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Soaring global fossil fuel prices have led some commodity professionals to call the current situation an “energy crisis”, which may have a far-reaching impact on American consumers.
It also has an impact on energy policy as the United States and the rest of the world try to get rid of crude oil and its by-products and transition to renewable energy.
Energy assets from natural gas futures to crude oil have been at or close to multi-year highs, and its rising speed and severity deserve attention.
Helima Croft, global director of commodity strategy at Royal Bank of Canada, told MarketWatch in a telephone interview, “it’s like almost everything that can go wrong has gone wrong.” “this is a multifaceted story,” said energy expert and former senior economic analyst of the CIA.
What is the energy crisis?
So what is the energy crisis and how did we get there?
Some people define it as the bottleneck of energy supply, which may hinder economic development. Jeffrey curry, head of commodity research at Goldman Sachs, told MarketWatch that in short, the “energy crisis” is a phenomenon of “not enough [energy] supply to meet demand”.
In the early 1970s, the energy crisis swept the United States, partly due to the oil embargo imposed by major oil producing countries in the Middle East. Because of the surge in consumption, the United States relied on imported crude oil.
All action in the energy sector comes against a backdrop of growing concerns about sticky inflation, exacerbated by soaring energy prices.
The stock market has been unstable due to concerns about pricing pressures and their ability to hinder the global economy. The Dow Jones Industrial Average DJIA, the standard & Poor’s 500 index SPX and the NASDAQ comp have been in volatile trading and lagged behind the performance of energy assets.
How did we get here?
This time, the rise in prices was blamed on a series of events. These include reopening the economy from pandemic closures; China is one of the largest importers of energy products in the world; Concerns that major energy producers will not increase production; And on and off to renewable energy, while investment in fossil fuels has decreased.
In fact, the covid-19 pandemic may exacerbate the trend of reducing fossil fuel investment. The global blockade in 2020 will help limit the spread of deadly viruses, which has a significant impact on crude oil production. International Energy Agency exhibition.
China is the world’s largest importer of energy products. Reports and data show that although the country has been trying to comply with standards to reduce carbon emissions, the country has been caught off guard by the rebound in energy demand after covid, forcing it to turn to dirtier coal.
The financial times pointed out that coal-fired power plants account for about 70% of China’s electricity, but there is a serious shortage of fuel because it has closed coal-fired power plants and coal mines, in part for environmental reasons.
Most importantly, China banned imports from coal producing Australia a year ago due to rising tensions between the two countries, which now limits Beijing’s ability to outsource commodities.
Nevertheless, Reuters reported last week that China is releasing Australian coal from bonded warehouses. Some speculate that if the problem intensifies, the country may eventually completely end Australia’s ban.
Reuters quoted the General Administration of Customs of China as saying on Wednesday that China has been increasing coal imports. In September, Beijing purchased 32.88 million tons of coal, a year-on-year increase of 76%.
Russia, a major producer of oil and gas, is accused of exacerbating the energy crisis by limiting its global exports to further push up prices. Russian leader Vladimir Putin denied these claims in a speech at the Moscow Energy Forum on Wednesday and said that Russia’s natural gas producer Gazprom did not limit production and complied with the existing contract to supply natural gas to Europe.
“The rise of natural gas prices in Europe is the result of energy shortage, not the opposite. That’s why we should not shirk our responsibility, which is what our partners are trying to do.” – Russian President Vladimir Putin
Putin blamed European leaders for the continent’s energy problems. “The European gas market looks unbalanced and predictable,” he said.
A Kremlin spokesman told reporters on Wednesday that Russia has increased its European natural gas supply as much as possible, and any further increase needs to be negotiated with Gazprom.
Russia is accused of using its influence to win the approval of Nord Stream 2, a controversial underwater gas pipeline from Russia to Germany to deliver fuel to the EU and bypass Ukraine. According to Reuters, the pipeline will double the export capacity of Russia’s existing natural gas pipeline across the Baltic Sea to 110 billion cubic meters, equivalent to more than half of Russia’s total natural gas pipeline to Europe.
Croft of Royal Bank of Canada speculates that Russia may still not have enough capacity to meet the current needs of Europe.
“Even if Nord Stream 2 magically lights up green, Russia does not have the ability to meet the surge in current demand,” analysts said
China’s purchase of coal has led to a surge in coal prices. It is reported that an important coal futures contract rose to an all-time high of 1640 yuan ($254.44) per ton on Wednesday.
“We don’t even have coal analysts… We got rid of them in 2014.” – Jeff curry of Goldman Sachs
Rising coal prices have forced energy users to turn to alternatives that may be cheaper or easier to obtain, including fuel oil, crude distillates for heating oil and natural gas.
“We had an unusually cold winter in Asia, which reduced the supply of natural gas stocks in Europe,” Croft said.
Currie of Goldman Sachs says coal prices are soaring after this new green era seems to have been written off. He pointed out that Goldman Sachs (like some other research companies) ended its coverage of coal a few years ago.
“We don’t even have coal analysts… We got rid of them in 2014,” he said.
The Goldman Sachs analyst said that since the energy market is already unbalanced, it does not take much time to get rid of the imbalance.
Energy crisis in Europe
In the UK, the government is transitioning to renewable energy sources such as offshore wind power. In summer, there is no wind to turn turbines to generate electricity, resulting in the demand for energy exceeding the availability.
The transportation difficulties of natural gas supply also exacerbated the crisis due to labor shortage and other factors.
Due to these problems, the price of regional natural gas futures has increased almost parabolic in recent months.
Croft said investors need to become meteorologists as soon as possible, because the severity of this winter’s cold may be the biggest determinant of where the crisis comes from. The cold winter may increase the demand for natural gas and heating fuel, which will raise the already rising prices again.
Reading: American consumers are ready for double-digit growth in heating costs in winter
Currie described the energy crisis as “revenge on the old economy” because many people have been pushing for a faster shift to electric vehicles and energy considered more environmentally friendly.
“Capital has been redirected to the new economy and is stifling everything needed to expand the supply base in the [old economy, i.e. fossil fuels],” curry said.
That is why Goldman Sachs analysts believe that the crisis could lead to a “decades long commodity super cycle”. This is a reaffirmation of the assessment made by Currie and his colleagues in January. The investment bank announced that the price surge “is the beginning of a longer structural bull market in commodities”.
To be sure, Goldman Sachs had expected that the current super cycle might be supported by the transition to renewable energy, but it was unclear whether the transition would proceed as smoothly as predicted by commodity and green energy supporters.
Climate crisis meets energy crisis
An IEA report outlines plans to achieve net zero carbon emissions by 2050, but recent developments, including increased demand for coal and doubts about the reliability of green energy as a form of base load electricity, may raise doubts about the achievement of these global environmental goals.
“[this] is a wake-up call for policymakers. We must take a more balanced approach to this transition… If we don’t do so, it will be a disaster.” – Phil Flynn of price futures group
“All this is happening in the context of cop 26,” Croft said, referring to the 2021 United Nations climate change conference scheduled for October 31.
In a recent report, the World Health Organization called on governments to “take urgent action” against the climate crisis, describing it as “the greatest health threat facing mankind”.
Critics believe that promoting green development highlights the structural problems in the existing energy complex.
The energy crisis “sounded an alarm to policymakers that we must take a more balanced approach to this transformation… If we don’t, it will be a disaster,” said Phil Flynn, a senior market analyst. Price futures group told MarketWatch.
Policymakers “must find a way to do this if their goal is low carbon,” Flynn said.
Robert yawger, head of energy futures at Mizuho Securities, said that U.S. consumers may have the greatest pressure on gasoline pumps, especially if the price reaches $4 per gallon. He said that this is equivalent to about $87 a barrel of West Texas medium crude oil.
Yawger also said that as the United States enters winter, heating oil will become the next commodity pursued by speculators.
Hurricane IDA is one of the strongest storms ever to hit the United States. It shut down 90% of energy production along the Gulf Coast. The slow recovery from the shutdown has also exacerbated energy problems in the rest of the world.
This large-scale storm is one of the most serious storms in recent memory, highlighting ongoing environmental changes, including heat waves on the west coast of the United States, drought and deep freezing in Texas, which have exposed the problems of energy infrastructure in lonely areas. Xingzhou.
One sign of instability in the energy market is that despite the surge in fossil fuels, renewable energy sources other than uranium are not subject to much bidding. This is illustrated by the performance of SPDR fund ETF in energy selection industry compared with the one-year return of INVESCO wilderhill clean energy ETF, which tracks more than 70 environmental protection companies, including Tesla.
Yawger said that in his view, the clean energy initiative is a step in the right direction, but the market will be bumpy all the way.
“This is a big life circle in the energy sector,” he said, referring to how changes in a commodity affect the rest of the complex.
Reprint indicated source：Shine Trader Limited Live information