US shale producers just can’t beat OPEC Plus

Shale oil drillers turned from scrappy wildcatters into multi-millionaires over the past two decades, propelling the United States to become the world's largest producer, but now they are running out of runway. Oil output gains are slowing and executives from some of the largest firms are warning of future declines from overworked oilfields and less productive wells.

On Sunday, the Organization of the Petroleum Exporting Countries (OPEC) meets to decide whether to hold the line or cut its output, no longer afraid that their policy decisions might provoke a surge in shale production in the way they did in the years before the pandemic.

The sidelining of US shale means consumers around the world may face a winter of higher fuel prices. Russia has threatened to block oil sales to countries supporting a European Union price cap, and the United States is winding down releases from emergency oil stockpiles that helped cool energy inflation.

US shale production costs are soaring and there is no sign that tight-fisted investors will change their demands for returns rather than investment in expanding drilling.

During a decade of stunning growth, shale consistently defied production forecasts, and opposition from environmentalists, as technology broke open more and more shale plays and revolutionized the global energy industry.

But there appears to be no new industry-transforming technologies in the works or cost-savings that could change the picture this time around. Inflation has pushed up costs by up to 20%, and less productive wells are crimping the industry's ability to produce more.

Industry spending on new oil projects, said analysts last week at Morgan Stanley is modest at best and the absolute level of investment is still historically low.

Shale has proven naysayers wrong in the past. After the 2014-2016 OPEC price war put hundreds of oil companies into bankruptcy, shale innovated with less expensive ways of operating. Their subsequent gains gave the United States by 2018 the title of world's largest crude producer, a distinction it still holds.

Shale can't come back to become a swing producer, because of the investors' unwillingness to finance growth. The demand for payouts and repeated price busts has forced oil producers and service companies to cut back on science projects that fed past production breakthroughs.

The industry also has less time to regain its former leadership, said Hess Corp CEO John Hess. He estimates rivals have about a decade of running room before they fizzle out. Shale is no longer in the driver's seat with OPEC regaining control over the market, said Hess.

Shale's waning influence is clear in North Dakota. Once the vanguard of the US shale oil industry, poor well productivity in the state's Bakken region and labor shortages have left it far from its boom days.

As the number of prime drilling locations decline across all shale fields, the outlook is grim. Shale production declines rapidly after peaking compared to conventional oil wells, falling about 50% after the first year.

The Permian Basin of west Texas and New Mexico, the largest and most important US oilfield, is the only US shale region to exceed its pre-COVID-19 pandemic oil production levels, according to US Energy Information Administration data. Even that field is showing signs of stress.

EU Countries Lambast Gas Price Cap Proposal

European Union Energy Ministers locked horns on Thursday over a proposed gas price cap at 275 euros per megawatt hour (MWh), grappling over its effectiveness at that level and the impact on supplies and incentives to cut consumption.

The long-standing disagreements were holding up other policies to alleviate the acute energy crisis, such as the launch of joint EU gas purchases and a quicker permit process for renewables.

Diplomats said the 27 EU countries agreed on these two in principle but delayed formal approval until another meeting called for December 13, 2022 with proponents of a cap demanding a green light for all three proposals or none at all.

Polish Climate Minister Anna Moskwa called the 275 euro blueprint put forward by the European Commission a joke.

Belgium's Energy Minister Tinne Van der Straeten also chimed in, telling reporters, "The text that is on the table is unsatisfactory ... it doesn't clearly say if it will have an effect on prices."

Their Greek counterpart, Konstantinos Skrekas said a cap of 150-200 euros/MWh would be realistic.

"It could help us reduce gas prices and therefore reduce electricity prices, which is a major challenge in Europe this winter," he said.

Malta was also unhappy with the proposed ceiling. Energy minister Miriam Dalli said the strict conditions needed for the mechanism to kick in made it "next to impossible".

As many as 15 EU states want a set limit to contain energy costs after gas prices soared to record highs in August 2022, driven up by Russia cutting supplies to Europe in the wake of Western sanctions over Moscow's war against Ukraine.

But stiff opposition comes from a smaller but powerful camp led by Germany, the EU's biggest economy. Together with the Netherlands, Sweden, Austria and Finland, they say a cap could shift supply elsewhere and cut incentives to lower consumption.

The Commission proposed to limit the front-month price on the Netherlands' Title Transfer Facility (TTF) gas exchange if it exceeds 275 euros/MWh for two weeks and if the price is more than 58 euros higher from a liquefied natural gas (LNG) global reference for 10 consecutive trading days.

Dutch minister Rob Jetten was highly critical of the plan.

"The proposal is flawed," he said. "There is a lot of risk for damaging the energy security of supply, and also for stability of the financial markets."

German state secretary for climate, Sven Giegold, added, "We still have a lot of work to do."

The Estonian minister was the only one to say the plan was OK, pretty much as a temporary measure and only to address extreme price increases rather than a permanent solution.

The EU has approved a series of measures to mitigate the crisis in recent months, ranging from consumption savings to windfall taxes to claw back profits from energy producers. But the issue of whether and how to cap gas prices has split the bloc.

Ukraine's energy minister was also due to dial in, according to an EU diplomat, to discuss support for his country where the Russian war destroyed civilian infrastructure and incapacitated power and heating systems as winter cold sets in.

 

 

LNG trade faces unprecedented times

According to Seatrade Maritime News, LNG shipping is seeing exceptional strength, already fueled by geopolitical vagaries, and with the impact of winter weather patterns yet to be determined.

The sector received considerable emphasis at Marine Money’s mid-November Ship Finance Forum, held in midtown New York.

Mike Tusiani, Poten & Partner’s Chairman Emeritus, in introducing the day’s kick-off panel, described the present situation as an unprecedented time in the LNG trades.

His colleague at Poten, Jefferson Clarke, talked about “ton time” having supplanted ton miles as the operative metric in explaining LNG shipping’s rise.

He said that commodity prices are driving the flows of LNG; in short, it gives the incentive for charterers to hold on to tonnage…and not get access to tonnage.

He explained that vessel charterers have been moving vigorously into the term market, and explicitly linked high LNG prices with demand for term charters.

Though media headlines within the mainstream and trade press have pointed to charter hires for high end LNG carriers at US$400,000 per day or more, spot fixtures are actually few and far between.

Oystein Kalleklev, CEO of Flex LNG said, after reviewing fixture lists, that he could only find two spot fixtures done in November.

On a shipowner panel later in the day, Kalleklev opined that LNG shipping is like a liner trade in contrast to more spot-oriented commodity sectors, including VLGC/ LPG transporter Avance Gas, where he is Executive Chairman.

On that same panel, he described the FLNG strategy, if he were taking delivery of a hypothetical new vessel, as “fix it out, finance it, and pay a hell of a lot of dividends.”

He described one year time charters as being in the US$200,000 per day range with three-year deals drawing around US$170,000 per day but added that there will be volatility.

In the earlier panel, he indicated a preference for a strategy of fixing FLNG’s vessels on term business when they come off existing charters, rather than expanding the fleet with expensive newbuilds.

Kalleklev attributed strength in the markets to waiting and delays, which effectively reduce available supply, in explaining the market’s dynamics. In LNG trades, he explained that “ton time has mitigated the downturn in ton miles.

People are waiting more, people are deploying floating storage. One component of the potential volatility awaiting market participants this time around might be unwinding of such storage if the present contango structure LNG pricing was to flatten out.

He noted that a precipitous market fall in late 2018 had been brought about by a previous instance of floating storage being unwound.

 

 

 

OPEC Plus production cut decision attracts opposite reactions

US Treasury Secretary Janet Yellen said a decision by the OPEC Plus to cut oil production was unhelpful and unwise for the global economy, especially emerging markets, the Financial Times quoted on Sunday.

"We're very worried about developing countries and the problems they face," Yellen told the newspaper in an interview.

As against this, Kremlin praised OPEC Plus for agreeing production cuts that had successfully countered the ‘mayhem’ sown by the United States in global energy markets.

The OPEC Plus decision to cut oil production despite stiff US opposition has further strained already tense relations between President Joe Biden and Saudi royal family, Reuters reported on Saturday.

The White House pushed hard to prevent the output cut. Biden hopes to keep US gasoline prices from spiking again ahead of midterm elections in which his Democratic party is struggling to maintain control of the US Congress.

Kremlin spokesman Dmitry Peskov said it was very good that such balanced, thoughtful and planned work of the countries, which take a responsible position within OPEC, is opposed to the actions of the United States.

"This at least balances the mayhem that the Americans are causing," Peskov said, according to Russian news agencies.

Peskov said that the United States had begun to lose its composure over the OPEC decision and was even trying to push additional volumes of its reserves into the market.

"They are trying to manipulate with their oil reserves by throwing additional volumes into the market. Such a game will not lead to anything good," Peskov said.

The worry for those tracking Europe's energy transition commitments is that these accumulated costs of LNG imports, alongside other expenses already incurred, drain both the funds available for de-carbonization projects and the level of ambition of the governments responsible for them.

There's an irony in that this potential diminished firepower comes when the appetite in society and government for weaning Europe off fossil fuels has likely never been greater.

But funding has always been a critical component of every energy transition plan, and the reality is that if government and commercial budgets have already been drained by imports of fossil fuels to keep the economy going, there may be little left in the kitty to finance the transition to a greener energy system.

 

OPEC Plus thought of production cut annoys US

OPEC Plus looks set for deep oil output cuts in its meeting today (Wednesday), curbing supply in an already tight market despite pressure from the United States and other consuming countries to pump more.

The likely cut could spur a recovery in oil prices that have dropped to about US$90 from US$120 three months ago due to fears of a global economic recession, rising US interest rates and a stronger dollar.

The cartel that includes Saudi Arabia and Russia, is working on cuts in excess of one million barrels per day (bpd). Reuters reports the cuts could be as high as two million bpd if reductions could include additional voluntary cuts by members such as Saudi Arabia or if cuts could include existing under-production by the group.

OPEC has been under-producing over 3 million bpd and the inclusion of those barrels would dilute the impact of new cuts.

"Higher oil prices, if driven by sizeable production cuts, would likely irritate the Biden Administration ahead of US midterm elections," Citi analysts said in a note.

"There could be further political reactions from the US, including additional releases of strategic stocks along with some wildcards including further fostering of a NOPEC bill," Citi said referring to a US anti-trust bill against OPEC.

Saudi Arabia and other members of the Organization of the Petroleum Exporting Countries and allied producers (OPEC Plus) have said they seek to prevent volatility rather than to target a particular oil price.

The West has accused Russia of weaponizing energy as Europe suffers from a severe energy crisis and may face gas and power rationing this winter in a blow to its industry.

Moscow accuses the West of weaponising the dollar and financial systems such as SWIFT in retaliation for Russia sending troops into Ukraine in February. The West accuses Moscow of invading Ukraine while Russia calls it a special military operation.

A significant cut is likely to anger the United States, which has pressured Saudi Arabia to pump more to pressure oil prices and reduce revenue for Russia.

Saudi Arabia has not condemned Moscow's actions and relations are strained between the kingdom and the administration of US President Joe Biden, who travelled to Riyadh this year but failed to secure any firm cooperation commitments on energy.

Saudi Aramco CEO and President Amin Nasser said that the spare production capacity is not the responsibility of Saudi Arabia alone.

Nasser made the remarks on Tuesday during his speech at the Energy Intelligence Forum 2022 in London. He added that the spare capacity amounts to 1.5% of global demand.

The oil market does not focus on the fact that global spare capacity to increase oil production is very low, Nasser said.

He clarified that the market focuses on what will happen to demand if there is recession in different parts of the world. He also added that they do not focus on the supply fundamentals.

Nasser stressed that Aramco maintained its market in Asia despite European demand, while he pointed out that the problem of Europe lies in gas and liquefied gas due to the lack of spare capacity.

During his speech, Nasser expected that the demand for oil would increase until 2030 and beyond. He also added that Aramco is on track to raise its capacity to 13 million barrels per day by 2027, which would cost billions of dollars.

The Aramco's CEO remarks came about 24 hours before the meeting of the OPEC Plus meeting that will be held on Wednesday in Vienna, which is its first attendance meeting since March 2020.

The alliance is expected to reduce production by at least 500,000 barrels per day, while other expectations indicate the possibility of reducing by more than one million barrels per day.

 

 

OPEC Plus mulling largest cut since 2020

The OPEC Plus group of oil producers is discussing output cuts of more than one million barrels per day (bpd). Voluntary cuts by individual members could come on top of that, making it their largest cut since 2020.

The group is set to meet on October 05, 2022 in Vienna in person for the first time since March 2020, against a backdrop of falling oil prices and months of severe market volatility which prompted top OPEC Plus producer, Saudi Arabia, to say the group could cut production.

The cartel, which combines OPEC countries and allies such as Russia, has been gradually raising its output target to unwind the record cuts it made in 2020.

Now faces a sharp fall in prices, which have dipped below US$90/barrel from as high as $120 in recent months due to fears about the global economy and a rally in the US dollar after the Federal Reserve raised interest rates.

"It may be as significant as the April 2020 meeting," the source said, referring to when the cartel agreed record supply cuts of around 10 million bpd, or 10% of global supply, as the COVID-19 pandemic slashed demand.

A significant cut is likely to anger the United States, which has been putting pressure on Saudi Arabia to continue pumping more to help oil prices soften further and reduce revenue for Russia as the West seeks to punish Moscow for sending troops into Ukraine.

Saudi Arabia has not condemned Moscow's actions amid difficult relations with the US administration under President Joe Biden.

Last week, a source familiar with Russian thinking said Moscow would like to see OPEC Plus cut its output target by one million bpd or 1% of global supply.

On Sunday, sources said the cut might exceed one million bpd.

On Monday, one OPEC source said voluntary cuts by individual members would come on top of that figure.

It was not yet clear what levels of voluntary cuts Saudi Arabia or any other top Gulf OPEC producers could contribute.

In the past few years, only Saudi Arabia has offered voluntary cuts to give additional boost to the markets.

"My instinct is that if they (OPEC Plus) have suggested a cut and prices are still going down, they will have to do it and a bigger one than they wanted," said Raad Alkadiri, Managing Director at Eurasia Group.

Stephen Brennock at PVM said fears of a demand-sapping recession have rattled OPEC Plus and hence they are set to take preemptive action.

"It must be noted that OPEC Plus is already pumping more than 3 million bpd below its target, hence any further cuts will only exacerbate the existing supply tightness," he said.

 

Emerging massive stimulus for oil tankers

Tankers generally, but VLCCs in particular, will benefit spectacularly as Europe’s energy trades transform and the ban on Russian crude oil imports comes into effect in December 2022.

According to New York broker, Poten & Partners, the ton-mile demand generated by European imports rose by 32% as a result of reducing Russian imports to 2.0 million barrels per day (bpd) from 2.5 million bpd.

“Finding alternative sources of supply for another 2.0 million bpd will provide another massive stimulus to ton-mile demand and tanker rates,” the broker declared.

Over the five-year period from January 2017 to January 2022, Europe imported at an average of 2.7 million bpd of Russian crude oil by sea, 26% of the seaborne total but only 14% in terms of ton-miles.

Most of the oil imported into Europe was carried on smaller tankers running short-haul trades across the Baltic and Black Seas. Between March and August, however, crude oil imported by sea from Russia fell to 19% and, in ton-mile terms, shed two percentage points to 12%.

Since the start of the war, Europe has pivoted away from Russian crude, replacing supplies with imports from the US Gulf, South America (Brazil, Guyana), West Africa, and the Middle East. Imports from the US Gulf have doubled from 6% to 12%. This has led to a significant increase in ton-mile demand, and is a welcome shot in the arm for the recently weak large tanker sector.

The broker also noted that Russia will look for other customers for its displaced two million barrels of crude, most likely in Asia, China and India in particular. This will provide a further boost for ton-mile demand. “The tanker market is in for a wild ride,” Poten predicted.

MOL orders first VLCC

Dalian Cosco KHI Ship Engineering has announced a contract to build two dual-fuel VLCCs for Mitsui O.S.K Lines (MOL).

This is the first LNG-fueled VLCC ordered from a Japanese tanker operator, and the first VLCC newbuild order from global market since July last year, said Dalian Cosco KHI Ship Engineering. 

According to brokers Poten & Partners in a recent report the last VLCC newbuilding was ordered in June 2021, while there have been no contracts for Suezmaxes since July last year. Tanker markets have endured a torrid couple of years which has seen owners refrain from ordering new tonnage.

This VLCC pair for MOL, measuring 339.5 metres in length and 60 metres breadth, meeting the Phase 3 regulation of EEDI, will be able to reduce 25-30% carbon emission as compared to the traditional vessel. 

The newbuild VLCCs are scheduled for delivery from 2025 through 2026.

Germany revamping LNG import capacity

The German Government has signed two memoranda of understanding with the country's top gas utilities for the delivery of two floating LNG import terminals.

According to a Reuters report, the deals, with Uniper, RWE, and EnBW, will see the vessels, due to be completed this winter, delivered by March 2024.

"This is an important date in the series of steps that we have been taking since the beginning of the year, to make ourselves independent and less susceptible to blackmail from (Russian President Vladimir) Putin, and to give Germany a robust and resilient energy infrastructure, or in this case gas infrastructure," Economy Minister Robert Habeck said.

LNG has become the last resort for energy-hungry Germany when Russia reduced flows via the main artery supplying the EU's biggest economy with natural gas. Most of it comes from the United States, but Germany has no import terminals for the super-chilled fuel that needs to be re-gasified at the point of entry into the country.

Stationary LNG import terminals take years to build while floating storage and regasification are much faster to install once their construction is completed.

US LNG volumes are not large enough to fully replace Russian gas flow via pipelines due to production capacity constraints, so Germany needs alternative suppliers, too.

Chief among these could be Qatar, but negotiations between Berlin and Doha ended without a deal earlier this year as the Qataris insist on long-term contracts and a clause that would oblige Germany not to resell any gas it is not using.

Meanwhile, the head of Germany's energy regulator warned that gas consumption would have to be cut deeper than the EU-wide voluntary 15% to 20% if the country is to avoid a harsh winter of shortages.

"If we fail to reach our target of 20% gas savings then there is a serious risk that we will not have enough gas," Klaus Mueller told the Financial Times earlier this week, which would lead to gas rationing.

 

 

Crude oil prices slip on receding fears of output cut by OPEC Plus

Crude oil prices fell on Wednesday, taking a breather from a near 4% surge the previous day, on receding fears of an imminent output cut by the Organization of the Petroleum Exporting Countries and allies, a group known as OPEC Plus.

Global benchmark Brent crude futures fell to US$99.82 a barrel by 0337 GMT, after rising 3.9% and WTI futures declined to US$93.47 a barrel, having jumped 3.7% on Tuesday.

Both contracts soared on Tuesday after Energy Minister of Saudi Arabia flagged the possibility of supply cuts to balance a market it described as "schizophrenic", with the paper and physical markets becoming increasingly disconnected.

"While Abdulaziz bin Salman's comment may have achieved more than putting a floor under crude prices, we expect it to follow the law of diminishing returns, unless it is followed up by more signals or action from OPEC Plus to restrain output," said Vandana Hari, founder of oil market analysis provider Vanda Insights.

With OPEC Plus already delivering about 2.8 million barrels per day less than its monthly target, cutting production is going to be more complicated than usual, Hari added.

Potential OPEC Plus production cuts may not be imminent and are likely to coincide with the return of Iran to oil markets should it clinch a nuclear deal with the West, nine OPEC sources told Reuters on Tuesday.

A senior US official told Reuters on Monday that Iran had dropped some of its main demands on resurrecting a deal. 

"Tuesday's rally was overdone as many investors knew it would take several months for Iranian oil to flow into the international market even if an agreement to revive Tehran's 2015 nuclear deal was made, meaning OPEC Plus would not trim output so quickly," said Kazuhiko Saito, Chief Analyst at Fujitomi Securities.

"Still, there is not much room for the market's downside due to robust heating fuel demand for the winter," he said, citing that the recent rally in the US heating oil market and surging natural gas prices boosted expectations for stronger heating oil demand and tighter crude supply.

US gas prices shot above US$10 for the first time in about 14 years due to a surge in prices in Europe, where tight supplies persist.

Underlining tight supply, US crude stockpiles fell by about 5.6 million barrels for the week ended August 19, according to market sources citing American Petroleum Institute figures on Tuesday, against analysts' estimate of a drop by 900,000 barrels.

But gasoline inventories rose by about 268,000 barrels, while distillate stocks increased by about 1.1 million barrels.

Europe inching towards worst energy crisis

The International Energy Agency (IEA) has warned Europe is facing a red alert over its gas consumption and significant additional reductions are needed to prepare the continent for a tough winter ahead.

The warning comes as Russian gas exports to the continent have decreased in capacity and amid maintenance work on the main pipeline to Germany (Nord Stream 1). The IEA fears that further gas cuts cannot be ruled out. 

Experts argue the European Union is struggling to secure alternatives to Russian supplies but has approved another 500 million euros in arms to Ukraine, whereby a push towards a peace settlement may save the bloc a lot of breathing space on its gas stocks, instead of the panic it finds itself in. 

The IEA itself which serves as the west’s energy watchdog says efforts to boost supplies are still falling short and the 27-member bloc needs stricter measures, such as restricting air conditioning demand (during the current heat wave in Europe) and auctioning gas supplies to industry.

Dr. Fatih Birol, the Executive Director of the IEA has said there is a global energy crisis but warned the situation is especially perilous in Europe, which is at the epicenter of the energy market turmoil. He has expressed concern about the months ahead for the continent. 

The IEA has acknowledged there has not been enough progress by the EU to ween itself of Russian gas especially on the demand side, to prevent Europe from finding itself in an incredibly precarious situation.

It says any further cuts of Russian natural gas flows to Europe, combined with other recent supply disruptions, are a red alert for the European Union, adding that as we get closer to next winter, we are getting a clearer sense of what Russia may do next. The next few months will be critical, the organization warned. 

Moscow has strongly rejected any allegations that it has been using its gas supplies for political purposes. Experts have also argued that it is not in the Kremlin’s interest to cut gas supplies as Russia would lose out financially. 

Nevertheless, Brussels the headquarters of the EU is reportedly preparing to tell the bloc members to cut gas consumption immediately, warning that without increased preservation the continent risks running short of the vital commodity this winter. 

Reports have surfaced that the European Commission will provide members with voluntary gas reduction targets by next week, which cautions that targets will be made mandatory in the event of severe disruption to supplies.

Acting jointly now will be less disruptive and costly, facilitating solidarity and avoiding the need for unplanned and uncoordinated actions later in a possible crisis situation with gas reserves running low.

The IEA warns that efforts to diversify away from Russian gas are no longer enough on their own and that Europe faces the real prospect of rationing its energy unless demand is restricted in order for storage facilities to be filled ahead of the long winter season. 

Birol says he has spoken to EU officials urging them to do all they can right now to prepare for a long, hard winter. He said, “Europe is now forced to operate in a constant state of uncertainty over Russian gas supplies, warning that we can’t rule out a complete cut-off.

The irony is that the EU initiated gas crisis by imposing unprecedented economic sanctions on Russia including hundreds of individuals, businesses, companies, entities, flights, and oil by the end of 2022. In March the bloc said it would reduce gas imports by two-thirds within a year, but there have been disagreements among EU members about this. 

The EU is evidently heavily reliant on Russian gas, yet it has threatened Moscow and at the same time, appears to have shot itself in the foot with its sanctions policy.

An EU last week recommended limiting central heating and cooling in buildings as well as the exemption of coal power stations from its target of emissions reductions.

One EU official has said talks are ongoing over what punitive measures can be enforced if mandatory targets set by the EU to cut gas are not met among member states. 

Europe had relied on Russia for about 40% of its gas but since Russia’s military intervention in Ukraine, Western sanctions have disrupted supplies. The continent imported a total of 155 billion cubic meters of gas from Russia in 2021 and consumes close to 400 billion cubic meters of gas in total during a normal year.

A new EU gas plan issues a warning that continued cuts to Russian gas supplies could lead to a drop in the bloc’s GDP by up to 1.5%, depending on the level of disruption.

Birol said, “Flows have been halted through Nord Stream [1], the biggest single gas pipeline between Russia and Europe, for what Russia says is planned maintenance that is due to end on July 21, 2022. Russia had already significantly reduced the flows coming through Nord Stream in June, and it remains unclear whether they will resume and if so, at what level, after the stipulated deadline.”

The maintenance work is routine procedure that is carried out every year and it’s not uncommon that the work would take longer than ten days. Kremlin spokesperson, Dmitry Peskov, has rejected accusations that Russia would use its gas exports to put pressure on European governments.

Nevertheless, the IEA has offered thorough guidelines and steps to the EU on how to fill European gas storage to adequate levels before winter; starting with the reduction of Europe’s current gas consumption, and putting the saved gas into storage. 

Among the advice is to bring down household electricity demand by setting cooling standards and controls. Government and public buildings should take the lead on this to set an example while campaigns should encourage behavioral changes among consumers.

If the measures proposed by the IEA are not implemented now, Europe will be in an extremely vulnerable position and could well face much more drastic cuts and curtailments later on,” the agency warned. 

It goes on to say that in addition to the measures proposed, “European governments also need to prepare the people of Europe for what may be coming. Public awareness campaigns in the context of an energy crisis have been successful previously in reducing short-term energy demand by several percent.”

According to the IEA, since Russia’s military operation in Ukraine, the amount of revenue that Moscow has collected from exporting oil and gas to Europe has doubled compared with the average of recent years – to US$95 billion. 

“The increase in Russia’s oil and gas export revenues in just the last five months is almost three times what it typically makes from exporting gas to Europe over an entire winter.” the IEA says. 

The agency warns that should Russia decide to completely cut off gas supplies before Europe can get its storage levels up to 90%, the situation will be even more grave and challenging.

The warnings and plans for Europe to cope with enough heat in the winter offers an idea on how reliant the EU is on Russian gas and how fragile the situation may become in wintertime. 

Cool heads are required at such a delicate time. Perhaps a peace deal, which the US-led NATO alliance doesn’t appear to care about, is just what’s needed.

 

Rising gas and crude oil prices not a good omen

Meteorologists are predicting a cold winter, and it could send international energy prices even higher. Record high natural gas prices have forced some utilities to switch to oil, boosting demand for crude. It is feared that oil prices may witness further rise, though not likely to stay there for long.

The spike in oil prices to the highest in years came after OPEC plus decided not to add more barrels than the initially agreed 400,000 bpd monthly. Analysts say that prices could witness further increase. Now, some forecast price may rise to US$100/barrel. The good news is that even if it happens, it won’t last. 

Goldman Sachs recently updated its oil price forecast for the final quarter, saying it now expect Brent crude to reach US$90/barrel by end December 2021. The bank believes oil demand could jump by 900,000 bpd if the winter gets harsher.

“While we have long held a bullish oil view, the current global supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast and with global supply remaining short of our below consensus forecasts,” the bank’s commodity analysts said in late September this year.

Then Bank of America said oil could hit US$100/barrel because of the energy crunch that has now gone global. US Energy Secretary, Jennifer Granholm said last week that the government may release oil from the country’s emergency reserve to lower gasoline prices.

The record-high natural gas prices have forced some utilities to switch to oil derivatives instead, boosting demand for crude and, like Goldman, noted the prospect of a cold winter as another bullish factor for oil.

“If all these factors come together, oil prices could spike and lead to a second round of inflationary pressures around the world,” BofA analysts wrote in a note. “Put differently, we may just be one storm away from the next macro hurricane.”

Yet even if Brent hits US$100/barrel, it is unlikely to stay there for long, according to John Driscoll, chief strategist at JTD Energy Services. And it would take a lot of things to happen for the benchmark to reach this price level.

“I see that as kind of a lower probability scenario. That is, if everything goes wrong, if we have Arctic weather, if we’ve got glitches, breakdowns in the deliverability, the supply chains. That is a possible scenario but I don’t see that likely to be sustainable,” Driscoll told CNBC last week.

Yet the weather is impossible to predict with any accuracy over longer periods of time, and indeed, current forecasts for the winter season differ dramatically among meteorologists, as Bloomberg reported earlier this month. 

The rational thing to do, of course, is to plan for the worst possible scenario, which would be a very cold winter. Indeed, this was what Europe and China tried to do and what became one big reason for the gas price spike. 

Yet some of that spike, at least, was the result of speculation rather than fundamentals. Gas prices dropped after Russian President Vladimir Putin said the country will supply additional gas to Europe.