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Hello Power Up readers! It’s getting hotter out, the days are getting longer, fuel is getting more expensive, and today is Chewbacca actor Peter Mayhew’s birthday, so in honor of the esteemed Wookie (more than 200 years old), let’s look at the state of the energy markets and yell “RAAAWWWRGGR!!”
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Graphic by David Gaffen
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A frequent refrain among market watchers is that the dollar’s strength can undermine the price of oil, since crude transactions are most frequently conducted in dollars - and so rising greenback strength often tempers the rise in crude.
Not in 2022. While U.S. crude prices are up by 51%, the dollar has also surged, with the broad dollar index up 8.4% on the year - and in some cases, even more. That’s a double-whammy for big importers of energy that have also seen their currencies erode this year, such as South Korea, Japan, India and Turkey, all of whom are among the 15 largest importers of crude oil.
For instance, when measured in Turkish lira, U.S. crude is up more than 80% this year, accounting for currency effects - and part of the reason inflation there recently soared to 70%. “The ones that have been having difficulty in the past with currency crises, they’ve been hit the hardest, like Turkey for instance,” said Fawad Razaqzada, market analyst at City Index in London. “It’s really scary, if you look at all of the other currencies of oil importers.”
In some places, the situation is even more dire. Sri Lanka, off India’s coast, closed its one refinery last year due to the high price of crude; it is now effectively out of fuel and is struggling to find the foreign exchange reserves necessary to pay for crude to re-open its refinery. The crisis has already toppled the nation’s prime minister as protests have devolved into violence and the nation’s foreign exchange reserves have dwindled.
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Russian Deputy Prime Minister Alexander Novak attends a session of the St. Petersburg International Economic Forum (SPIEF) in Saint Petersburg, Russia, June 4, 2021. REUTERS/Evgenia Novozhenina
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The European Union spent weeks running in several directions when it came to determining whether buyers of Russian gas can indeed buy in roubles or not. Suffice to say that there has been much confusion on this point, even as the EU is pulling together plans to wean itself off all Russian fossil fuels within five years.
Brussels (that’s what we call the EU, collectively, like you’d refer to the U.S. government as ‘Washington,’ and the Jedi Council as ‘Coruscant’) finally seemed to come to a position, and it’s still pretty muddled. The European Union's executive told member states this week they can keep buying Russian gas without breaching sanctions imposed on Moscow following its invasion of Ukraine, but advised against opening rouble bank accounts to pay for it, EU officials said.
There have been multiple attempts at clarification out of Brussels - and companies have taken differing stances on how to handle this, with some, like Italy’s Eni, saying it is going to open a roubles account, while some German and French companies have said they’ll honor contracts with Gazprom - but not open accounts in roubles.
The EU’s newest stances makes it even less clear whether the group will enforce sanctions against members who do open rouble accounts. So that keeps things pretty up in the air at a time when Russia has already dropped supply to Poland and Bulgaria. Finland has said that Russia is considering cutting off gas to that country this week.
There could be more clarity in the coming days. Half of Russian gas giant Gazprom's 54 clients have opened the dual accounts at Gazprombank, Russian Deputy Prime Minister Alexander Novak said on Thursday.
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President and CEO of Occidental Petroleum, Vicki Hollub, speaks during the opening session of the International Petroleum Technology Conference (IPTC) as other delegates look on, in Riyadh, Saudi Arabia, February 21, 2022; REUTERS/Ahmaed Yosri
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Over the last few months, major oil consuming nations - particularly the United States - have issued something of a clarion call to energy companies: boost your crude production. The drumbeat for this grew particularly loud in March just after Russia invaded Ukraine.
The response from oil majors, shale companies and national producers? We’ll get to it, eventually.
Several shale companies at the giant CERAWeek conference in Houston in March had something of a sympathetic ear for Biden administration officials who urged more output, but since then, little has changed. And in the last round of earnings - and worldwide - the response has been similar: there’s not enough labor or parts, and companies don’t want to upset the fiscal discipline that has delighted investors after years of awful returns.
A few choice comments:
--On May 11 Occidental CEO Vicki Hollub said accelerating projects would be “value destruction” and that there were a “lot of headwinds” to boosting output now.
--May 6: EOG Resources says production will fall short of U.S. expectations
--May 5: Pioneer Natural Resources’ CEO Scott Sheffield says constraints on fracking fleets, inflation, and labor are going to restrain production growth.
--APA CEO John Christmann the same day said increasing activity would be “logistically challenging and capital inefficient.”
To be sure, numerous providers have pointed to labor and equipment costs, as well as lack of availability of both, as part of the reason for costs to rise. The cost of drilling and completing a well could be up 20% this year, according to analysts.
In addition, U.S. Energy Department figures show that the Permian Basin right at record levels of production, though rig counts in the Permian have started to slow of late, according to JPM analysts. That’s been driven by private operators taking advantage of the $100-plus prices. But other basins have seen slower growth, and that’s kept production from swiftly increasing. Globally, the International Energy Agency expects non-OPEC+ supply to grow to 48.1 million barrels per day in 2022 from 46.3 million bpd in 2021 - so output is growing.
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A man stands under an artificial waterfall to cool off at a water park on a hot weather day in Gandhinagar, India, May 18, 2022/REUTERS/Amit Dave
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It’s already hot in a lot of places in the world, with places from Houston to Delhi reaching unexpected temperatures that are straining power grids, and there is growing concern that this summer could see an electricity crisis because of lack of supply.
India is already suffering. That nation was hit with its worst electricity crisis in six years in April, forcing it to reverse a policy to cut coal imports. If those supplies don’t arrive by mid-June, the power ministry there says more power cuts could be seen - by about 5% to state-run utilities.
Meanwhile, the North American Electric Reliability Corp (NERC) said ongoing droughts could present a severe problem in parts of the United States, as the lack of water cuts hydropower generation, and the heat results in stresses to grids - as seen in Texas this past week. The hydropower reduction puts the entire U.S. West "at risk of energy emergencies due to the limited supply of electricity available for transfer" in the event of a wide-area extreme heat event.
Other hot spots will include the Midwest, due to a lack of available generation, and the Canadian province of Saskatchewan, where more demand will strain capacity.
With 2021’s disastrous freeze still fresh in people’s minds, the Texas grid operator ERCOT suffered through some transmission problems a week ago - causing day-ahead prices to spike to as much as $4,000 per megawatt-hour briefly last week. Things are supposed to cool down - and the grid usually has more operating power in the summer, by design - but it will also be a major test of whether much-discussed improvements to the grid have actually come to fruition.
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"We've been here since 7-8 a.m. in the morning and it is still not clear if they will have fuel or not. When will it come, no one knows. Is there any point in our waiting here? We also don't know."
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-Mohammad Naushad, an auto rickshaw driver in Colombo, capital of Sri Lanka
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Coal is unloaded onto large piles at the Ulan Coal mines near the central New South Wales rural town of Mudgee in Australia, March 8, 2018. REUTERS/David Gray
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Australians go to the polls this coming weekend in an election that is turning on climate change and the high cost of power in a country that is tied heavily to fossil fuel exports - even as an activist billionaire has forced questions about the issue by vowing to close coal-fired power plants.
Australia is a big natural gas exporter (until 2020, it was the biggest LNG exporter) and also ranks second for coal exports in terms of energy weight; overall, it ranks sixth worldwide in terms of total energy production, and the nation relies nearly equally on petroleum, coal and natural gas for power production. That makes numerous politicians - both the ruling conservatives and Labor - loath to touch the issue of an energy transition.
That has, however, fueled a group of independent candidates who want the country to move faster on dealing with rising worldwide temperatures. At the same time, climate-focused investor Mike Cannon-Brookes earlier this month took an 11% stake in AGL Energy, the country’s biggest power producer, in an effort to prevent the company from splitting off its generation division - with a goal to more swiftly shut coal plants that provide 30% of the nation’s power.
So while climate-focused independents look to gain sway in elections Sunday, they’ll have to contend with those warning of higher power costs without sufficient reliable energy, Average wholesale power prices more than doubled in the first quarter of 2022 from the year-ago period to A$87 per MWh - and they may keep rising, with UBS analysts pegging A$131/MWh for all of 2022 as an average. “This reflects an unusually elevated price point due to 2022 reflecting a sharp lift in coal and gas fuel costs,” they wrote earlier this month.
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Sustainable Business
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BlackRock, JPMorgan Chase and other top financial firms have told a Texas official they are not boycotting energy companies, in response to requests for information that could determine if they are able to continue to manage state funds. It follows a new Texas law that prohibits state agencies that invest funds from investing in financial firms found to boycott fossil fuel energy companies.
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