Robert Minter(pictured), Director of Investment Strategy, abrdn, considers what’s been happening in the energy resources market of late:
The oil price took off in 2021, with the WTI price rising by 55% from the start of the year to the close. Supply discipline from public oil companies and OPEC led to a consistent draw of petroleum inventories – about 2 million barrels per day in 2021. This erased the Covid-generated inventory glut, leaving inventories 4% below 2019 levels.
World leaders focusing on energy needs in 2050, have neglected the energy supply needed until then. This has left leaders pleading for more oil supply to weaken high energy prices and inflation. This year will tell if public oil companies believe that regulators will allow for medium-term investment in oil and gas supply. Consider that global oil demand has increased by 1-1.5% per year over the last 50 years, as a result of higher standards of living and population growth.
Natural gas prices in the US, Asia and Europe also made substantial gains over 2021. The US benchmark Henry Hub spot price increased by 40.7% over the period, while the European benchmark was up over 1000%. The difference is due to Europe’s reliance of 90% of its gas supply being imported at the spot price – not via long-term contracts. European leaders are now addressing the energy crisis by increasing natural gas storage capacity, and legislation to include natural gas and nuclear energy in the European taxonomy. Germany’s move away from coal and nuclear forces them to rely even more on natural gas to fill in for intermittent solar and wind energy sources. European natural gas inventories may not return to normal levels before next winter begins, so this story may be with us until additional US natural gas export facilities are completed in 2024. It seems inevitable that Nordstream 2 will receive its operational permit.
Despite its high carbon intensity, unfortunately the age of coal is not over. Countries that still have much developing to do, want to do it cheaply with their own resources. So, while western economies decommission coal power plants, almost 200 new coal-fired power stations are being built in Asia – including 95 in China and 28 in India. India and China accounted for 82% of global coal power capacity additions over the last 20 years.
Demand for electricity continues to rise, sending the price upwards. With electric transport, cars, heating and cooling – the future will be electric. More electrical infrastructure will be needed and existing grids will require upgrades. In the US alone, electric vehicles will need 30% more electrical power.
Expect soaring demand for the metals that will be required to build the energy revolution, in particular: copper, zinc, aluminium and nickel. There are up to 4.7 tons of copper in a 3 MW wind turbine, 5.5 tons in a 1WM solar panel installation, 4 to 7 times more copper in an EV than a gasoline auto. Despite the very strong outlook for industrial metal demand, supply has been constrained by a host of factors including well-intentioned ESG constraints, labor issues and unstable government policies.
As the world transitions from fossil-fuel reliance to greener energy, we should see investment and innovation in renewable energy, especially wind, off-shore wind and solar power. The gap between what electorates want and governments are doing is getting larger. Renewables have never been more popular. Expect voters to demand more action from their governments.
Currently, electricity storage is in its infancy – only four hours or so of battery backup can be relied upon. So, development and innovation are required, and the need for batteries will further fuel demand for industrial metals.
Since January 2020, there has been at least one major region of the globe in some form of mobility restriction. The potential for 2022 to reveal true global energy demand in a globally unconstrained economy presents additional upside in price and further supply issues. Stay tuned.