would threaten a weak global economy anew and put energy prices back at the top of the agenda of many governments.
China’s big comeback
Foremost is China. The extended lockdowns of big cities across China last year sapped demand in the world’s largest oil importer and helped keep a lid on prices at a time when supplies were tight.
“The only reason that oil prices did not stay north of $130 a barrel is that China’s demand fell away,” Jan Stuart, an analyst at Piper Sandler, a Houston investment bank, wrote in a recent note outlining his case for a crude rally. The bank sees Brent crude averaging $110/barrel this year, up about 40 per cent from yesterday’s closing price.
Oil consumption is set to rise sharply after Beijing abruptly lifted its zero-Covid policy last month, analysts argue. More driving and flying will fuel an energy demand recovery similar to when pandemic restrictions were eased across the US and Europe last year
China’s re-emergence from lockdowns will be enough to propel global crude demand above last year’s pace even as consumption growth across the US and Europe sputters, many analysts say.
“The most bullish piece of news to emerge over the holiday period has, in our view, been China’s rapid move towards reopening,” Goldman Sachs’s Jeff Currie wrote in a note to investors yesterday. He said it could add $5/barrel to Goldman’s expectations for oil to rally past $100 later this year.
War and sanctions weigh on Russia
At the same time that China gets thirstier for crude, analysts expect the effects of war and western sanctions to finally start hitting Russian output, which has remained remarkably resilient.
Fresh sanctions on imports of Russian oil products such as petrol and diesel into Europe will come into force in early February. That will add to existing bans on crude imports, restrictions on European companies’ ability to insure oil shipments, and the price cap western governments have tried to impose on Russian crude.
Western governments have tried to impose sanctions on Russia in a way that saps funds from Moscow while keeping the energy flowing through the global economy. But analysts say the sanctions are starting to take a toll on production.
“With sanctions raising legal risk around shipping, insurance and financing of oil trade flows, exports are increasingly struggling to find homes, with even China and India seeing sequential declines in imports recently,” said Goldman Sachs’s Currie.
If Russian output does slide, don’t count on other members of the Opec+ group of suppliers plugging the gap. Saudi Arabia did little to put a lid on prices during last year’s price surge and even if they wanted to lift output, there remains limited spare capacity within the group to respond to supply shortfalls.
American shale and SPR hemmed in
The US is also unlikely to push a whole lot more oil on to the market this year. The country’s shale juggernaut has been hemmed in by a combination of Wall Street pressure to limit spending on new output and real limits on the equipment and people that would be needed to spur high growth. The Energy Information Administration, part of the Department of Energy, sees US output slowing sharply to less than 400,000 barrels a day from January through the end of the year — far from shale’s boom years over the past decade.
The Biden administration helped boost US output last year, and cool prices, by tapping into the nation’s strategic stockpiles, pumping about 1mn barrels a day from government-held reserves for several months. But with stockpiles at their lowest levels since the early 1980s, and the administration under political pressure to rebuild the reserves, that effort would be hard to replicate if prices start to rise again in the coming months. Instead, the administration is now talking about replenishing the reserve.
Put together, it is a compelling case for another jump in oil prices as we move towards the summer and crude demand rises.
But that does not make it inevitable. China’s economic reopening will be complicated, especially if the number of Covid cases explode and the nation’s hospitals become stretched. Russia’s ability to continue pumping oil at high levels also should not be underestimated after what we’ve seen over the past year. It will also be hard to sustain an oil rally if the US and big economies in Europe tip into recession. Still, oil markets are not out of the woods yet.
UK manufacturers are cutting jobs and lowering production due to high energy costs, says a survey by Make UK and PwC. Forty per cent of manufacturers have seen bills double in the past 12 months, and 70 per cent said they expected prices to trend even higher in 2023.
Soaring electricity prices since Russia’s invasion of Ukraine have prompted a cost of living crisis in the UK. Nearly two-thirds of manufacturing executives identified high energy costs as the biggest threat to competitiveness, according to the survey.
Over half of manufacturers said they were increasing prices for final products to mitigate energy costs. More than one in 10 executives said they were considering shutdowns or closing the business.
The survey comes as the UK prepares to scale back its energy support scheme for businesses when it expires in the spring despite industry calls for an aid extension. Prices for natural gas have cooled in recent weeks as warmer temperatures and efforts to cut fuel usage have depressed demand. The UK benchmark for natural gas is sitting at prewar levels, averaging about 171.50 pence per therm, around $21 per million British thermal units, according to Refinitiv. (Amanda Chu)
Energy Source is a twice-weekly energy newsletter 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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