LONDON, Nov. 28 (Reuters) – From mid-2021 to late 2022, parts of Europe and Asia will see oil, gas, coal and electricity prices soaring, in some cases reaching record highs, causing households and businesses to suffer. was hit by an energy crisis that hit the country hard. Reduce usage rapidly.
Russia’s invasion of Ukraine and the sanctions imposed by the United States and its allies in response disrupted energy supplies, which were already under strain due to the recovery in industrial production after the coronavirus outbreak.
However, after 18-24 months, the acute phase of the correction will be complete, energy stocks will be comfortable, and prices will return toward their long-term inflation-adjusted averages.
Chart book: European energy supply and prices
There will no doubt be more shocks to come, but the pandemic is over and the chaos associated with Russia’s invasion of Ukraine is over. The market has adapted.
Europe’s remaining problem, switching from relatively cheap Russian pipeline gas to relatively expensive LNG, is putting its industrial competitiveness at risk, but this is more of a chronic problem than a crisis. .
oil
In the oil market, U.S. domestic crude oil and condensate production continued to increase, surpassing its pre-pandemic peak in August 2023. Other non-OPEC production sources are also steadily increasing.
U.S. high-frequency data shows commercial crude oil inventories in mid-November were 12 million barrels (+3% or +0.26 standard deviations) above the 10-year seasonal average, indicating the market is well supplied. It shows.
Brent crude oil futures have averaged $82 a barrel so far this month, exactly in line with the inflation-adjusted median price this century.
Brent’s six-month calendar spread is trading at an average of $1.57, just slightly above its long-term average of $1.04.
By late 2022 and early 2023, concerns about overproduction and the potential buildup of oil inventories gave way to concerns about supply shortages and rapid depletion of inventories.
In response, Saudi Arabia and OPEC+ partner countries pressed for increased production a year ago to eliminate expected shortages and to avoid an initial increase in inventories. The company has cut production many times.
gas
The rapid correction is also evident in gas, with U.S. inventories consistently above the 10-year seasonal average since February 2023 and exports increasing at a record pace.
Last month, U.S. gas futures prices hovered near their lowest levels in 30 years after adjusting for inflation, confirming that the market was reacting to the early surplus.
In Europe, gas storage has continued at record seasonal levels since the end of the first quarter of 2023, following an unusually warm winter in 2022/23 and a sharp decline in industrial gas consumption.
Germany’s energy-intensive manufacturing production has fallen by about 17% since the start of 2022, with no signs of recovery.
Total gas usage in the top seven consumer countries of the European Union (Germany, Italy, France, Netherlands, Spain, Belgium and Poland) in the first nine months of 2023 compared to the seasonal average of the ten years before the invasion decreased by 13%. 2012 to 2021.
Adjusted for inflation, futures prices averaged 48 euros per megawatt hour in November this year, down from 223 euros in August 2022 at the peak of the crisis.
In real terms, the average price in the previous year was 53 euros by 2023, compared to 23 euros in the five years from 2015 to 2019 and 32 euros in 2010 to 2014.
Although prices remain high, they are no longer at critical levels and are likely to fall further in 2024.
coal
An even more severe adjustment has occurred for coal, where demand has fallen sharply as gas supplies have become more plentiful while mine production has increased.
The real year-on-year price for coal supplied to north-west Europe will average just $112 per tonne in November 2023 (69th percentile since 2010), from a record of around $300 per tonne in September 2022. Ta.
In terms of production, China, the world’s largest coal-mining country, will increase production by 425 million tonnes (10%) in 2022, with an additional 144 million tonnes (10%) in the first 10 months of 2023 so far. 4%) increased.
adjustment
Each market experienced a slightly different adjustment process, but each resulted in faster production growth and slower consumption growth.
In oil, while consumption growth is slowing due to a slowing business cycle, non-OPEC+ production is increasing rapidly and the market is heading towards surplus.
Russian exports remain high despite sanctions for evasion (exploitation of legal loopholes and increased use of black fleet tankers designed to keep exports flowing) and evasion (misdeclaration of cargo values). Maintaining the standard.
Regarding gas, Europe experienced an unusually warm winter in 2022/23, which led to a decline in consumption, as well as a significant drop in industrial demand from the most energy-intensive users due to factory production shutdowns.
Europe was able to replace piped gas from Russia with more LNG imports, surpassing other customers in South and East Asia in winter 2022/23, shifting some of the adjustment burden to poorer countries.
For coal, increased mine production in China, along with a rapid increase in renewable energy from wind and especially solar power, has eased coal shortages and allowed power producers to increase their fuel inventories.
Other factors that contributed to the adjustment include Brazil’s high level of hydropower production, reducing the need for LNG imports, and an unusually mild fall in northwest Europe in 2023.
However, the common factor is that the magnitude of the price increases in 2021 and 2022 was very large, accelerating the adjustment process and extending over a relatively short period of time.
As a result, after a very painful adjustment in 2021 and 2022, production, consumption and inventories will be much more comfortable from the end of 2023 to 2024, and the crisis phase will be over.
Related columns:
– China prepares for record winter power demand (November 24, 2023)
– Europe’s gas crisis is over, but the painful adjustment is not (November 21, 2023)
– Oil prices fall as fundamentals are reconfirmed (November 9, 2023)
– Europe’s record gas inventories begin to weigh on prices (November 7, 2023)
John Kemp is a market analyst at Reuters. The views expressed are his own. Follow his comments on X (formerly Twitter). https://twitter.com/JKempEnergy
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