Energy Market Scan - Sep 1st 2022

It is a question on many investors' minds: "Have crude oil prices finally reached their lowest point, or is there room for further decline?"

Posted on Sep 1, 2022 by Prakash Kini (PK)


Have crude oil prices bottomed out? 

On one hand: 

  • Recession is a hot topic in the US and demand seems to be falling - the Chinese economy seems to be sputtering 
  • Fire in major US refinery impacts short-term demand for crude 

While on the other: 

  • US Strategic Reserves have fallen 27% since the 2021 end 
  • Supply constraints still holds
  • OPEC+ has resisted increasing production 

Are the US domestic natural gas prices going to rise further? 

As US domestic natural gas prices hover around $9/MMBtu, the key question is - are the US domestic natural gas prices going to rise further? 

One one hand:

  • The LNG export opportunity continues to be lucrative
  • Supply pressures in EU increase with erratic Russian supplies - Heatwaves are increasing the demand for cooling and in turn gas powered generation
  • Drought and drop in river water levels brings down hydro generation
  • There has been a delay in the re-start of nuclear generators (tentatively November)
  • The EU needs to plan for a harsh winter while Russia might completely shut down gas supplies

While on the other hand:

  • Countries such as Germany are reaching their natural gas reserve targets for the coming winter (they are 80% there)
  • Recession continues to impact demand
  • US LNG export facilities facing a delayed start post Freeport fire

Read more at: Natural Gas

Geopolitics and War 

Russia and Iran to create a Natural Gas OPEC

Last month, Gazprom and the National Iranian Oil Company (NIOC) signed a $40 billion Memorandum of Understanding (MoU). The MoU has been hailed as a move that will enable Iran and Russia to implement their long-standing plan of becoming the major players in a global cartel for gas suppliers, similar to the Organization of the Petroleum Exporting Countries (OPEC) for oil suppliers. 

Russia and Iran, the number one and two world's largest gas reserves, are best placed to coordinate the reserves and control prices.

Russia has around 48 trillion cubic meters of gas reserves, while Iran possesses 38 trillion cubic meters.

The Russia-Iran partnership aims to have as much control as possible over the two main elements in the global supply chain matrix – over-the-land gas supply via pipeline and maritime supplies via ships in LNG. 

EU is making an emergency intervention in its electricity markets 

The EU is preparing for an emergency intervention into its electricity markets which will provide necessary structural reforms which can assist with getting a hold on tearaway electricity prices.

In the UK, an 80% hike in power price caps was announced. According to an analyst, over half of the British population plunged into fuel poverty in a month's time. The scenario in EU countries is not very different. 

US Army Veterans object to new LNG facilities in the US Gulf region 

US Army veterans have joined local politicians in objecting to setting up LNG export facilities in the US Gulf region citing that the region is battered by incessant and destructive hurricanes.

Supply and Demand

Russia surpasses Saudi to become India's second-largest oil supplier

Since the start of the Ukraine war, Russia has surpassed Saudi to become India's second-largest oil supplier. 

This move has received severe criticism from several sources citing this as "blood oil", which continues to provide Russia with revenue that can be spent on its war supplies. 

Other factions, of course including India's own, have refuted this, citing that India is still quite low in the ranking of oil and natural gas importers from Russia, and the leaders in this list continue to include EU countries and the US, despite the ongoing sanctions against Russia; and stating the argument that India is only doing this for its own energy security and is fully justified in doing so. 

Related posts: 

Japan reverts to nuclear-generated power 

Japan had put a halt to nuclear power generation post the Fukushima disaster. But now it has no option but to revert to nuclear power, as global fuel prices soar. 

Weather and Climate Change 

Iran's nuclear program hits climate change snag

The latest challenge to Iran's controversial nuclear program is not world geopolitics, but climate change 

Global Warming has led to a rise in water temperatures in the Persian Gulf, water that is used as a coolant for nuclear reactor cores 

So ironically, though climate change increases the demand for power, has also led to a practical challenge in nuclear power generation

Devastating floods in Pakistan contrast to droughts elsewhere

Pakistan has been inundated with devastating record-breaking floods. 

The floods have led to widespread damage, a third of the country is submerged, as well as human losses, and the death toll has surpassed 1,000 figures. Rescue operations are underway. 

The floods come as a new shock to an already economically stressed country and populace, which is now exposed to further escalation in food prices and supply shortages. 

Global aid arrives as these cataclysmic floods overwhelm Pakistan. 

Pakistan's floods could be seen as an urgent call to action for the world to invest in Climate Change adaptation.